SC Lowy is wrapping up a new direct lending fund more than three times the size of its predecessor, as the Hong Kong-based asset manager seizes upon strong investor interest in Asia's private debt markets.

The firm started marketing the vehicle focused on Asia-Pacific last April, targeting $300 million, according to co-founder Jamie Tadelis. SC Lowy is now on track to hold a final close for the fund in August on around $400 million, Tadelis said.

SC Lowy, started by Tadelis and Deutsche Bank credit veterans Michel Lowy and Soo Cheon Lee, is known as a high-yield and distressed-debt specialist. The firm diversified its credit offerings in 2018, raising just over $100 million for its first fund dedicated to Asian direct lending. The vehicle was backed by existing LPs seeking broader exposure in the credit markets.

The latest fund comes as investors seek to diversify their private market investments and hunt for higher yields in a relatively untapped market.

In recent years, appetite has grown for private debt funds in Asia, where smaller companies face limited access to credit because of inefficient debt markets. Last year, Ares SSG, an investment arm of Ares Management, closed its biggest secured lending fund in the region on more than $1.6 billion. More recently, KKR raised $1.1 billion for its inaugural credit fund targeting investments in the Asia-Pacific region.

Investors anticipate growing opportunities for direct lending in Asia amid pent-up demand and less competition, Tadelis said. Asia's private debt market, which has only been around for about five years, is less developed than its counterparts in the US and Europe.

The relative lack of competition has helped some credit investors to post higher returns.

SC Lowy's predecessor fund has exited roughly half of its investments, with realized net returns of more than 18% year to date, according to Tadelis. KKR is also anticipating that its Asia Credit Opportunities Fund will generate low- to mid-teen returns, Bloomberg reported.

By comparison, global direct lending funds posted a one-year IRR of 6.96% through Q4 2021, according to the latest PitchBook Benchmarks.

Other Asia-focused private debt managers that have launched funds targeting net returns in the mid-teens include Hong Kong- and Singapore-based OCP Asia.

SC Lowy's new direct lending fund will target opportunities across the Asia-Pacific region, with a focus on South Korea, Hong Kong, Australia, India and Indonesia. It aims to make first-lien senior secured loans in the $10 million to $50 million range to companies across a mix of sectors including infrastructure, industrials, pharmaceuticals, real estate, shipping, commodities and financial services. 

The fund will have a five-year life—encompassing a three-year investment period and two-year harvest period. It will target net returns in the mid-teens using zero leverage. In comparison, direct lending funds targeting the US market typically return in single-digit levels.

Featured image by krisanapong detraphiphat/Getty Images

This article originally appeared on PitchBook News