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Asian private structured finance: Growth capital in a flavour other than vanilla

Asia’s nascent market in structured growth capital is hard to define and even harder to resist. Fat margins and tied clients are bringing more entrants and might engender greater risks.

In an industry saddled with high fixed costs and cut-throat competition, investment banking learned long ago to eat what it kills. As traditional markets become commoditized and overcrowded and fee margins shrink, the industry’s innovative vanguard drums up new ways to earn its lucrative crust.

So it is proving in Asia’s capital markets with the emergence of a new financing product that straddles several funding disciplines and defies accurate definition. Essentially, highly structured debt products offering attractive equity participation rights, they occupy the space between established high-yield debt and the vanilla convertible bond market and are typically issued by companies unable or unwilling to tap more traditional funding sources.

“So far, we’ve done the most business in China and Indonesia,” says Andrew Cooper, managing director and head of Pacific Rim equity-linked capital markets at Merrill Lynch. “Companies [there] have been sufficiently rehabilitated to raise private capital from a small group of investors. The further you get away from 1997 [the start of Asia’s financial crisis], the easier it has become.”

Merrill Lynch has already closed several such deals, termed for the purposes of this article, structured growth capital (see box), and claims to have a strong pipeline of new transactions.

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