Private credit in the Asia-Pacific (APAC) region is emerging as a compelling investment opportunity, driven by a combination of structural inefficiencies in traditional banking and the region’s robust economic growth. With fragmented banking markets unable to meet the growing demand for credit—particularly in middle-market sectors—private lenders are stepping in to fill the financing gap. This rapidly expanding market offers investors attractive risk-adjusted returns and diversification opportunities, positioning APAC private credit as a key driver of regional economic development.

Economic growth

APAC is projected to account for up to 70% of global GDP growth, creating substantial demand for credit financing. Traditional banking institutions in the region face regulatory and structural constraints, such as Basel III requirements, limiting their ability to meet this rising demand. This is especially true for micro, small, and medium-sized enterprises (MSMEs), which make up 97% of all businesses in Asia, accounting for 56% of the workforce and 28% of economic output. This unmet need for financing presents a significant opportunity for private credit providers to step in and bridge the funding gap.

Structural inefficiencies in traditional banking

The APAC banking sector, while a dominant force in credit supply, faces significant inefficiencies, particularly with non-performing exposures and inflexible lending practices. Many banks favour lending to government-backed industrial sectors, leaving other segments, notably MSMEs, underserved. Recent global banking concerns and tightening credit conditions have further amplified these challenges, presenting a clear opportunity for private credit to step in with flexible and accessible capital solutions. Additionally, the region’s leveraged loan and high-yield bond markets are underdeveloped and fragmented, as local lenders seldom venture beyond their borders—highlighting the untapped potential for private credit to fill this gap.

Infrastructure and sustainability

Private credit in APAC is increasingly pivotal in both financing critical infrastructure projects and promoting sustainable development. Funds like SC Lowy’s Strategic Investments IV (Asia) are providing essential capital to businesses that are otherwise restricted from traditional bank lending. This funding enables the development of crucial sectors such as real estate, toll roads, and transportation networks, particularly in countries like India. These infrastructure projects are vital for supporting long-term economic growth and enhancing regional connectivity.

At the same time, private credit is advancing sustainable development by offering financing to small and medium-sized enterprises (SMEs) and large infrastructure projects in underserved areas. Many APAC countries face limited access to capital, and private credit steps in to fill this gap, promoting entrepreneurship, job creation, and inclusive economic growth. By fostering both infrastructure development and financial inclusion, private credit investments contribute significantly to the region’s long-term sustainable growth, especially in markets that have historically been underserved.

Dynamic market opportunities with returns

APAC presents a broad spectrum of investment opportunities, from highly developed markets like Australia and South Korea to rapidly growing emerging economies in Southeast Asia. This diversity allows private credit investors to implement tailored strategies, such as direct lending and collateral-backed lending, that suit the unique characteristics of each market. Investors who navigate the region’s complex legal and regulatory environments gain a competitive advantage, positioning them to achieve attractive risk-adjusted returns. APAC private credit investments offer a premium over comparable opportunities in the U.S. and Europe, with direct lending deals typically yielding a 300-500 basis-point premium. More complex capital solutions can offer even higher returns. The relatively low level of competition among lenders enables private credit providers to negotiate favourable terms, such as robust covenant packages and asset-backed loans, enhancing both risk protection and return potential.

Diversification

For global investors, APAC private credit provides substantial diversification benefits, offering exposure to both developed and emerging markets. Sectors like real estate, industrials, healthcare and infrastructure are ripe for investment, providing opportunities to diversify beyond the traditional focus areas of public market portfolios. Additionally, investors with local expertise and strategic flexibility can tap into niche opportunities, navigating diverse legal frameworks and capitalising on regional market nuances.

Risks

Despite the potential for strong returns, investing in APAC private credit is not without challenges. Political and regulatory risks are significant, as sudden policy changes—such as those seen in China—can affect the stability of private markets. Local regulatory environments may also be less mature compared to developed markets, adding layers of complexity. Mitigating these risks requires deep local knowledge and partnerships with firms that understand the intricacies of each market.

Conclusion

The APAC private credit market is poised for continued growth as economic expansion, structural banking inefficiencies, and rising demand for capital create new opportunities. With attractive risk-adjusted returns and diversification benefits, private credit is well-positioned to meet the financing needs of businesses across the region. For investors equipped with local expertise and a strategic approach, APAC private credit presents a compelling opportunity to achieve superior returns while supporting sustainable economic development across a rapidly evolving region.

Read the article here by Institutional Asset Manager