Who Takes the Risk in Asia’s Private Credit Boom?

Private credit in Asia means businesses borrowing through privately negotiated loans from non-bank lenders, often investment funds. Companies gain another financing option; investors earn interest while accepting the risk that repayment may fall short.

It sounds straightforward. So does lending money to a relative, until the repayment date arrives.

Who lends and why do companies borrow?

Private credit managers raise money from investors such as pension funds, insurers and wealthy individuals, then arrange loans to businesses.

Companies may want money for expansion, acquisitions or replacing existing debt. Some need terms that banks cannot offer. Others are too small for a public bond issue or lack the assets traditional lenders prefer as security.

Speed and flexibility can make private credit attractive, even when borrowing costs more.

Singapore’s government, for example, established its Private Credit Growth Fund to support high-growth local businesses needing tailored financing beyond traditional debt or equity options.

But Asia is not one lending market. Currency movements, insolvency laws and lenders’ ability to recover money differ between countries. A loan secured against assets is only as reassuring as the assets’ value and the ability to enforce that security.

How is private credit different from private equity?

Private credit generally lends money. Private equity buys ownership.

A lender expects interest and repayment under an agreement. An equity investor hopes the business becomes more valuable and eventually sells its stake for a profit.

They can appear in the same transaction: a private equity firm buys a company, while a private credit fund helps finance the purchase.

Lenders generally rank ahead of shareholders when a business fails, although their position depends on the financing structure. That priority improves their claim on available money. It does not guarantee there will be enough.

“First in the queue” is less comforting when the cupboard is empty.

Where can losses land?

Consider a hypothetical loan of US$10 million. If the borrower fails and the fund ultimately recovers US$7 million, the principal loss is US$3 million, before other costs or recoveries.

That loss reduces the value available to the fund’s investors. If the fund itself borrowed money, its lenders may also face losses if its resources cannot cover its debts.

Two further risks deserve attention.

Limited disclosure can make problems difficult for outsiders to assess. Loans that rarely trade may rely on estimated valuations.

Illiquidity means investors may struggle to withdraw or sell when they want. Withdrawal limits can apply even to funds offering periodic access.

Before admiring a yield, ask who borrowed, what supports repayment and how you get your money back. Regular interest payments are welcome. They are not proof that the principal is safe.