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In 2008, Andrew Schantz moved to Hong Kong from New York for what was meant to be an 18-month work rotation. Fast forward 17 years and he is still there, now heading up Bain Capital’s Asian private credit business as a partner.

While private credit has grown to become a fairly mature market in the US and Europe, the asset class is at a much earlier stage on the Asian continent, something Schantz believes makes for attractive growth opportunities.

Bain did its first private credit deal in Asia almost 20 years ago and has since then built a local presence in a number of Asian markets, including in Singapore, Japan, and India, in order to take advantage of the expected growth.

9fin sat down with Schantz to discuss the opportunities he sees in Asia, how the market compares to Europe and the US, and — most importantly — his favourite cuisines.

1. What are the growth opportunities in Asian private credit?

Private credit in this part of the world is beyond the proof-of-concept stage and it has established itself as an asset class. But within that post-establishment phase, it’s very early on, so what we are seeing is a ton of demand for this type of product, but very little supply of it.

One of the clearest ways to think about it is to look at the share of non-bank credit in different markets around the world. In North America, where private credit is far and away the most established, non-bank credit is about 65% of the total financing landscape. In Asia, it’s about 15% of the financing landscape. Now, non-bank credit includes other things besides private credit, but private credit is obviously a big part of that. So, if you think that the use case for private credit is clear — with its ability to offer flexible, bespoke, customised solutions we certainly do — then there’s every reason to think the numbers in Asia should start to converge with those in developed markets like North America or Europe.

I’m not making the call that all of a sudden we are going to have the same levels of non-bank credit penetration across these markets, but even if there’s a bit of convergence, the impact on the asset class in this part of the world is massive.

2. How does the Asian private credit market compare to Europe and the US?

It’s a much smaller market out here than in North America and Europe, and it’s also much less formalised, much less standardised, and it runs a much wider spectrum than you see in North America and Europe. That’s really no surprise when you think about it, because Asia is just a geographic term at the end of the day — it’s not a single place. We’re dealing with many different languages, currencies, tax systems, regulatory regimes, insolvency regimes, business customs, et cetera.

You have markets that are already highly developed — such as Australia and Japan — and markets that are rapidly emerging, like India and much of Southeast Asia. There are also frontier markets like Sri Lanka and Cambodia, and while they’re less relevant for the private credit opportunity, their markets, politics, and people add to the complex mosaic that is Asia. With all that complexity, what you end up with is a set of private credit products that are very different from the somewhat more uniform financial markets in North America and Europe.

3. Speaking of terms — what are they like in Asia? And what about margins?

We do see pricing premiums out in this part of the world compared to North America and Europe, and the risk profiles we see associated with that pricing are stronger. It’s a bit hard to lay the deals side by side, because often they just look so different, but we believe that the pricing premium could be anywhere from 50bps to 500bps. That pricing premium might also be associated with a transaction that has a lower risk profile, for example it might have lower leverage or a shorter tenor. In general, deals might be much more lender friendly in Asia than they would be in North America and Europe.

On top of standard credit terms, we also have other elements that you don’t often see in other markets, like personal guarantees, which are quite common in many Asian markets. Could you imagine if Warren Buffett was giving a personal guarantee on the Berkshire Hathaway debt? That kind of thing is unheard of in most parts of the world. If you put that pricing dynamic together with that risk profile — we believe it’s incredibly compelling.

4. In terms of countries, where do you see the most opportunities?

We honestly see opportunities for our capital in pretty much all of the non-frontier markets. The second part of that answer though, is that there are different opportunities in different markets. So, if we’re thinking about just pure performing credit, we see a lot of opportunity for that in Australia, a lot in India, and a growing amount in Southeast Asia. There are more limited amounts in places like China, Korea, or Japan. That doesn’t mean we don’t see a lot of opportunity in those countries. We actually see a ton of opportunity there — particularly in Japan — but for other parts of our credit business, which are more on the complex and structured special situations side.

What we observe though is that because of this regional dynamic where there are massive domestic bank markets and very tiny non-bank markets, you have a wide range of borrowers who need financing solutions outside of what their banks can provide, but often just can’t get them. Anything that’s outside of plain vanilla lending you generally can’t get bank capital for. For example, if you want to buy a factory in another country, it’s really hard to get domestic banks to finance overseas acquisitions. If you want to buy out a minority shareholder, that’s almost impossible.

5. What can you tell us about public debt markets in Asia?

Different countries have had issues with their banking system in the past, but for the most part, the domestic banks across the region are pretty healthy. It’s less an issue that these borrowers can’t get bespoke, fit-for-purpose capital from the banks because the banks are unhealthy, but more because that it isn’t the banks’ focus. A lot of them are focused on providing regular-way lending to the blue-chip corporates, the policy-favoured corporates, the SOEs, and those sorts of borrowers.

A lot of regional banks have a big domestic focus, so if a business wants to buy a complementary business in another country, their domestic banks may say ‘oh, we’re just focused on our home country’. And then they go to the other country, but those banks may say ‘well, who are you?’, and so they don’t have many options. We often hear from borrowers that their local banking relationships are very well established, but they just can’t provide the flexible, fast acting, fast moving, bespoke capital that is required in certain situations.

Without a bank option, often the next place to turn is the private credit market. After all, high yield is a fraction of what it is in North America and there’s virtually zero CLO market in Asia, which means there’s not much of a broadly syndicated loan market.

6. What have the challenges been when growing your Asian business?

Investing across Asia, like doing anything across an entire region, involves a ton of challenges. It’s a region with a lot of jurisdictional complexity. Being credit investors, a key part of managing that jurisdictional complexity is understanding how the insolvency systems, the bankruptcy systems, and the corporate structures work in every one of these markets. Then you layer on things like currency differences and cultural differences – it’s complex.

Because of that complexity, sometimes we hear from people that ‘credit doesn’t work in Asia’. My response to that is always that if you look at the aggregate size of the credit markets — because the biggest credit market in the world is Asia — it clearly works. It’s almost the size of the North American and European markets combined, so these difficulties and the complexities can clearly be managed.

The logical question then, is how? What we find is that if you go into the local markets, if you build teams of people who grew up in these markets, who have operated in these markets, who have track records in these markets, and who are well-networked, then they know how to source deals from people that you want to do business with, how to structure them in a prudent way, and how to manage them to successful exits. You can't take one American guy — speaking as one American guy—, drop him out into Hong Kong and say ‘invest across the entire region and do it successfully’.

The way that we've done it is by going local. We've opened 11 offices around Asia and now have almost 200 investment professionals in this part of the world. That team is not all concentrated in one office either. It's real, local depth in every one of these cities, and that allows us to invest in these markets at the local level. It is not easy, I've observed that my entire time in Asia, but that's also what makes it interesting — If you can manage all that complexity, the risk and the returns on offer can be very attractive.

7. How is LP interest for Asian private credit?

An increasing number of investors are spending the time to look at the region and to understand the region. They're starting to catch on to what we would say is the ‘big secret in Asia’, which is that the deals out here can have better relative value than any other market. While they can be better than what we see in other markets, they're also harder to access. If you can get it done the right way, we think they're really compelling.

I see more LPs starting to go down the same path and follow the same journey that I followed when I moved out here almost 20 years ago, where you have this notion of the region that might be based on a couple of data points that you saw in the global press, and then you start spending more time with it and realise the way the region works. Then you start to really appreciate it, and then you get really interested and excited about it.

When I talk about the asset class out here, I don't feel like I'm marketing because I just get to talk about what I see. It's compelling and people can see it. You don't really need to go through some big song and dance to convince the LPs, we can just show what we see: the returns, the leverage, the structures, the covenants, and so on.

8. How is the competition?

With what we think is an increased focus from LPs, we are seeing some of our peers also catching on to the secret in Asia, and there are a handful of existing peers out in this part of the world already. What people are finding is that to do Asia on a regional scale — the right way — you have to make a massive commitment in terms of investment and time. I believe that a lot of the large asset managers who don't already have a presence in the region may not be willing to do that.

You basically have to say: ‘we're going to invest in this platform for X number of years before we even make any money’, because you not only have to hire people in all the regions, but you also need to set up infrastructure; not only getting the desks and the computers, but also licenses and regulatory approvals.

It's not the case that there is no competition in Asia, but we feel it is very limited. For the people who want to come into the market, we think that there could be a decade-long runway before they have proper scale across the region. I almost view it as sitting in this walled garden where people can kind of see over the wall and they say “it's really interesting”, but they have a very hard time getting in, and we're already inside.

9. Having traveled across the region, what is your favourite Asian cuisine?

This is like asking to choose a favourite child!

The cultures here are all very different, and food plays a huge role in every one of them, so as a result they all have amazing cuisines. The answer to this for me will be 100% driven by recency bias. I was recently in China and I love Sichuan food, so I went out there and I had La Zi Ji, which is a crispy chicken with dried chillies — it was unbelievable! So right now I would probably say that’s my favourite. But before that, I was in India and I must have eaten a bucket worth of Dal Makhani, which was fit for a king — and I love Dal Makhani, so it was incredible.

But a couple of weeks before that, I was in Japan and had an amazing pork Katsu Curry, and the crispiness and the flavour you get from these local Japanese places… nothing compares! It’s impossible to choose one favourite.

9Questions is our Q&A series featuring key decision-makers in leveraged finance and distressed debt — explore the full collection here.