More family offices are turning to Asia-Pacific private credit: Lighthouse Canton

[SINGAPORE] Family offices and private wealth are accounting for an increasingly larger share of private-credit assets in Asia, said Sanket Sinha, CEO of global asset management at investment institution Lighthouse Canton.

“Over the last three years, the share of family office capital… in Asia-Pacific’s (private credit assets under management) has been increasing,” noted Sinha.

“Three years ago, it used to be around 23 to 24 per cent – now it is touching nearly 30 per cent,” he said, referring to the findings of the Alternative Investment Management Association’s Private Credit in Asia 2.0 report.

In an interview with The Business Times, Sinha said that Lighthouse Canton, as a global wealth manager for domestic Asian families, is seeing more of them wanting to participate in global growth, as well as looking into private-market opportunities.

“A number of home-grown managers have come up, understanding local markets, domestic dynamics, (and they have) opened up to family offices.”

The interview came after his keynote speech at the SuperReturn Asia event on Sep 28. In his speech, Sinha contrasted Asia’s contribution of nearly 35 per cent of global gross domestic product with private-credit penetration in the region of only around 5 to 10 per cent.

For every US$1 of private debt, he said, there is US$31 of private equity being deployed in Asia, as compared with a ratio of around six times in the US and four times in Europe.

Lack of sponsored deals and fragmented markets

He attributed this to two main reasons: the lack of sponsored private credit deals and fragmented markets.

Sponsored private-credit deals, which are usually backed by private equity that helps structure, negotiate and support the debt, account for 70 per cent of all deals in the US and 85 per cent in Europe.

In Asia, they account for less than 10 per cent.

Fragmentation also keeps penetration low, but Sinha pointed out that this is an opportunity as well, and that investors have to change their strategies to capitalise on it.

“Investors need to have a paradigm shift, and they need to start thinking (about) jurisdictions,” he said. “(They) have to understand the size of the market and rightsize their allocation to every market.”

Why Asia?

The leverage ratio for companies in the West for direct lending is higher than five-and-a-half times earnings before interest, taxes, depreciation and amortisation, noted Sinha. In contrast, direct lending across Apac continues to offer solid security structures, first claim and decent security cover.

He highlighted a few key markets in Apac for private-credit deals where capital can be deployed, with managers’ local expertise as the standard playbook for allocators, given that deal flow and positioning between countries change every year.

He cited India, Australia and Japan as markets with strong deal flow, adding that Singapore-based managers are looking at these deals.

In India, he gave the example of an Indian conglomerate looking at a global acquisition. In Australia, he pointed to real estate and commodities as sectors with potential.

Family office allocators

Sinha said institutional investors and family offices alike are focused on conducting due diligence on deal managers, and are now becoming more stringent when they evaluate direct investments.

Many family offices are also looking for co-investment opportunities, relying on managers’ due diligence and requiring managers to hold the deal in their own portfolio when bringing it to them, he added.

“Institutions have had a much longer history of doing manager diligence. Initially, ultra-high-net-worth individual investors or families’ diligence would probably be a shade less stringent compared to institutions,” observed Sinha.

“But that gap is being bridged at a very fast pace,” he said, adding that he has come across a number of family offices who do similar levels of diligence as large institutions, if not more.

This trend is accelerating as wealth passes to the second and third generations, he said, with more of them interested in setting up family offices to handle wealth than in managing and operating businesses.

Sinha also noted that private credit is meant to be the part of a portfolio that is robust, earning returns and yield irrespective of what is happening elsewhere in the world or in other parts of the portfolio.

“It offers low correlation to the other traditional asset. That is what the objective of private credit is.”