HONG KONG  - As banks ignore smaller companies in Asia, private debt funds are filling the gap. Traditional lenders are grappling with soured loans and tougher regulation, creating opportunity for the likes of Bain Capital, BlackRock and KKR.

After the financial crisis, the West saw a drought in bank loans to all but the biggest and strongest companies. To fill the gap, tens of billions of dollars were raised by private lenders, which enjoyed annualised returns of 10 percent or more from extending credit to small and mid-sized businesses.

A similar phenomenon is emerging in the Asia-Pacific region. The causes are manifold. In China, corporations are struggling to finance acquisitions abroad, as Beijing reins in capital flight. India’s banks are prioritising lending to the safest borrowers, playing little attention to mid-sized firms and those that don't have a credit history. Australia is limiting bank lending to international buyers of real estate.

This supply and demand imbalance means big returns, typically 3 to 4 percentage points higher than in the United States to account for the relative immaturity of the market, fund bosses say. Expected annualised returns typically range from 9 to 15 percent, and can hit the high teens in riskier places.

Competition is limited too, meaning it is a seller’s market when it comes to pricing loans. As of June, there was just $1.3 billion of committed, unspent capital for direct lending in Asia, data provider Preqin reckons, a fraction of the $71 billion available globally. That could change quickly, however. Among U.S. financial heavyweights, KKR is eyeing direct lending in Asia, and Bain Capital and BlackRock are raising credit funds that will do the same, people familiar with the matter say.

There are, of course, risks. While India is rolling out a new bankruptcy law, those in Indonesia and China remain immature, making it hard for creditors to seize assets or liquidate companies, should it come to that. Potential interest-rate hikes will probably create more opportunities to lend, but capital flows out of Asia will also leave existing borrowers vulnerable. For now though, shadow banking in the region looks like a lucrative business.

CONTEXT NEWS

- Twelve funds raised a record $6.2 billion to invest in Asia-based private debt in 2017, according to data provider Preqin, almost triple the previous year's total. As well as lending directly to companies or individuals, the category also includes other specialties such as distressed debt and acquisition financing.

- Worldwide, a record $110 billion was raised by private debt funds last year.

(Editing by Quentin Webb, Pete Sweeney and Sharon Lam)

© Reuters News 2018