Private Markets 360° | Episode 27: Unlocking Private Credit Potential in Asia

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Jocelyn Lewis: Welcome to Private Markets 360°, your insider's guide to the world of private investments.  Today, we are joined by Chris Botsford, Co-Founder and Chief Investment Officer at ADM Capital. 

Chris brings over 25 years of pioneering experience in private credit across Asia where he   has been at the forefront of investing in underfinanced SMEs across the APAC region. His extensive experience includes navigating some of the most complex financial landscapes from the depths of the 1997 Asian Financial Crisis to today’s intricate global markets. 

With a remarkable track record of transforming distressed debt into strategic investments, his firm has been at the forefront of private credit in Asia, developing innovative approaches to lending and investment that go beyond traditional banking models.

His financial acumen coupled with his knowledge of local markets, long-standing relationships and commitment to ESG principals, set his investments apart.  From negotiating complex deals in Indonesia to developing cross border lending strategies, he has consistently demonstrated an ability to see opportunity where others see obstacles.  

Today, he’ll share insights into the private credit market in Asia, the evolution of his investment strategy and the critical lessons he’s learned over decades of global investing.  

Chris, welcome to Private Markets 360o! It's such a pleasure to have you with us today. How are you doing?

Christopher Botsford: Great! Thank you so much for having me on the show, and I hope I can part a little bit of our experience over the past 20 years, 30 years to your listeners.

Chris Sparenberg: We're thrilled to have you, and we've got quite a conversation ahead of us. I’d like to jump right in Chris, can you tell us about your background and journey to establishing ADM Capital?

Christopher Botsford: yeah, my background, I started off while I read engineering at university in the UK, and wasn't very good at that, so ended up at a bank doing financial engineering, really, at the formative years of the currency swap market, and then helped found a sort of boutique derivatives company. And then when the Asia financial crisis happened in 97, I and a couple of friends set up ADM Capital, really looking at a situation where almost everything was for sale and there was very little information. And really, at that point, it was, it was very complicated to get detail on what you should be buying and what you shouldn't touch. But that was the beginning of ADM,

Chris Sparenberg: It's a fascinating story, Chris, I'd love to drill in a little bit here and talk about some of the early success stories you had, how you developed your approach, and maybe some anecdotes from your time early on.

 

Christopher Botsford: Yes, it's quite interesting, because back then, of course, everything was for sale, and a lot of people had a lot of this distressed debt, distressed bonds, in their balance sheets. So when we went round with a hat saying, Would you like to invest in a fund to go and buy distressed assets, distressed debt, everyone said, Well, why would I do that? Because I've already got bucket loads of it in my balance sheet. So we sat down and we thought about it, and we came up with quite an interesting idea, which was to do a fund based on in-specie subscriptions. So if, if you, as the investor, give me your holdings in the distressed debt instead of cash, then what we will do is accumulate holdings from lots of different people, and then we'll have a critical mass to go to Indonesia, go to China, go to India, and go and see the borrow and say, Well, I own a significant amount of your debt. Are we going to how are we going to resolve this? 

 

Well, the investors, or potential investors, said, Well, how much is my bad debt worth against your other potential subscribers? Though, good question, and what we did was to work with HSBC to pull the market and come up with a grid of approximate values of all these different holdings we're being offered. And because most of the holders of this debt at the time just wanted to get it off that balance sheet, because they didn't want to be reminded of the bad deals they've done in the past. You know, to have ADM capital units is much more neutral than having a PPE backer or whatever. And so actually, people liked the approach, and they started to give us debt. Well, we ended up with all sorts of things, but one particular piece which was quite interesting was we accumulated debt in a satellite TV company called Datacom, and they'd launched the satellite borrowed 260 million through a bond issue through Merrill Lynch, and the debt was trading, if you like, through the HSBC grid at 5 cents in the dollar. But when we did the count, had a pledge of an insurance claim from AIA because one of the solar panels had failed to deploy, and that claim was like $50 million so 50 divided by 260, is more than 5 cents. So we flew down to Indonesia, and we said, explain this to us. Why is that the case? Well, initially, the main guy there, Peter Gontha, who later became the ambassador to Poland for Indonesia. Peter Gontha he sat there and he said, Look, I hate you, hedge fund guys, you're always trying to sue us. You arrested my son at Harvard, and you make my life difficult. Why should I talk to you? And we said, well, because otherwise how you're going to resolve your situation? So he led across there and said, How much did you pay for my debt? And I said, Well, actually, we got it free. Well, that was a big conversation starter. 

 

He said, How can I get all the debt for free? If you can do it, tell me your secret. And with that, we had a good dialogue, and we came up with this solution where he said, the reason you can't claim against insurance is you need my signature as President Director to release the insurance payment, and I'm not going to pay it unless I get something for it or the company gets something for it. So we came up with a solution. We said if we could get back 90% of his debt into an escrow account, then would he release that insurance payment, and he signed off on the release, plus the sale of SCTV, a 30% holding an SCTV, which was the second biggest TV company, and we found a buyer through our network for that. We put the whole lot in escrow. We went back to Merrill Lynch. They bought back as it was 96% of the bond at 30 cents, but conditional on getting 90% of the bond, and they were all on commission, providing they got success and the deal was done, they managed to Datacom, managed to cancel most of their debt, and the bondholders went away with a pretty good profit compared to the 5 cents it was marked out, and our investors also got a big markup from 5 to 30. So good deal. Good win all around. And Peter Gontha became a pretty good ally. So that was quite a fun outcome.

 

Jocelyn Lewis: Yeah, we love to hear stories like that with positive outcomes, especially when you're dealing with distressed debt, because there's a lot you can uncover there.

 

Christopher Botsford: Well, we went on and we started work with India cements, which is one of the biggest cement companies in South India, and we did a similar sort of transaction with them. And the fellow that was behind that was also the head of the Indian Cricket Board, and he was quite interesting that we became quite good friends again, having had hostility at the beginning. And we asked him, could you be a… do a favor and then tell us who we should be dealing with in India and how we can help them. And he said, actually, what's much more valuable at this stage in India is who you should not be dealing with. So that was quite amusing at the time. I think India's moved on that wonderful place to be.

 

Jocelyn Lewis: For sure. But it's always nice to have those relationships, and you know, those allies that can help you uncover some information that can turn out to be really, really helpful. So that's a good story. Chris, that's some really great information about how the start of private credit really happened, and how you were there in Asia. But could you share some insights too, on how the markets evolved and what have been some of those growth drivers of the demand for private credit within the Asia Pacific region?

 

Christopher Botsford: Yeah, to put it in perspective, private credit in Asia is still pretty small as a percentage of GDP compared to what it is in the States or in Europe, approximately 6% of the global private credit market is in Asia, compared to perhaps 50% of GDP. So it's got a long way to go, and there are very good reasons why it is still so low. It's pretty fragmented from a legal perspective. There's very little sponsor finance outside of Australia, so it's a very different market. And I think you've really got to be comfortable with Asia to be comfortable with private credit out here. So putting that aside, the growth actually happened from over time, it stopped being a distressed market into being a market where there was really a need for more complicated finances as bridge finance. And that was and it still is, things like cross border finance, things where quick money is needed, so bridge finance, and then as different crisis happened, like 2008 as different jurisdictions have brought in different banking regulations, then you get a movement of the need for additional credit from outside. So, for example, in the Philippines, at one stage, the banks or the finance minister changed the way the banks calculated reserves for loans related to property, and overnight, there was no credit available for the property sector. Well, if you were there available, and you understood the Philippines, you could get outsized return with really good collateral to provide the completion finance on buildings. You know, a building that's three quarters finished doesn't have any revenue and it's pretty useless, whereas, if you provide the extra 10 to 15% to finish the building, then you're producing an asset that can be sold or can be led. So there's a lot of value, and the developers would be happy to put nearly anything in to get that done. So you're really quite opportunistic, and that's the way it's always pretty much remained, putting aside Australia, where there is a good sponsored finance market.

 

Jocelyn Lewis: Yeah, opportunistic credit has really evolved both, I would say, within APEC, definitely within the US, and over in Europe as well. But and it still continues. But I was also wondering if you could share with us some of the ways in which investing in Asia compares and contrasts with investing in the US. Of course, if you can mention anything about returns, are they comparable across regions, and what are some of the unique implications to consider when you're thinking about risk versus reward?

 

Christopher Botsford: Well, for a start, you know, I think over here it's, it's a slightly different model. What we do at ADM is perhaps slightly different to what others do. We tend to try and become an advisor, unpaid advisor, to a borrower before we lend to them. And we'd really try to find out why they're willing to pay our outsized returns. And over the years, we've averaged about 16.8% exited deal gross returns across all jurisdictions. And you will ask, Why? Why are we able to get that and what's different from the States, perhaps, is we don't leverage either. Just because you want to be have time on your side, as opposed to time against you. And if you leverage up the portfolio, then time eats you alive, and we've seen that with portfolios elsewhere. So these are unleveraged returns. 

 

We do stuff that's below that if there's more collateral, but it really depends on the type of collateral, the collateral pool and so on. A lot of the lending in the States and elsewhere is uncollateralised or lightly collateralised. We're pretty covenant heavy, as well as having the collateral perhaps we're lighter on cash flow and more flexible, because that can differentiate us from the banks. The banks in Asia tend to be less flexible. So if you look at the banks, who are the major lenders in Asia that dominate the market, they tend to be the state-owned or privately-held, family-held, and they tend to be very focused on their own jurisdiction. And a lot of the business that we end up getting then is cross border or more complicated stuff, whereas in the States, particularly, you've got one fairly generic system that goes across America, and of course, you've got one legal system. Out here in Asia, you've got to understand all the different legal systems you're working in. So I'd say it's considerably more complicated. And that's a plus and a minus. Minus is, you've got to understand it all before you go in. Plus is, it's a barrier to entry for other people coming into staff lending, although, as one of my counterparts joke, there are no barriers to lending money in Asia, just getting your money back. So that's that.

 

Jocelyn Lewis: Very important. And Chris turning also to capital raising, I'd imagine now ADM has this track record, but capital raising is kind of difficult in this current environment across the globe. Could you share some insights into the current landscape for capital raising that you're seeing specifically within the Asia Pacific region, and are there any challenges specific to the investor base in Asia versus the US.

 

Christopher Botsford: Yeah. Typically, our investor base going back was, was us, some Australian and some European. So whilst we had a small amount from elsewhere in Asia, Korea, Japan, relatively speaking, it was quite small. And of course, with geopolitics having changed, the American appetite for Asia, that's made that side much more difficult. And I think with the volatility in the markets, people don't want to take the risk of coming into Asia, let alone into private credit in Asia. 

 

So yeah, it has been hard where we've managed to raise new money around very specific funds, and we've got one fund that is developing landscapes in Indonesia, and it's partly guaranteed by DFC, by the US government, and that's about really avoiding DF, deforestation and mangrove destruction. And it's doing that by investing in the landscape, believing poverty, alleviating poverty, and so on. So that's a very specific fund. Another fund that we've got is on ESG integrated finance towards smart cities. You've got a big move here in Asia, particularly in some countries like India, where you've got a lot of people migrating from rural areas into the city. And is what the kinds of investments that one can do to take advantage and really help that kind of movement. And there, we've got very specific investors that like that theme, that can understand that you're on a trend that is going to keep going, and that if you've got collateral, you know, even if you get into trouble on a deal, the collateral value is going to go up rather than down, because of the trends in in what's going on with the population. So that's that resonates the regular funds bit more difficult.

 

Chris Sparenberg: So, Chris, when we talk about deals, you did a good job of outlining some of the challenges in multi jurisdiction lending and some of the finer points of kind of working with cross border payments and other factors. But would love for you to take a moment to walk us through the diligence process. How are you underwriting these deals? We have a good sense of how you're finding them, but any other insights that you have there for what drives deal flow would be really great for our listeners.

 

Christopher Botsford: Yeah, I think again, what differentiates us is about 85% of the deals we do are bilateral deals with ADM as the sole lender. So we take very few of other people's deals, and that's because we really want not only to understand really what's going on behind the scene, but to have a dialogue with the borrower to make sure that everything is valid and everything hangs together. But also because for risk mitigation, primarily, we put ESG KPIs into the deal terms and things like avoiding areas where there's flooding, putting better finishes into buildings where their lead plus and so on. So we tend to end up with a pretty close relationship with the borrower. And then we're looking at what, what are the risks to his business, which are going to cause defaults in the loan that we give him, and how are we going to be repaid? And what are the risks of getting repaid? And then what other assets in the future could he use to support if the outcome is different to what we'd expected? 

 

We then use a network of lawyers and accountants that we've worked with over the years, and we've been doing this now 27, 28 years. So we've built up a pretty good collection of people that we know and trust, and we cross-reference with them the underlying assets, you know, what risks, there are outstanding taxes, whatever other problems a certain asset may have. And then finally, you're looking at what is going to happen to that asset in the future, in terms of, you know, one thing we can do if we do get into trouble, and it's extremely rare, is go to court, and I can come back to why that isn't such a good idea. 

 

Another is to be with the borrower and try and find a solution to the problem, and that's a preferred route. And the third is to sit back and wait for asset appreciation to help you out. And in many of these cities, situations in Asia, in general, there has been property appreciation, the one outside that has been China, which obviously has had its problems and that I set aside as a different case, but in general, overall, it's been a very benign environment. And so far, for most of the things we've been involved in, in the end, values will take you out of problems that you've had if you've got waiting time, which comes back to leverage.

 

 

Chris Sparenberg: I think we're all dying to know why you avoid court or kind of what some of your experiences have been there.

 

Christopher Botsford: The court system is, is super interesting around Asia. And we, case in point is we bought one time early on, a portfolio of NPLs from one of the big banks in Malaysia, we did a study on how long foreclosure takes depending on the jurisdiction. And inside Malaysia, it's a federal system, so each state has its own legal network. And you look at KLCC, which is downtown KL the early capital, and there, it's about 18 months. If you go out to more remote regions, like Sabah, it could be 10 years. So it's not just the legal system in Malaysia. You're talking about very specifically which city you're in and what's going on. And if you go to a hostile situation, then you could be there for even longer, and it can get very difficult, but you've got to remember that the asset has lending capacity for the person that ends up owning it. And whilst we've got our clause into an asset, and we've got mortgages, title deeds, chops or whatever, it makes it very difficult for another borrower to or the original borrower to borrow any other money against it. So whilst one says, Okay, it's 10 years, work out in reality, actually, there's a very pragmatic system of getting around the table now, because we tend to do bilateral deals. We tend to have a dialogue directly with the borrower. We don't have these big workout scenarios where, say, 10 banks and three private credit companies all turn up to a table, each with their lawyers, and it becomes a very hostile environment. What we tend to do is try and find a positive way through where we find other people that may buy some of their subsidiaries or a golf course, or they've got a relative that might bail them out enough that we can release some collateral or something. So it tends to be much more a dialogue, rather than some kind of hostile negotiation with a big table of people.

 

Jocelyn Lewis: It's really interesting, Chris, because in my prior life, I also invested in non performing loans. And a lot of what you're talking about, it's the same themes that happen here in the US. There are certain jurisdictions that you just know are going to take longer, be more difficult to get out of specific deals, depending on where they're based, where the collateral lies. And of course, those relationships that you're building with the borrowers and out of court restructurings, for sure, have tended. I've seen, in my experience, much better returns going that path when applicable.

 

Christopher Botsford: Sometimes here you have different jurisdictions, and when we're doing these cross border trades, and so one part is better than another, so you can have different treatment the two sides of the same loan.

 

Jocelyn Lewis: Yeah, absolutely. But I think it's really interesting and unique. How do you explain some of these experiences and what you're seeing and really understanding the story that's associated with each of the borrowers, as well as finding, you know, a common way when you can so that both sides benefit. And I think that it really speaks to how you've evolved, you know, with here, I think it was over 25 years of experience. It's really fascinating.

 

Christopher Botsford: Thank you. I'll give you an example. Quite a lot of people say, Well, where are you investing? Which country you're investing in? Because increasingly, a lot of what we do is cross border. It's quite interesting to reflect on risk and return and where the underlying risk lies. We had a company approaches who were making modular housing systems in Vietnam, and they'd gone into a bit of a problematic development in Auckland, they had part of the government there as a put option on some of the end product, but they had a working capital issue, and we lent them the money to try and help solve the problem. And there you've got, really a Vietnamese borrower, but quite a lot of the underlying risk is actually in Auckland with a put option to part of the government. So, you know, when people say, oh gosh, it must be so risky down there. You say, well, hold on. You know, where do you put the New Zealand government or the Auckland government in this regard? And it's quite interesting to pick us, pick these deals apart, really come down to what the underlying risk is and the legal system that's underpinning it. As most people would have stopped at Vietnam and said, Oh, maybe that's too risky for me. But actually, when you look at what we're trying to finance, a good part of that is this Auckland Property.

 

Chris Sparenberg: It's incredibly interesting how interwoven so many of these opportunities are. And that turns us to our last question, which is, as you're in market, as you've been here, you know, for two plus decades, and you've seen these changes take place in Asia credit. Can you give us a sense of what you see on the horizon? What are the trends coming over the next two plus years? Where do you expect more activity?

 

Christopher Botsford: It's super interesting. I mean, at the moment, everything is pretty hard to predict, so you know, it's a little bit difficult. But one thing is for sure, is the growth is going to continue in Asia, and that a lot of the bigger banks have backed off from Asia. And so, you know, as you get these more complex transactions, you know, there is a space for us private credit providers. And in particular, if you look at what's going on, where supply chains are threatened, where people feel they've got to diversify where they're getting product from, you see a move. For example, there was an Indian company that called us up this morning saying that they want to diversify their production into Indonesia and Vietnam. Could we help them and provide a bit of finance? You get these transactions where their Indian bank would not understand the risks in Vietnam or Indonesia wouldn't be comfortable with that, and certainly the Indonesian so Vietnamese banks wouldn't be there and available to an Indian bank. Last week, we had a similar case, a Korean company looking to go in Australia, and it's exactly the same sort of thing that you get these cross border things, and there is just a need for someone to fill the gap once the companies are up and running, which is maybe two years time, then the refinancing comes from the local bank relationship where they've invested, because they understand now and it's been de risked. So you know, that's our exit route, which is good. 

 

 

Chris Sparenberg: Certainly. Fascinating to see all this play out, and we'll be keeping a close eye on it. 

 

Outro 

Chris Sparenberg: Thank you for joining us for this episode of Private Markets 360o  where we had the pleasure of speaking with Chris Botsford, Co-founding Partner and Chief Investment Officer at ADM Capital. Chris provided invaluable insights into the evolution of the private credit market in Asia, highlighting the significant opportunities available for investors and the importance of integrating ESG principles in financing. We delved into the unique challenges and dynamic of capital raising in the Asian market, the differences between private credit practices in the US and Asia and the critical role of local relationships in navigating diverse jurisdictions. Chris' extensive experience and expertise truly shed light on the complexities and potential of private investments in APAC. We appreciate you tuning in. I hope you found this discussion as enlightening as we did. Don't forget to subscribe to Private Markets 360o for more expert insights and trends in the world of private investments. Until next time.