Private debt can help address the alternative financing needs of businesses and the portfolio diversification needs of institutional investors in Thailand, according to a new study by Deloitte Consulting.
Based on best practices from abroad, the study also examines multiple initiatives that can potentially help build the private debt ecosystem locally. Ideas to help develop the private debt ecosystem in Thailand include:
Creating a regulatory framework that enables Thai investment professionals to register their private debt vehicle, raise money from investors and lend to local enterprises.
Broadening the eligibility criteria so that more sophisticated investors, particularly institutions, can invest in the asset class both onshore and offshore.
Improving Thai debt enforcement capabilities to encourage international debt funds to participate. This could entail introducing borrower deadlines for debt resolution cases, empowering arbitrators, setting up specialised courts, etc.
"In Thailand, onshore private debt funds are not well established as there is not yet a clear regulatory scheme that enables local general partnerships to raise money from qualified investors and lend directly to enterprises, like there is in other countries," said Metinee Jongsaliswang, country consulting leader of Deloitte Thailand. "International funds are also hesitant to lend in Thailand due to perceived debt enforcement challenges.
"Additionally, many institutional investors in Thailand do not yet have permission from their respective regulators to invest in this asset class."
The lending landscape in Thailand is mostly dominated by banks, which have fairly standardised credit requirements and loan terms. While alternative lenders exist, they are not yet able to completely fulfil the financing gaps of Thai businesses, she said.
"Digital lending platforms have emerged in recent years in Thailand, but they tend to offer smaller-sized loans tailored to smaller enterprises," said Ms Metinee. "On the other hand, a few international private debt funds also have activities in Thailand, albeit focusing on larger deals targeted to bigger corporates.
"That leaves a potential gap for mid-market firms seeking alternate lending in the $10-million to $50-million range. Domestic private debt funds can potentially come in and help fill that gap."
For commercial borrowers, advantages of private debt include bespoke lending terms (payment-in-kind, mezzanine options, etc) that suit various business needs, longer time horizons, faster capital deployment and more flexible credit/underwriting requirements compared with bank loans.
For investors, advantages include portfolio diversification (both geographically and by asset class), higher risk-adjusted returns in exchange for liquidity lockup (known as the "illiquidity premium"), and more predictability in returns and less price volatility compared with many public market investments.
"On the demand side, businesses want flexibility when it comes to their financing solutions -- especially after the start of Covid-19," said Kenneth Tay, director of financial services at Deloitte Consulting. "On the supply side, investors want good risk-adjusted returns.
"Part of the reason why private debt has grown globally is because the market is able to match demand and supply in this way."
"Private debt has grown rapidly in the US and Europe, and has also gained popularity elsewhere in Asia. However, the asset class is still nascent in Thailand -- particularly when we talk about private debt managed in the general partnership/limited partnership structure," said George Gao, manager of financial services at Deloitte Consulting.
The results of the study were based on primary interviews with more than 20 private debt lenders, institutional investors, commercial borrowers and regulators both in Thailand and abroad -- in addition to secondary research and analysis.
The purpose of the study was to understand the opportunities and challenges for private debt -- defined as debt financed by non-banks in private markets -- to help address small and medium-sized enterprise (SME) and corporate financing gaps in Thailand, as well as investment needs of sophisticated investors. The focus was on private debt managed by general partners (GPs), in which GPs raise money from limited partners such as institutional investors and then lend those funds to private borrowers (such as SMEs and larger corporate borrowers).
Key challenges for developing the private debt market in Thailand, as detailed in the report, include regulatory barriers limiting the scale-up of the asset class; market and stakeholder readiness (many stakeholders in Thailand are not yet aware of the strategic uses of private debt); and information asymmetry challenges for lenders.
"As Thai businesses and investors mature, so too will their financial needs. There is a lot Thailand can learn from leaders abroad in terms of adapting more flexible, more sophisticated capital market solutions -- whether in the form of private debt or other alternatives," said Ms Metinee.
To read the full report, visit https://bit.ly/3rSFpkA.
