Asia accounts for over 40% of global gross domestic product and is expected to drive more than 60% of global economic growth in 2024. Yet when it comes to private finance, Asia represents just around 6% of the global total GDP.
This mismatch could be creating one of the most intriguing opportunities in global finance. The Asia-Pacific region is composed of some of the world’s fastest-growing economies, and APAC entrepreneurs are eager to expand, but they face a significant hurdle: limited access to capital.
As of September 2023, private credit assets under management in APAC were valued at $124 billion. While this may seem substantial, and has indeed quadrupled over the last decade, it’s minimal compared to the roughly $1.7 trillion global total. One argument for this disparity is the historical reliance on bank lending in Asian businesses. Banks provide 79% of all credit in the region, a stark contrast to the United States, where banks account for only 33% of credit.
However, as economies grow and develop, the proportion of private credit typically increases, as has been the case in the U.S. and Europe. Thus, the combination of growth and a gap in bank and private finance could signify the early stages of a financial transformation in Asia.
Various players are emerging to fill the gap left by traditional banking institutions. These include global private equity firms, local credit funds, and specialized finance companies.
One such specialized finance provider is EquitiesFirst, which provides liquidity to entrepreneurs and professional investors financed against their existing equity holdings. This approach allows investors and entrepreneurs to access capital while maintaining long-term exposure to equity stakes, a model that may be particularly appealing in a region with a high concentration of family offices looking to invest on the ground floor of fast-growing sectors in the area.
The $2.4 Trillion Opportunity
The estimated annual funding gap for small and medium-sized enterprises in developing economies across Asia is $2.4 trillion, and the private finance industry in APAC is emerging as a means of bridging this funding gap.
Providers like EquitiesFirst operate under distinct capital models and regulatory frameworks from those of traditional banks, enabling them to finance a broader range of assets, credit profiles, and corporate situations.
According to a Bloomberg survey, industries such as education, health care, and consumer-facing industries are ripe for private financing in Asia-Pacific. The demand for capital in these is fueled by notable demographic trends such as increasing affluence in India and Southeast Asia, along with aging populations in China and other developed economies.
There’s also an increasing number of family offices in the region. In Southeast Asia alone, they account for over 60% of listed companies. These firms often have significant wealth tied up in their businesses or invested in global equities, but that wealth is often illiquid.
EquitiesFirst’s model allows these investors to unlock the value of their equity holdings, providing liquid capital that can be invested into fast-growing sectors in the area.
This approach is particularly appealing in a region where traditional bank lending is becoming increasingly constrained. In several of Asia’s most dynamic economies, including Malaysia, Indonesia, and Thailand, bank lending to nonfinancial private companies as a percentage of GDP has actually declined over the past three years.
Beyond Traditional Financing
Firms like EquitiesFirst are helping to fill a gap left by retreating banks and are becoming part of a broader trend toward more diverse and specialized forms of financing in Asia.
Take the clean energy transition, for example. The World Economic Forum estimates a $4 trillion annual funding gap worldwide to reach net-zero emissions by 2050. That’s not the kind of gap that traditional bank lending alone can bridge.
Private finance providers like EquitiesFirst can step in to augment public and traditional bank funding by providing the flexible financing solutions needed to fund large-scale renewable energy projects and develop clean technologies.
So, what does the future hold for equities-based financing and the broader private financing market in Asia? If the experts are to be believed, we’re looking at a period of significant growth.
Several respondents to the Bloomberg survey expect the market to grow by more than 10% in 2024 alone, and because this growth is from a lower base in many cases, there’s significant room for expansion in the long term.
While large fund platforms will likely continue to dominate the biggest private credit categories, there’s growing demand for specialized financing secured by a wide range of assets.
In a region that’s driving global growth and innovation on an international scale, access to capital is more crucial than ever. And as traditional sources of financing struggle to keep pace with the region’s dynamism, firms like EquitiesFirst are stepping up to bridge the gap.
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