Asia’s mezzanine market seems to have become popular recently with some private equity funds. What words of caution do you have?
Industry-wide, I think you have a phenomenon of very low interest rates, obviously driven by central banks stimulating their economies. And since people are chasing yield, what you see is an increasing level of interest in credit-related instruments. But over the last decade, we have seen this happen before. We’ve seen various cycles that [the credit market] has gone through – we’ve seen the bull run from 2005 to 2007, we’ve seen the market shocks that happened between 2008 and 2010. And now we see from this chase of liquidity, particularly starting in 2011 until today, that we’re heading into that bull market again. This will come down to a game of musical chairs and there's always someone who is left standing when the music stops. There will come a time when interest rates start picking up, demand will evaporate and you find that much of it was hot air. The trick is to ensure that if you’re a longer-term investor – call it a three- to six-year horizon – then you’ve got to be sure you’re built well to withstand the cycles.
What will it take for mezzanine to really take off in Asia?
It’s [dependent on] the evolution of the buyout market, the evolution of the broader private equity market – mezzanine can run behind [that] and provide levels of funding that banks may not be able to provide. If you trace back the growth of mezzanine in the US and Europe, it all was a by-product of the overall growth in private equity, the overall extension of liquid markets in alternative funding. We’re not even there yet [in Asia], and it will be some time before you see [other] liquid funding alternatives arise. Why? Because I think the domestic funding sources are quite active on the bank side, and until we see a real proliferation of bond markets that are homogenous across the region, there will be a space for mezzanine.
Global firms are raising debt funds in Asia. Are you starting to run into more competition for deals from these firms?
No, not really. It’s a different focus. These big boys coming into Asia are not going to get out of bed for anything less than $75 million to $100 million. And that’s a lot of money. If you say that mezzanine is only 30 percent of a deal, then that’s a deal that’s worth $200 to $300 million. Those deals are few and far between. We’ve seen some large transactions, but we don’t know if that’s going to increase over the next three-to-five years. We certainly hope so, because that means that all the other companies are getting bigger and Southeast Asia is growing as well. But in the space that we’re in – the $10 million to $30 million dollar [range] – there is enough to do. If you look at mid-size companies across Southeast Asia that are willing to [take funding] of that size, there’s actually quite a lot.