Investors need to be wary of comparing apples with oranges in private credit

Nehemiah Richardson,

A more clear distinction between global private credit and Australian private credit would help investors and advisors ensure they are not comparing ‘apples with oranges’ when considering an allocation to this asset class, according to a private credit expert.

There are vastly different risk and return profiles between the local and international private credit markets, says Nehemiah Richardson, CEO of Pengana Credit, a division of Pengana Capital Group. “Comparing global private credit with local private credit is like comparing apples and oranges. Bout both local and global private credit are often lumped together.

“In reality the asset class is far more nuanced, and this is most apparent when you consider the banking sector in Australia in comparison to the USA and Europe.

“In Australia, 90 per cent of corporate lending is done by the major banks, with only an approximate 10 per cent of lending by private credit providers.

“In the USA and Europe it’s almost the exact opposite: approximately 84 per cent of corporate lending is done by private credit providers, with around 16 per cent done by the banks.”

This creates different risk profiles between local and global private credit, he said. “In Australia most private credit loans are in commercial property and subordinated positions in asset-backed structured finance vehicles, where banks don’t have the risk appetite, and which are yet to be cycle tested.

“Yet in the USA and Europe private credit plays a major role in their economies. There is a massive market of lending available including relatively lower risk positions in bilateral loans to quality companies.”

Richardson said the historical loss rate for global private credit direct lending strategies since 2005, a period which includes the GFC, is 1.03 per cent annualised (source: Cliffwater). “For a well-constructed portfolio the loss rate can be miniscule, for example the Pengana Mercer global private credit direct lending funds demonstrate a weighted average loss rate of less than 0.2 per cent per annum.

“Unfortunately average loss rates for the Australian private credit sector are not widely available, another reason why investors need to be informed before they invest.”

Pengana Credit runs several different investment strategies backed by global private credit, including its online term accounts, TermPlus, the listed Pengana Global Private Credit trust (ASX: PCX), and the wholesale Pengana Diversified Private Credit Fund.

Globally, the private credit industry has surged since the GFC, having nearly tripled in value over the last 10 years to a US$1.5 trillion market size at the start of 2024. Some forecasts suggest the market could expand to US$2.8 trillion by 2028, with fund manager BlackRock predicting it will grow to US$3.5 trillion.

Richardson said managers and investors need to stay disciplined as the sector grows. “It’s likely we’ll see more variability in complexity and risk profile as more product enters the market. There will be longer term benefits in sticking with the quality end of private credit.”