Emergence of convertible notes as an instrument of choice in APAC
Even a decade ago, convertible notes occupied a niche middle ground between traditional private credit and private equity markets. However, their scale has become impossible to ignore with market observers reporting a sharp uptick over the past two years, fueled by private credit's rapid expansion from roughly US$320 billion in 2010 to between US$2 trillion and US$3 trillion. What is particularly striking is the convergence of investor interest: private equity sponsors, private credit platforms, and other alternative capital sources are increasingly deploying convertible notes as an important part of their investment toolkit. Asia-Pacific momentum is building with PRC issuers setting new records for offshore convertible issuance since early 2024, and regional private-credit funds now managing many multiples of previous assets.
Forces propelling the rise of convertible notes and navigating the debt-equity spectrum
Since 2023, with tightened APAC equity market liquidity, policy rates at 15-year highs, and scarce IPO exits, many investors view structured/hybrid equity as a natural bridge turning credit deals into long-term equity plays. Investors are demanding more than simple liquidation preferences: collateral over hard assets, financial ratio covenants, and IRR floor certainty. The market has responded with secured, redeemable convertible notes offering lender-style protection (guaranteed exit rights, credit covenants, default triggers) and equity-style optionality (cash at maturity or conversion at pre-agreed valuations). While the pitch sounds irresistible - equity upside with lender-style downside protection - this paper explores a contrarian perspective: might provisions designed to protect downside risks potentially suffocate upside in practice, with safeguards possibly constraining target company growth and inadvertently undermining meaningful equity returns.
Convertible debt offers compelling advantages: it delivers more predictable, risk-adjusted returns that are attractive for many investors and deployment scenarios. This paper discusses the strengths and limitations behind such structured / hybrid equity structures.
Click here to read the full insight: "Hybrid Equity in Asia: A Deeper Dive into the Role of Convertible Notes."
