Private credit to grow share of business lending, fund transparency to become more important
Growth in business lending has accelerated from year-ago levels despite higher interest rates, with still favourable funding conditions encouraging businesses to borrow across Australia and stimulating the growth of the private credit sector, according to Tim Keith, Managing Director of private credit fund manager Capspace.
Data from the Reserve Bank of Australia (RBA)[1] released on Friday reveal growth in business credit of 7.5% over the year to September 30, 2024, up from 6.8% a year earlier, easily outstripping growth in home lending of 5.1% (up from 4.2% a year earlier) and personal credit growth of 2.4%.
The RBA recently estimated[2] the private credit market in Australia is worth around $40 billion in outstanding debt, or around 2½ per cent of total business debt, though that could grow to 5% in 2025, using the same RBA analysis, according to Mr Keith.
“I think private credit could account for up to 5% of overall business lending in Australia by the end of next year,” Mr Keith said. “Still, the industry is far bigger in the US where private lending accounts for a significant portion of business lending. Looking ahead, if private credit lenders can obtain deeper funding pools and a bigger portion of Australian investors’ portfolios, then growth could accelerate as banks will not be able to match the speed and flexibility of private lenders,” Mr Keith said.
According to Mr Keith, private business loans offer some advantages over bank loans for small and medium sized businesses (SMEs). “Lending from their funds’ capital, private credit managers can act much more quickly than banks and they are far more flexible in the businesses to whom they lend. By comparison, banks move far more slowly and can restrict the capital they allocate to SMEs versus other market segments such as home loans,” Mr Keith said.
“Private credit lenders also offer more tailored financing solutions compared to the rigid lending criteria applied by Australia’s big banks. Private credit funds typically offer more customised lending, collateral arrangements, and repayment schedules to match the specific needs of borrowers.”
Drawing investors to private credit are yields that between 8% to 10% in recent years. According to the US Federal Reserve:[3] “Over the past decade, the asset class, particularly direct lending, has generated higher returns than most other comparable asset classes, including 2% to 4% over syndicated leveraged loans. Borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customisation that private lenders offer. Additionally, private debt funds have attracted highly leveraged borrowers that are unable to get adequate funding from heavily regulated banks.”
Mr Keith said: “Private credit returns have been attractive, with some of the highest historical returns across debt markets and those have been delivered with relatively low volatility to investors. For this reason, the private debt market has attracted investment from industry superannuation funds in Australia which have readily diversified into this asset class.”
Private credit investments also offer potentially higher returns than cash investments such as term deposits and residential property. “Yields on many private credit funds sit at around 10% per annum and that is especially attractive with falling term deposit interest rates,” Mr Keith said. The Capspace Debt Fund yielded a return of 9.30% p.a. in October with interest paid monthly.
The Australian financial services regulator ASIC isn’t expected to significantly increase the regulation of private credit funds in 2025, though it will likely insist funds deliver greater transparency over the make-up of the loan portfolios and bad debts as the industry accounts for a greater proportion of business lending, Mr Keith said.
“I don’t think that the market will be heavily regulated as it is still small comparatively to other investment markets. However, private credit could be required to offer investors greater transparency over the loans they grant. ASIC will likely keep pushing funds to declare when loans go bad and disclose more detail of the loans that funds hold within their portfolios.
“I would expect that as transparency in this asset class grows with ASIC oversight, additional investors including those in retirement such as self-managed superannuation funds (SMSFs) will be attracted to private credit given the returns on offer,” Mr Keith said.
———
You must be logged in to post or view comments.