What a difference two years makes these days when it comes to China. The last time I spoke to SC Lowy’s CEO Michel Lowy in October 2021, his investment firm that specializes in private debt was “selectively” looking at borrowers there. Lowy is focused on Asia, the Middle East and Europe.
Slow economic growth and rising geopolitical risk have since hurt China’s lure. Lowy, which manages $1.5 billion of funds, currently sees potential in two other Asian economies: South Korea and India. According to the IMF, South Korea’s GDP is likely to grow by 2.3% this year and India’s will expand by 6.5%.
“We see better opportunities than we have seen in a very long time there” in the two, said Lowy, whose firm uses investor money to buy relatively high-yielding debt based on its judgement of getting repaid. Real estate and manufacturing offer opportunities in both countries, Lowy said in a Zoom interview from Europe earlier this month.
The Belgian-born, long-time Asia hand co-founded SC Lowy in Hong Kong in 2009, after earlier working at Deutsche Bank, Cargill and Arthur Andersen. Edited interview excerpts follow.
Flannery: The last time we spoke, you were selectively eyeing Chinese debt. How you size up the China landscape now?
Lowy: We aren’t investing anymore. We were never large investors in China. The little we did, we stopped doing because we just don’t believe there is the right criteria in place for us as private creditors to be comfortable with downside protection and visibility.
We continue to be investing heavily in Korea and India. We see better opportunities than we have seen in a very long time there. We are in the process of raising new private debt funds to invest more capital across the Asia-Pacific with a core focus on Korean and India. Those are the two main markets where we can take advantage of banks that are either retrenching or not able — for a host of regulatory reasons – to lend to businesses that we can partner with.
Flannery: Overall, what’s driving the boom in private credit in the Asia-Pacific?
Lowy: There is a significant funding gap in APAC due to rapid demand growth and structural inefficiency in the credit supply. With the region projected to account for over half of global GDP in the next five to six years, the demand has never been higher. On the other hand, the intensification of regulation and anxiety in the banking sector, which is refocusing on large corporates, creates a compelling case for asset managers to fill in that gap. Competition remains sparse as it requires strong local knowledge and presence.
Flannery: What’s particularly appealing about South Korea now?
Lowy: On the one hand, you’ve got a very strong legal system, very strong creditors rights protection, and very efficient and predictable core processes — very similar to what you would find in U.S or in the UK. So globally, it’s really at the top end.
On the other hand, you’ve got a very regulated banking system, and very little foreign capital that is invested in debt. You have barriers to entry because the loan documentation is in Korean, and the negotiations are in Korean. Trust and relationships are very important. It’s very difficult for foreigners to break into a market that otherwise is highly predictable and sophisticated.
Flannery: On the demand side, what kind of companies are looking to borrow?
Lowy: A lot of the focus is around real estate. The central bank in Korea has quite a bit of rules in place to limit real estate (debt), and that has created quite a bit of demand. We do shy away from construction risk. Very often, we enter when a construction company has developed the assets but hasn’t sold them as quickly as planned. We come in to refinance the construction loans, in sort of bridge situation until the asset can be sold. We look at office properties, residential properties and warehouses – it varies. And then there’s industrial businesses – typically midsized.
Flannery: What do you see as South Korea’s place in the world economy now, with growth slowing in China and a geopolitical cloud hanging over the region?
Lowy: The geopolitical cloud is hanging over the whole world. It’s very cloudy (chuckles). It’s very obvious that South Korea’s position is on the U.S. side with Japan. As a result, the importance of China to the Korean economy has diminished a lot. But ultimately, China is important to any economic globally, whether on the supply or demand side.
But one of the things that makes Korea different is that Korea was one of the first markets where they raised rates aggressively to come back to inflation.
Flannery: How long have you been investing in India?
Lowy: I’ve been investing in India for about 20 years – first in a few portfolios of NPLs (non-performing loans) in 2004. Things have changed quite a bit. The insolvency regime and creditors’ rights are significantly stronger than they used to be. They are far from perfect. It’s not as good as Korea, but it is predictable. It is much slower, so you try to avoid using the court system if you can.
The opportunity in India is at the macro level. The economy is doing really well. The banking system is very highly regulated with a lot of state-owned banks that have significant limitations to the projects where they can get involved in an economy that’s starving for financing for growth. We do real estate as well but also have a lot of industrial businesses. The most recent transaction we approved in India is a company that’s a manufacturer of credit cards.
Flannery: Do you expect more manufacturing to switch to India from China? What will be the drivers of manufacturing growth in India?
Lowy: There are multiple drivers — part of it is geopolitical. There are certain countries who would rather do business with India. It’s also local demand and growth in India itself. India will replace China with high single-digit GDP growth. There’s also export growth.
Flannery: And if you were starting out SC Lowy today, would you center it in Hong Kong as you once did?
Lowy: There are still a few strong advantages in Hong Kong. I wouldn’t necessarily say that we are headquartered there anymore; I would more define it as being our largest office. An advantage is that you can still recruit talent. The system still attracts good people. There is good schooling, and it’s easy to operate in English. It’s easy to assemble a team of international staff, and there are advantageous tax rates and efficient airports. While Hong Kong remains our headquarters and largest office, I can’t guarantee it will still be our largest 10 years from now.
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