What a difference two years makes when it comes to China these days. When I last spoke to SC Lowy CEO Michel Lowy in October 2021, his investment firm, which specializes in private debt, was “selecting” borrowers. Lowy focuses on Asia, the Middle East and Europe.
Slower economic growth and rising geopolitical risks have since taken a toll on China's temptations. Lowy, who manages a $1.5 billion fund, is now seeing potential in two other Asian countries: South Korea and India. According to the IMF, South Korea's GDP is expected to grow by 2.3% this year, while India's is expected to grow by 6.5%.
“We're seeing opportunities like never before,” Lowy said of the two deals. The company uses investor money to buy relatively high-yield bonds based on whether they will be repaid. In a Zoom interview from Europe earlier this month, Lowy said real estate and manufacturing are opportunities for both countries.
Born in Belgium and with a long history of working in Asia, he co-founded SC Lowy in Hong Kong in 2009 after working at Deutsche Bank, Cargill and Arthur Andersen. Edited excerpts of the interview follow below.
Flannery: Last time we spoke, you focused narrowly on China's debt. What is your current understanding of the situation in China?
Mr. Loewy: We are no longer investing. We have never been a large investor in China. We've done very little, but we stopped because we don't believe there is a suitable standard that would allow us to comfortably enjoy downside protection and visibility as a private creditor.
We continue to make significant investments in South Korea and India. We think we have the best opportunity here that we've seen in a long time. We are raising a new private debt fund to invest more capital across the Asia Pacific region, with a focus on South Korea and India. These two key markets are those that can leverage banks that are downsizing or are unable to lend to companies they can partner with for various regulatory reasons.
Flannery: Overall, what are the drivers of the private credit boom in the Asia-Pacific region?
Lowy: Rapid demand growth and structural inefficiencies in credit supply are creating a significant funding gap in the Asia-Pacific region. The region is expected to account for more than half of global GDP in the next five to six years, and demand is at an all-time high. Meanwhile, increased regulation and uncertainty in the banking sector, with a renewed focus on large corporates, creates an imperative for asset managers to fill the gap. Competition remains low as strong local knowledge and presence is required.
Flannery: What is particularly attractive about South Korea today?
Lowy: On the one hand, we have a very strong legal system, very strong creditor rights protections, and very efficient and predictable core processes that are very similar to what we see in the United States and the United Kingdom. I am. So, globally speaking, it's right at the top end.
On the other hand, it has a highly regulated banking system with very little foreign capital invested in debt. There is a barrier to entry as financing documents are in Korean and negotiations are also conducted in Korean. Trust and relationships are very important. It is very difficult for foreigners to enter a highly predictable and sophisticated market.
Flannery: On the demand side, what kinds of companies are looking to borrow?
Lowy: A lot of the focus is around real estate. South Korea's central bank has significant rules in place to limit real estate (debt), which creates significant demand. We avoid construction risks. Construction companies often enter when they have developed a property but are unable to sell it as quickly as planned. We come in to refinance construction loans in a bridging situation until the property can be sold. The properties we consider include office properties, residential properties, and warehouses. And then there are industrial businesses, which are usually medium-sized.
Michelle Loewy
SC Lowy
Flannery: With China's growth slowing and geopolitical clouds gathering over the region, what do you think is South Korea's place in the global economy?
Lowy: Geopolitical clouds are covering the entire world. It's very cloudy (lol). It is clear that South Korea's position is on the side of the United States compared to Japan. As a result, China's importance in the Korean economy has declined significantly. But ultimately, China is important to every economy in the world, both on the supply and demand sides.
But one thing that makes South Korea different is that it was one of the first markets to aggressively raise interest rates to bring back inflation.
Flannery: How long have you invested in India?
Mr. Lowy: I have been investing in India for about 20 years. Initially in 2004 he invested some portfolio of NPLs (Non-Performing Loans). The situation has changed considerably. The bankruptcy regime and creditor rights are much stronger than before. They are far from perfect. It's not as bad as Korea, but it's predictable. We try to avoid using the court system as much as possible because it is much more time consuming.
India's opportunities lie at the macro level. The economy is really strong. The banking system is highly regulated, with many state-owned banks placing significant limits on the projects they can engage in in an economy starved for capital for growth. Our company does real estate business, but we also do a lot of industrial business. The latest deal approved in India is by a company that makes credit cards.
Flannery: Do you think more manufacturing will switch from China to India? What are the drivers of manufacturing growth in India?
Lowy: There are multiple factors, some of which are geopolitical. Some countries would rather do business with India. It is also local demand and growth in India itself. India will displace China with low single-digit GDP growth. There is also growth in exports.
Flannery: So if you were to start SC Lowy now, would it be centered around Hong Kong like it used to be?
Lowy: Hong Kong still has some strong advantages. I can't necessarily say that we're already headquartered there. I would like to define this as our largest office. The advantage is that you can continue to hire people. This system still attracts top talent. School education is also good, and it is easy to work in English. It's easy to build a team of foreign staff, there are favorable tax rates and an efficient airport. Although Hong Kong remains our headquarters and largest office, we cannot guarantee that Hong Kong will still be our largest office 10 years from now.
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