The private credit market is currently navigating a period of intense volatility, driven by a convergence of high-profile defaults and AI-driven technological disruption. While Jamie Dimon’s warning of “cockroaches” – those hidden, lurking impending defaulters – primed the market for anxiety, the rapid advancement of AI tools has shifted that fear into high gear. Investors are no longer just worried about bad underwriting; they are panicking over the AI-driven obsolescence of the companies that anchor private credit portfolios. This has forced major US private credit funds to “gate” redemptions or seek emergency asset sales, turning what was once an “invisible” market into a visible scramble for the exit.
In Malaysia, the sentiment is more tempered. Our markets lack direct exposure to the US credit fallout, and we remain in the initial stage of our own private credit evolution. While a local market exists, it is largely “invisible” and operates within a fragmented regulatory landscape. This is set to change under the fourth Capital Market Masterplan 2026–2030 (“CMP4”). The Securities Commission of Malaysia (“SC”) has signaled a significant shift: private credit will be recognized as a distinct asset class. By designing a dedicated framework from the ground up, the SC aims to leapfrog established systems in the US, building a more robust and localized structure for private credit lending.
Against this backdrop, Malaysian lenders and borrowers must ask: what exactly is private credit, and what is Malaysia’s version of it? Part 1 of this series aims to distil the concept into a clearer framework.
The Malaysian Context: MSMEs and the Funding Squeeze
While the global private credit market sweats over AI-driven redemptions, the opportunity in Malaysia is much rosier. Perhaps the most compelling tailwind propelling the rise of private credit in Malaysia is its potential to solve the long-standing financing gap for Micro, Small, and Medium Enterprises (“MSME”). MSMEs form the backbone of the Malaysian economy, yet they frequently find themselves caught in a “funding squeeze”.
The challenge is oftentimes the conservative nature of traditional banking. Banks are bound by rigid credit frameworks and tend to withhold or withdraw financing the moment a borrower’s financial health deteriorates. For a growing MSME, these restrictive covenants can act as a “glass ceiling” that halts expansion exactly when capital is needed most. Other traditional routes – private equity (“PE”) or an Initial Public Offering (“IPO”) – are also not always viable alternatives due to stringent governance and public disclosure requirements.
Private credit offers a strategic alternative. This “debt-first” approach enables business owners to bet on their own growth and ensure that the long-term upside remains in their hands, rather than being prematurely traded away for an equity injection via PE or an IPO.
Why Private Credit?
To understand how business owners can or should tap this “strategic alternative,” one must look at how the market evolved to fill the gaps left by traditional banking. By and large, private credit emerged in the vacuum left by the 2008 US financial crisis. As regulators tightened capital requirements globally, banks became reluctant to extend leveraged loans to “risky” mid-market companies, preferring to retreat to the safety of larger borrowers.
In their place, non-bank lenders such as specialized credit funds stepped in to provide a new financing avenue for firms that were “too risky” for a bank’s balance sheet. Viewed through this lens, private credit is more than just an alternative; it is a direct market evolution in response to the constraints of traditional finance, offering a level of agility and speed that the legacy banking system simply cannot match.
What is Private Credit?
Stripping away the jargon, this asset class is built on a simple foundation: debt.
1. Credit = Debt
At its core, “credit” is money lent with a promise of repayment. It is the lifeblood of the economy, enabling businesses to spend beyond their immediate cash flow in pursuit of growth. The blunt synonym for credit is debt. Generally, credit flows from two main pools:
- • Banks: Provide credit via loans and deposit-based financing under highly regulated frameworks.
- • Investors: Provide credit via private lending and bonds, typically accepting higher risk for higher returns.
2. Private = Non-Bank, Not Traded on Public Markets
Private credit is “private” because loans are made directly by non-bank lenders – typically asset managers, but also insurance companies, pension funds, or family offices – to companies. Blackstone calls this the “farm-to-table” model, where investor capital bypasses traditional bank intermediaries. Unlike public credit, these deals are privately negotiated, governed by bespoke documentation, and held on the lender’s balance sheet for the duration of the loan.
Understanding Private Credit: A Two-Sided Framework
Like most forms of financing, private credit functions as a two-sided market, connecting the capital supply side (upstream) with the borrower side (downstream).
1. Upstream: Non-Bank Investor Capital
The “upstream” consists of sophisticated capital providers – such as asset managers, insurance firms, and family offices – who deploy funds with an explicit mandate to generate returns above public markets. This segment is characterized by:
- • Mandate-driven deployment: Lenders conduct deep due diligence and modelling to ensure that the risk-adjusted returns are superior to other available investment classes.
- • Yields commensurate with risks: Returns are primarily generated via interest payments. These rates are scaled to the borrower’s specific risk profile and often exceed those of conventional bank loans.
- • Illiquidity premium: Capital is “locked up” for several years in exchange for an illiquidity premium. Unlike public bondholders, these lenders cannot easily exit via a secondary market.
- • Non-bank intermediation: There is no depositor protection or central bank backstop, these lenders hold legal priority as creditors over shareholders in the event of a borrower’s insolvency.
2. Downstream: High-Yield Borrowers
The “downstream” represents the borrowers. While the archetypal borrower is not a blue-chip corporation, they are often fundamentally sound businesses that are simply too complex, too fast-moving, or in a transition phase that does not fit rigid bank lending standards. This segment is characterized by:
- • Growth Hungry Businesses: Borrowers include tech-driven startups and growth-stage firms, but also traditional MSMEs undergoing rapid digitalization or regional expansion. These businesses often require capital for investment-related purposes that go beyond what a bank’s collateral-based model can support.
- • Speed of Execution: Traditional bank loans often involve lengthy approval processes and extensive paperwork. Private credit offers faster access to capital, allowing borrowers to readily seize growth opportunities.
- • Information Opacity: Most borrowers are unlisted and lack the public financial disclosures required for a traditional credit rating (e.g. RAM or MARC). Instead, lenders utilize private letter ratings – confidential credit opinions issued to the lender – to gauge investment risk.
- • Bespoke Covenant Packages: Because these deals are privately negotiated, agreements can include tailored financial covenants, security structures, and enhanced information rights that provide more flexibility than conventional bank or bond market financing.
The Issue with “Cockroaches”
Attracted by high returns and a fragmented regulatory landscape, non-bank lenders have proliferated in the shadows of the regulated financial sector. However, the private credit model relies heavily on a thriving economy; when the cycle turns, weak due diligence and lazy underwriting are quickly exposed.
Jamie Dimon’s famous warning that “when you see one cockroach, there are probably more” serves as a stark reminder: the first default is rarely an isolated incident. It is a signal that more are likely hiding just out of sight.
While we wait for the long-term clarity of CMP4, the current reality remains a regulatory maze. This begs a critical question: In a market where the ‘rules’ are scattered across fragmented frameworks, do the players in the Malaysian private credit market truly know how to navigate the current terrain?
In Part 2 of this series, we will explore Malaysia’s specific version of “private credit” and examine the existing regulatory landscape (or lack thereof) to see how private credit currently functions.
About the authors
Shaun Lee Zhen Wei
Principal Associate
Corporate & Investor Services
Halim Hong & Quek
shaun.lee@hhq.com.my
.
Sherzanne Lee
Senior Associate
Corporate & Investor Services
Halim Hong & Quek
sz.lee@hhq.com.my
.
Carmen Lee Kar Mun
Associate
Corporate & Investor Services
Halim Hong & Quek
carmen.lee@hhq.com.my
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