Private debt and distressed asset investing have become increasingly significant in emerging markets, especially in the East Asia & Pacific (EAP) region. As global economic conditions fluctuate, investors must navigate evolving opportunities, risks, and regulatory landscapes. Johannes Raschke, Senior Investment Officer at the International Finance Corporation (IFC), brings over two decades of expertise in corporate finance, alternative investments, and non-performing loans (NPLs). In this interview, he shares insights on the state of private debt, strategies for distressed asset recovery, and the impact of ESG in private credit.

Private debt has grown as an alternative asset class in the East Asia & Pacific region. What unique factors make this region attractive for private debt investors, and where do you see the biggest opportunities and risks?

East Asia and the Pacific is an attractive region for private debt investors due to its relatively underdeveloped market compared to Western economies. Unlike in the U.S. or Europe, where private debt is prevalent, East Asia and the Pacific and the broader region has financing gaps, particularly for micro, small, and medium enterprises, which face challenges accessing traditional bank financing due to regulatory constraints, lower credit ratings, or a reliance on equity funding. This creates less competition and more opportunities for private debt providers to deploy capital. In this underserved market, private debt investors have greater flexibility and negotiating power to secure favorable terms when structuring transactions, and investors can secure more favorable terms and tailor securities to align with their specific risk appetite.

Opportunities in the region come from the ability to deploy capital across a wide range of sectors. The diverse economies in East Asia and the Pacific, with fast-growing markets, offer opportunities for portfolio diversification. Investors can target industries such as technology, manufacturing, infrastructure, and consumer goods, each of which has unique demand drivers that present growth potential. Moreover, the rise of the middle class and rapid urbanization in many countries creates additional demand for financing, which private debt can help meet.

Challenges arise from the volatile macroeconomic environment, where some economies experience rapid growth while others face slower progress or stagnation. Additionally, foreign exchange risks are particularly pertinent in the region due to its reliance on currency trading and the fact that many countries have relatively volatile currencies compared to some counterparts elsewhere in the world. Another key concern is geopolitical risk, which can also impact market performance and returns.

With your involvement in IFC’s Distressed Asset Recovery Program (DARP) in Asia, how has the approach to distressed asset investing evolved in recent years, particularly in response to economic downturns and regulatory shifts?

IFC’s Distressed Asset Recovery Program (DARP) is an effective tool in addressing high levels of distressed assets. This is crucial for maintaining financial stability and reinstating formal credit access for over-indebted borrowers, preventing the loss of their assets. Distressed asset markets are viewed by regulators as an effective method to enhance the stability of the financial sector. They also provide banks with a means to quickly reduce non-performing loan (NPL) volumes, which can otherwise reduce bank lending and slow economic credit flow when it is most needed.  Data indicates that NPL sales are often associated with new lending, and economies that manage NPL build-ups efficiently tend to recover faster.

The approach to distressed asset investing in Asia, especially through DARP, has evolved considerably in recent years, particularly in response to economic downturns and changing regulatory environments. There has been an increasing focus on providing sustainable and long-term financing solutions, creating flexible structures tailored to the unique needs of each situation. This shift underscores our commitment to ensuring both short-term efficiency and long-term value and stability for our partners.

IFC’s strategy involves working on private market terms to offer tailored, flexible capital solutions. This approach addresses the complexities and extended recovery periods frequently associated with distressed assets, particularly amid unforeseen external factors.

One key lesson from the COVID-19 pandemic was the importance of extended timelines for asset resolutions. The crisis revealed that businesses and assets required significantly more time to adjust to the rapidly changing environment. Consequently, longer-term solutions backed by more flexible capital are essential to help businesses recover and strengthen after facing challenging situations.

Additionally, regulatory changes in various Asian markets have highlighted the need for navigating local regulatory frameworks effectively. This has reinforced the importance of collaborating closely with local stakeholders to ensure that investments align with evolving regulations while fostering successful collaboration with authorities.

Given your expertise in NPLs, how has the landscape for distressed debt changed post-pandemic? What are the most effective strategies for managing and exiting NPL investments in today’s market?

Post-pandemic, the landscape for distressed debt experienced significant transformations, notably due to the measures implemented by numerous countries during the crisis. Moratoria on loan repayments, government subsidies, and temporary debt relief measures provided immediate relief to borrowers, but these also deferred the inevitable increase in NPLs. Consequently, many NPLs remained unresolved, and now, as these temporary measures have ended, investors are increasingly confronted with a backlog of NPLs.

The complex legal and regulatory environments in many regions further complicate the resolution of these distressed assets. In some instances, legal frameworks already slow in handling debt restructuring have been further strained by increased volumes of NPLs. Additionally, the pandemic's lasting effects on economies have introduced additional obstacles. Investors may encounter situations where resolving NPLs necessitates navigating a convoluted mix of outdated laws, political interference, and regulatory uncertainty, making it challenging to achieve quick and favorable outcomes.

To manage and exit NPL investments effectively in today’s market, investors must concentrate on building strong partnerships with local experts who possess in-depth knowledge of the regulatory landscape and can adeptly navigate the unique challenges of each jurisdiction. Local partners, including specialized legal advisors, restructuring professionals, and asset managers, are crucial for executing successful NPL resolutions. These partners can assist investors in identifying the most viable solutions, such as asset sales, restructuring deals, or strategic collaborations, while ensuring compliance with local legal and regulatory requirements.

Given rising NPL levels and complex resolution environments, a hands-on, region-specific approach with trusted partners is essential for successful management and exit strategies. Investors who invest the time to understand the local market dynamics, legal hurdles, and potential barriers to resolution will be better positioned to unlock value from distressed debt investments while mitigating risks.

IFC places a strong emphasis on sustainable finance. How does ESG integration impact private debt strategies, particularly when dealing with distressed assets?

ESG integration is a critical element of private debt strategies, particularly in the context of distressed assets, as it aids in risk mitigation, value enhancement, and the promotion of long-term sustainability. At IFC, we require that all partners adopt relevant Environmental & Social Management Systems (ESMS), adhere to IFC’s Performance Standards, and follow international best practices.

When investing in distressed assets, ESG considerations are especially important due to potential legacy risks such as environmental liabilities and governance failures. By ensuring that borrowers and asset managers implement robust ESMS, we can enhance risk management and pave the way for financial and operational recovery. For example, enforcing compliance with IFC’s Performance Standards addresses issues including labor practices, community impact, and climate risks, thereby improving asset quality and long-term viability.

Furthermore, integrating ESG into private debt strategies increases investor confidence, aligns with global sustainable finance trends, and creates opportunities for responsible exits. By establishing clear E&S requirements, we assist distressed borrowers in transitioning towards more resilient business models while promoting financial inclusion and sustainable economic growth.

In a high-interest-rate environment, what advantages does private credit offer compared to traditional financing methods? How should investors evaluate the risk-reward balance?

In a high-interest-rate environment, private debt provides flexibility in structuring deals and access to capital for borrowers who may struggle with traditional financing. However, emerging markets in particular face growing challenges. With higher yields available in developed markets, investors have fewer incentives to pursue private debt strategies in emerging markets, especially given currency volatility, legal inefficiencies, and geopolitical risks. Unlike previous low-rate periods when returns on emerging market investments stood out, today’s landscape demands a more cautious approach. Investors must assess risk-adjusted returns, regulatory frameworks, and ESG considerations. While private debt remains viable in areas such as structured credit and ESG-linked lending, a disciplined, selective strategy is essential to balance risk and reward effectively.

How do geopolitical tensions and macroeconomic uncertainties impact distressed asset recovery in the East Asia & Pacific region? Are there specific trends investors should be watching?

Rising global uncertainties complicate distressed asset recovery in the East Asia and Pacific region, increasing both the complexity and duration of resolution processes Investors must recognize that traditional recovery timelines are likely to be extended, necessitating long-term, stable financing solutions rather than short-term fixes. With unpredictability in economic conditions, a flexible approach to exits is essential, and relying on a single predefined strategy at underwriting might not be sufficient. Shifting macro environments, regulatory changes, and currency fluctuations can drastically alter the feasibility of an exit plan, requiring investors to develop multiple alternative exit strategies to preserve value and manage downside risks.

Investors need to watch for regulatory shifts and policy interventions that impact insolvency frameworks, which are increasingly difficult to predict in today's volatile environment. Governments across the region are introducing new policies and adjusting existing regulations related to insolvency frameworks, debt restructuring, and capital controls, all of which can significantly impact distressed asset recovery. These changes can create both opportunities and risks, but their unpredictability means that investors must be cautious.

To mitigate risk, a diverse portfolio allocation across various sectors and geographies is crucial.  This approach avoids concentration in specific areas vulnerable to regulatory shifts. Relying heavily on a single sector or market that may be subject to specific regulatory changes, such as new tariffs or stricter governance standards, could expose investors to greater risks. A well-balanced approach that spreads investments across multiple sectors and geographies can help avoid concentration in areas vulnerable to regulatory shifts, which protects the portfolio from unforeseen impacts.

Institutional investors are increasingly looking at alternative assets for diversification. How do you see the role of private debt evolving within institutional portfolios, and what should investors consider before increasing their allocation?

Institutional investors are increasingly exploring alternative assets for diversification. However, in the current high-interest-rate environment, there has been a shift towards more stable investments in developed markets. The higher yields on traditional fixed-income assets have made the risk-return profile of alternative investments less attractive. In private debt, there is a noticeable move away from complex structures to performing credit, which offers more predictable returns. Investors are now focusing on credit with a lower risk of default, particularly in mature markets, where regulatory and legal frameworks are more stable. Before increasing their allocation to private debt, investors should consider the risk-reward balance, taking into account the stability of underlying assets, market maturity, and the impact of volatile interest rates on distressed opportunities. It is essential to assess whether the expected returns justify the risks, especially when traditional bond investments appear to offer more attractive yields with lower risk in the current environment.

What are the emerging trends in private debt and distressed investing that investors should prepare for in the next 5-10 years? Are there any market inefficiencies or opportunities that remain underexplored?

In Asia, the private debt market shows growth potential due to a capital gap for micro, small, and mid-sized businesses and distressed assets. The lack of mature credit markets and financial infrastructure in many parts of the region creates an opportunity for investors to tap into this underserved market, where private debt could play a critical role in financing growth, restructuring, and recovery.

However, regulatory fragmentation and evolving legal frameworks pose challenges. The region’s developing regulatory environment could significantly impact asset offerings and resolution processes. As insolvency laws and debt restructuring frameworks advance navigating these changes will be critical. A stable regulatory environment can improve the resolution process for distressed assets, enhancing recovery rates and providing more stability to private debt investments.

Investors should also consider ESG integration, as aligning with global sustainability standards becomes more prominent in Asia. Strategies prioritizing ESG principles will capture long-term value and mitigate risks related to regulatory changes and stakeholder expectations.

Lastly, improved financial infrastructure, new technologies, and increasing cross-border investments present significant opportunities in Asia’s private debt market. Early adaptation to regulatory developments focus on underserved sectors will offer attractive risk-adjusted returns while shaping the region’s financial landscape.

Conclusion

Johannes Raschke's insights highlight the dynamic nature of private debt and distressed asset investing in emerging markets. As regulatory landscapes evolve and economic conditions shift, investors must adopt flexible, long-term strategies. The integration of ESG principles in private credit further emphasizes the importance of sustainable investing. With the right approach, private debt remains a viable and impactful asset class in East Asia & Pacific, offering opportunities for financial recovery and economic growth.