Asia-based private credit funds are emerging as a possible hedge against turmoil gripping the US$1.8 trillion industry, as investors seek safer alternatives in the asset class.

Concern about US private credit exposures to the software sector that’s under pressure from rapid advances in AI has fuelled redemptions at funds run by firms including BlackRock Inc, Blackstone Inc and Blue Owl Capital Inc. By contrast, Asia Pacific vehicles — with more conservative lending practices and comprised mostly of closed-ended funds — are better insulated from liquidity risks that have plagued the US and Europe, according to several private credit executives who spoke to Bloomberg News.

Against this backdrop, at least two private firms are pitching Asia‑focused funds as alternatives. In some cases, investors — so-called limited partners — are approaching managers proactively, according to people familiar with the matter.

While Asia isn’t totally isolated from the broader stresses — with mounting defaults and the risk of hidden “cockroaches” still lurking in global credit markets — the region is nevertheless better positioned to withstand the turbulence building in the West for several reasons.

Asian funding markets are largely bank-dominated and many private credit deals are backed by tangible assets such as schools and factories, some private credit players said.

“Given that some parts of Asia are developing markets with not very strong legal frameworks, underwriting is more disciplined relative to the US, including real asset collateral in a number of private investments,” said Neeraj Seth, chief investment officer at hedge fund 3R Investment Management. Asia offers diversification through its range of countries and sectors too, he added.

While Asia hasn’t seen a surge in withdrawals, many fund managers say investor calls and enquiries have increased sharply as anxiety grows over risks tied to the asset class. These concerns have been easier to address given conservative lending practices that closely mirror bank underwriting standards, the people said, who asked not to be identified discussing private matters.

“We don’t have as many covenant-light deals here,” said Nitish Agarwal, chief executive at Orion Capital Asia. “In the US, funds may need to relax terms due to competition for deals and pressure to deploy.” 

Private credit in the Asia Pacific is also predominantly closed-ended, collateralised and real economy-linked, said Kher Sheng Lee, managing director for Asia Pacific at the Alternative Investment Management Association. “Fund structures are generally designed to match the liquidity profile of the underlying assets.” 

One drawback is the relatively small size of Asia’s private credit market, with deal sizes typically more modest compared to the West. That limits the number of transactions available to absorb new capital, even if only a fraction of global flows were to shift toward the region, the people said.

Private credit in Asia is projected to grow to US$92 billion in 2027 from US$59 billion in 2024, driven by investor appetite for higher returns and diversification, according to an industry report. 

In some markets where enforcement of debt claims can be harder, such as Indonesia, private credit funds can also face legal and regulatory obstacles in recouping loans.