Super assets strike high at $3.94 trillion, official data shows RBA report points to relatively low defaults in private credit market

Simon Arraj

Australia’s superannuation savings struck a record high in the June quarter of $3.94 trillion, more of which is being invested in private assets as superannuation funds seek to diversify their portfolios out of equity and bond markets, according to according to Simon Arraj, founder and director of private credit investment manager Vado Private.

Household  wealth rose by 1.5% during the quarter to an all-time high of $16.48 trillion, new data from the Australian Bureau of Statistics shows.  Net worth was boosted by a record level of property assets of $11.22 trillion as at 30 June 2024, which represented 68.1% of all household assets, up from 61.7% in December 2020. The key driver of household wealth gains in recent years has been rising property prices.

Households also held $1.72 trillion in cash and deposits and a record $3.94 trillion in superannuation assets, or around one quarter of total household wealth, up from $3.92 trillion in the March 2024 quarter.

“The superannuation industry is growing, and in recent times, assets under management have been boosted by rising compulsory contributions and a very robust jobs market. As super funds seek to diversify their huge portfolios, more of their funds are being invested in private assets such as private debt and equity, which now comprise around a fifth of Australian pension funds’ A$3.9 trillion of assets, both locally and offshore, according to recent estimates from Bloomberg,” Mr Arraj said.

“As pointed out by Australia’s Reserve Bank today in its Financial Stability Review, ‘recent defaults experienced by private credit investors have been less frequent relative to other comparatively risky investments in the leveraged loan or high-yield bond markets’.

“That could help to explain why Australia’s largest institutional investors are allocating more to private credit assets including Equip Super, UniSuper and AustralianSuper. Just last month, Australian superannuation fund Equip Super said it plans to invest billions of dollars in private markets investments over the next few years and some of that will flow into private credit funds,” Mr Arraj said.

Private credit, or non-bank lending to companies, can offer retiree and other investors an attractive risk-adjusted returns… Importantly too, investing in private credit can reduce the risk of equity portfolio losses during periods of downturns in either property or stock markets.According to Mr Arraj, many private credit funds offer yields between 10% and 12% per annum, higher than those offered by cash, direct property or corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 8.65% over the year to 24 September 2024.   “This represents an attractive opportunity for investors to benefit from regular income while their capital is protected by loans’ senior secured position at the top of the capital stack. Stringent loan processes and security taken over borrower assets provide a degree of capital protection,” he said.

“With such a large proportion of household wealth tied up in cash holdings and residential property, both low yielding investments, it also makes for Australians to diversify their assets into higher yielding investments,” Mr Arraj said. “Over time, retail investors could follow the lead of Australia’s largest superannuation funds given the attractions of this asset class.  The key for investors is to conduct due diligence and find a specialist investment manager that can deliver attractive risk-adjusted returns from private credit over time.”