Alternative investment strategies offer unique opportunities generally not available through traditional markets and are increasingly an important component of a balanced portfolio.

Private credit has moved from a niche institutional allocation to a mainstream component of modern portfolio construction. It offers advisers a compelling way to enhance income, diversification and portfolio resilience. As traditional fixed income faces periods of lower real yield and heightened correlation to equities, investors are increasingly looking to alternative sources of return that are underpinned by structural rather than cyclical drivers.

One of the most attractive segments within this expanding universe is US middle market private credit. This segment focuses on lending to mid-sized, often sponsor-backed companies that sit between large-cap borrowers with access to syndicated bond markets and smaller businesses reliant on traditional bank lending. It is precisely this positioning – too complex and bespoke for public markets, yet too large for relationship banking alone – that has enabled private lenders to establish a durable and growing presence.

For financial advisers, US middle market private credit has become particularly relevant as global managers scale access to this segment. It offers client portfolios exposure to floating-rate income streams, senior-secured structures and robust covenant protections. It also provides access to a deep and diversified universe of borrowers in the world’s most developed credit market, one that has an expanding opportunity set for private capital.

Against this backdrop, private credit is increasingly being viewed as a core building block in diversified income strategies.

Understanding the history of private credit

Private credit is an umbrella term used to describe the provision of credit to businesses by lenders other than banks^[1]. These may include direct loans, distressed debt, asset-based loans or specialty finance solutions.

Unfortunately, recent challenges facing a number of SaaS companies have reinforced perceptions of private markets as a breeding ground for inflated valuations and speculative capital. As concerns over AI disruption and the sustainability of software business models have triggered sharp repricings, the narrative has increasingly focused on bubble risk rather than fundamentals. Yet this framing ignores the more disciplined, historically grounded segments of private markets, where rigorous underwriting and strong lender protections remain central to investment outcomes.

Understanding the history of private credit can shed light on how the industry evolved, and why painting all managers with the same brush today clouds the strength of the underlying fundamentals that made the asset class popular with investors.

Commercial bank officers in the 1980s knew that selling leveraged loans to structured vehicles such as collateralised loan obligation (CLOs) was better than holding them. For middle market loans, specialised teams within banks and finance companies better understood smaller to mid-sized company risk profiles.

Consolidation and regulation pushed many banks out of the middle market, a retreat that was structural, not cyclical. Post-GFC regulation reduced bank appetite for leveraged lending, capital requirements made middle market loans less attractive to traditional lenders and relationship banking no longer scaled economically.

Seasoned credit pros raised long-term capital from insurance companies and private equity firms to build the first private credit shops. They hired underwriting and origination teams who had successfully run middle market loan portfolios and built relationships with leading private equity owners.

At first, progress was slow. With non-banks’ commitment sizes limited, some banks remained competitive. But after the GFC, investors noted how well mid-cap loans performed compared to broadly syndicated loans (BSLs) and demand for capital did not disappear with bank exits. Fundraising for new private platforms took off, propelling their hold levels to US$100 million per deal and higher.

Amid the zero-rates of the 2010s, investor appetite for higher yielding instruments soared. Investment banking executives followed this slipstream, forming firms offering bank/bond options to large corporates. Because banks could still distribute this paper, non-banks had to match their aggressive terms: high leverage, tight spreads and weak covenants.

The game changed with the formation of ‘semi-liquid’ vehicles, including Business Development Companies (BDCs) and interval funds.  BDCs are a type of publicly traded or private investment firm created by the government specifically to fund small and mid-sized businesses that typically struggle to get traditional bank loans. Interval funds are regulated, semi-liquid investment vehicles that allow individual and institutional investors to access private debt markets.

These entities provided the first retail access to the asset class. Enormous capital inflows allowed managers to commit over US$1 billion per deal. At this point, non-banks could compete on almost any sized financing. Soon leveraged buyout (LBO) financings had all but disappeared from the bank market.

Key takeaways for advisers

1. The history of private credit is not academic background; it is the foundation for explaining why discipline in this asset class was built into its institutional origins, not retrofitted after problems emerged.
2. The distinction between core middle market managers and large-market peers is one of the most consequential portfolio positioning questions in private credit today; understanding how that distinction developed gives a grounding to guide clients toward it with conviction rather than caution.
3. The post-GFC performance record of mid-cap loans relative to broadly syndicated loans delivered a clear institutional signal about where credit discipline was concentrated – those who can articulate that signal may be better positioned to anchor client conversations in evidence rather than in headlines.
4. Middle market private credit emerged directly from the expertise of seasoned bank credit professionals who left consolidating institutions to build independent lending platforms, bringing institutional underwriting discipline with them. That lineage is one of the most credible narratives for clients sceptical of the asset class.

The relationship advantage of middle market credit

The zero-interest rate period post-GFC allowed private equity firms to buy companies with higher leverage and sell them at higher multiples. For the largest direct lenders, this included mega software businesses with increasingly borrower-friendly financing terms.

The Covid-19 pandemic forced the Fed and Congress to pump almost US$5 trillion into the system. It saved the economy but also ignited inflation and rate hikes. Reality returned in 2022 as the Secured Overnight Financing Rate (SOFR) soared from zero to 5%. Financing costs became headwinds, borrower leverage shrunk, and the upward march of purchase price multiples halted. Public credit markets shut down. Private markets remained open, but with M&A slowing, competition among upper-market lenders surged, resulting in significant portfolio overlap.

The core middle market is relationship driven. Sponsors and lenders are long-term holders, so successful outcomes require alignment of interests. A solid partnership of trust is more valuable than squeezing the last turn of pricing or leverage. Sectors and borrowers must prove resilience through cycles because, unlike large caps, you can’t easily sell an overweight position.

For years lenders demanded an illiquidity premium for mid-caps, anywhere from 100–300 bps. And more protection: maintenance financial covenants, security on all assets and cash flows and lower leverage.

But liquidity risk is different from credit risk. In fact, default and loss rates are historically lower for middle market loans than broadly syndicated loans. In part this is thanks to the cooperation between lenders and borrowers to get through tough times.

This helps point to the fundamentally different origination models, competitive environments, borrower profiles and risk characteristics in mid-caps versus large caps.

Deal sourcing in the core middle market is not dependent on market momentum. Activity is consistent regardless of cycles because experienced managers seek to diversify portfolios across defensive sectors. This helps reduce concentration risk in ways that bank/bond replacement platforms can’t.

The rush of retail money into those platforms worsens this dynamic. The tyranny of dry powder is the relentless quantity-over-quality pressure to put money to work. In contrast, approximately 5% of all middle market companies are owned by PE firms, creating a natural supply/demand balance.

As private credit grows, larger funds gain better origination networks and become first call lenders for sponsors. Even if they wanted to, banks cannot re-enter easily due to regulatory drag. This creates a flywheel in middle market private credit: more capital → better access → better deals → more capital.

Today’s credit concerns stem from several years of higher rates in higher risk portfolios, particularly AI-sensitive sectors. Flashing red lights for Payment in Kind (PIK) loans^[2], non-accruals and default rates are signs of stress. Using Nuveen Churchill’s portfolio performance as an example, it suggests the core middle market remains more resilient given its broader base of less tech-centric service companies.

Key takeaways for advisers

1. The middle market’s relationship-driven structure offers a compelling framework for discussing private credit quality with clients who ask why not all direct lending behaves the same way in a stress environment.
2. Deal overlap among middle market managers, and within the upper market, signals a fundamentally different competitive dynamic, one that supports more differentiated portfolio construction for clients seeking alternatives exposure.
3. Concentration in AI-sensitive and higher-leverage sectors represents a live risk in the current environment, with rising PIK loans, non-accruals, and default rates serving as warning signs to monitor when evaluating manager selection for clients.

Private credit’s origination divide

In private credit, the character of deal sourcing determines the destiny of the portfolio. How new transactions come in the door, and how a manager selects the best ones to close, drives performance.

As outlined previously in this article, private credit grew from the core middle market (CMM) and set the principles that became popular with issuers and investors alike: loans to small-to-medium-sized enterprises (SMEs) in diverse, defensive sectors backed by private equity sponsors with conservative terms and structures.

Select lenders stuck to this strategy even as enormous retail inflows reshaped the large end of the market. Terms in that segment mimic bank loans and bonds – large exposures in momentum-driven sectors, high leverage, low spreads, and, critically, public style liquidity – elements that have contributed to some of the difficulties faced by some sectors of private credit.

Bank loans and bonds are traded on secondary markets. This allows CLO managers to position portfolios to minimise risk. Large private loans don’t trade, so managers, like those in the core middle market, need to get it right going in. Even so, portfolio quality is governed by deal terms, which in large caps are less investor-friendly across the board than with core middle market loans. That’s because if they aren’t borrower-friendly enough, banks can compete!

If smaller loans are less risky, why are liquid loan spreads historically tighter? The answer is that active credit traders, like public equity traders, value liquidity over almost everything. They accept lower yields and weaker structures knowing they can exit quickly if needed. If your goal is to own, not trade, core middle market assets provide stronger returns and protection.

Like ‘Europe’, ‘private credit’ is a label for a collection of distinct entities with their own identities, legal jurisdictions and value propositions. Investors must understand how valuations, structures and fund liquidity differ for each ‘nation’ within the private credit ‘continent’.

Key takeaways for advisers

1. Deal sourcing, not market headlines, determines the quality of a private credit portfolio. How a manager originates and selects loans is generally the most consequential factor in long-term outcomes.
2. Liquidity expectations matter in client conversations about private credit. The underwrite-to-hold model means these are not liquid instruments, and it is critical clients understand that limited redemption capacity is a structural feature, not a defect.
3. Investor education about private credit’s internal diversity is a significant challenge in the asset class; advisers are well positioned to help close that gap in client conversations about appropriate allocation, structure and risk.

Private credit’s liquidity reality

The word ‘private’ in private credit signifies not just non-public, but non-traded. This is important from an investor perspective because it means you cannot readily buy or sell private assets the way you can stocks and bonds. These assets are called alternatives because they – like real estate and infrastructure – complement liquid assets. It is the foundational characteristic of the asset class.

Do homeowners expect daily valuations on their properties? No, because they know real estate value is proven over time.

Yet as some managers focused on the wealth segment, they suggested the line between liquidity for public and private assets was blurring. This accompanied offering investors the ability to redeem their interests beyond the typical 5% per quarter – implying a degree of flexibility the underlying assets cannot support.

Randy Schwimmer, Vice Chairman of Churchill Asset Management, recently highlighted a fundamental principle of private markets: “You cannot create liquidity from an illiquid asset class.” The comment reflects a growing industry focus on ensuring that redemption terms align with the liquidity characteristics of underlying private loans.

Middle market loans do not trade, so are illiquid. It is possible to package loans and sell them to an institutional buyer at or near par – a growing secondary credit market in private loans exists for exactly this purpose. But those transactions involve considerable due diligence on the part of sophisticated buyers with the capacity and understanding to manage the assets effectively.

In private credit, match funding means synching fund liquidity with asset liquidity. A fund can hold illiquid assets. A fund can hold liquid assets. What a fund cannot credibly do is hold illiquid assets and promise liquid benefits to its investors. If tested, this feature becomes a liability.

Institutional investors understood this from the start. Superannuation, pension plans, insurance companies and sovereign wealth funds have long-term liabilities that are well-suited to the illiquid, long-tenor nature of private credit. Their expectations were set correctly at the outset. The mismatch now being observed in retail channels is not a coincidence. It is a reminder that product complexity and investor transparency must move together.

Key takeouts for advisers

1. The illiquidity of private credit is a foundational characteristic of the asset class, not a temporary condition to be engineered away. Establishing this clearly at the point of allocation may shield clients from expectation mismatches now emerging across the wealth channel.
2. Match funding, the principle that fund liquidity must align with asset liquidity, is the standard that should apply when evaluating any private credit vehicle for client portfolios, since products that promise redemption flexibility beyond what underlying assets can support may create structural risk for both redeeming and remaining investors.
3. This inflection point, when investor expectations are colliding with reality across the industry, creates a meaningful opportunity to educate clients proactively and lead with transparency rather than follow with explanations.

As private credit continues to mature as an asset class, investors should look beyond the headlines and focus on the segment that has long formed its foundation: the US middle market. Often described as the OG of private credit, the middle market has demonstrated an ability to deliver resilient, risk-adjusted returns across a range of economic environments.

Its appeal lies in a structural market inefficiency. These companies are too large for traditional bank balance-sheet lending alone, yet too small, bespoke and complex for public debt markets or broadly syndicated loans. This creates a persistent financing gap that private lenders are uniquely positioned to fill.

Importantly, private credit’s growth should not be viewed as a wholesale replacement of traditional lending markets. Rather, it reflects the targeted capture of a segment where banks face structural constraints and borrowers place a premium on certainty, flexibility and long-term lending relationships. For financial advisers seeking diversified sources of income and return, this enduring opportunity set helps explain why US middle market private credit is increasingly earning a place as a core portfolio allocation rather than a peripheral alternative.

The information included in this article is provided for informational purposes only. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. PAN-Tribal Asset Management Pty Ltd, its related bodies and its associates do not give any warranty nor make any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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Notes:
[1] https://acc.aima.org/about-acc/about-private-credit.html
[2] PIK loans in private markets refers to a financing feature where borrowers defer cash interest or dividends by paying them in additional debt or equity rather than cash.

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Stuart James

PAN-Tribal has announced the appointment of Stuart James to its distribution team as Sydney-based Key Account Manager for New South Wales.

Commenting on the appointment, PAN-Tribal Asset Management CEO Colin Woods said, “This appointment is in response to the strong support from the Australian financial advisory community for PAN-Tribal’s range of strategies.”

With 23 years’ tenure at Aberdeen Standard Investments and experience with other fund managers, Stuart offers integrated insights and a wealth of knowledge across all facets of investment strategy.

“Stuart’s proven track record as an investment specialist and strong familiarity with emerging markets make him a powerful asset to both PAN-Tribal and our clients”, said Woods.

With PAN-Tribal’s ongoing expansion and its mission of unifying excellence in asset management, Stuart’s addition will further complement the existing distribution team consisting of Key Account Managers Nick Baring (VIC/TAS), Jordan Thurlow (NSW/WA), Mark Aufderheide (NSW/SA), and Matthew Mantle (QLD).

PAN-Tribal’s product suite currently includes the Ashmore Emerging Markets Equity Fund, ATLAS Infrastructure Global Fund, Barwon Global Listed Private Equity Fund AF, Jennison Global Equity Opportunities Fund, Nuveen Churchill Private Credit Income Fund, and     PAN-Tribal Global Equity Fund. A seventh strategy is set to be announced in the coming months.

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Colin Woods

We are extremely pleased to announce that the PAN-Tribal Global Equity Fund has once again maintained its prestigious Highly Recommended rating from Zenith Investment Partners (Zenith).

The global equities market is one of the most competitive fields in the investment landscape, containing a vast number of managers and strategies available to investors. Despite this challenging environment, the PAN-Tribal Global Equity Fund and its investment approach continue to stand out.

Our Fund offers investors a style-neutral, currency-unhedged, and benchmark-unaware exposure to international equities. While recent volatile equity markets have presented some challenging periods of performance, Zenith’s confidence in the Fund remains strong. According to their latest report, this conviction is firmly “underpinned by the high regard we hold for the depth and quality of the investment team.”

Commenting on this achievement, PAN-Tribal CEO Colin Woods said: “Despite the challenges posed to the Fund by challenging and increasingly concentrated markets, the Fund continues to be well supported by the advisory community.”

“That the Fund has retained its Highly Recommended rating for the eight consecutive years is a great result for the advisers and investors who have supported the Fund.

“It’s clear evidence of the quality of the Davis Advisors’ team and their consistent and reliable investment process, which they apply consistently in all market conditions.”

Some key highlights from the Zenith report include…

On the Fund overall

The report notes that Zenith “retains conviction in the Fund, which is underpinned by the high regard we hold for the depth and quality of the investment team.”

Further, Zenith “views Davis Advisors’ investment process positively, noting its successful implementation since 1969.”

“Zenith has a favourable view of the arrangement between Davis Advisors and PAN-Tribal, believing that it pairs a solid investment manager with a distribution partner that has a strong footprint in the domestic market.”

On the investment team

“Zenith has met with several members of the investment team and considers them to be high calibre, which we view as a key competitive advantage for the Fund.”

On portfolio manager Danton Goei the report notes: “Zenith rates Goei as a strong and highly experienced investor.”

On the investment process

“Davis Advisors favours market leaders with strong balance sheets, opportunistic investments and contrarian investments, expecting that the majority of the Fund’s performance to be driven by the investment team’s stock selection skills. Zenith believes the security selection process adopted by Davis Advisors is robust and detailed.”

“The portfolio construction process is primarily driven by the fundamental analysis conducted by the investment team. The primary determinants of a stock’s weighting in the Fund are the magnitude of the discount to fair value and the level of analyst conviction. Zenith is comfortable with Davis Advisors’ portfolio construction approach, which ensures a strong connection between the output of its security selection process and the resultant weight of the stocks in the portfolio.”

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Exposure to the private credit sector can provide benefits to your clients’ portfolios.

In today’s rapidly shifting investment landscape, traditional sources of fixed income are struggling to meet the yield and diversification needs of investors. They are also becoming more closely correlated with equities. With public markets becoming increasingly volatile and interest rates elevated yet unpredictable, many advisers are turning to alternative strategies that can offer enhanced returns, downside protection and low correlation with traditional fixed income investments.

Interest in alternative asset classes is intensifying as advisers look to improve the return profiles of client portfolios in an increasingly challenging environment. The universe of non-publicly traded debt and equity comprises a wide array of sectors with unique structures and risk-return profiles.

One asset class that has gained significant traction over the past decade is private credit. Much has been written lately about the huge increase in the number of private credit funds available to Australian investors.

Private credit refers to non-bank, non-traded debt financing, typically by institutional investors, private debt funds or alternative lenders. Unlike public bonds or syndicated loans, private credit transactions are negotiated directly between lenders and borrowers, often tailored to meet the specific capital needs of the borrower. The private credit sector has steadily increased in popularity since the Global Financial Crisis (GFC), filling the lending gap left by banks constrained by a tighter regulatory environment.

As with all asset classes, there are diversification opportunities within the private credit sector and it is important that advisers, and their clients, understand the private credit exposure each sector – and each fund – offers.

Within the expanding private credit sector, the US middle market stands out as a particularly compelling segment. Comprised of businesses typically earning US$10 million to US$100 million in EBITDA, the US middle market sector offers a unique combination of structural advantages, attractive yields and reduced correlation to public assets.

For clients seeking stable, income-generating assets with strong risk-adjusted returns, as well as low correlation with traditional asset classes, US middle market private credit represents a growing and underappreciated opportunity. An allocation to US middle market private credit can be added to a diversified portfolio as a complement to other private market loan segments.

US middle market private credit

The number of publicly listed US companies has plummeted by more than half since peaking at more than 8,000 in the mid-1990s. The rise of private equity allows companies to remain private longer, giving them time to establish themselves without market scrutiny and the rigour of regular reporting.

Within the broader market private credit market, US middle market private credit specifically targets companies that fall between large corporates and small businesses in terms of size and financial profile. It’s a growing segment; the GDP generated by the sector places it in the top five worldwide (figure one). The demand for private capital solutions in the US middle market meaningfully outpaces supply, resulting in a compelling opportunity for private capital investment.

Middle market companies are generally defined as having annual revenues between US$50 million and US$1 billion, or EBITDA ranging from US$10 million to US$100 million^[1]. These companies are often high-growth businesses that generate significant cash flow and are commonly backed by private equity sponsors. However, they may lack access to the public capital markets or prefer the speed, flexibility and certainty that private credit solutions can offer compared to traditional bank loans or public debt issuance.

The types of loans in this segment typically include senior secured debt, unitranche loans (a blend of senior and subordinated debt), second lien loans and mezzanine financing. These instruments are commonly floating-rate, short to medium-term in maturity, and structured with covenants and collateral protections that give lenders significant control and oversight.

One of the defining features of middle market private credit is that loans are typically privately negotiated. Consequently, lenders can generally negotiate terms that provide meaningful downside protection. Such terms may include financial maintenance covenants, board observation rights and tighter reporting requirements. A hands-on approach allows for more active risk management and greater alignment between lender and borrower.

As a result, middle market private credit offers an attractive blend of yield, structure and control, which are attractive attributes in today’s volatile environment.

Market size and growth drivers

The US private credit market has grown dramatically over the past decade. Industry-led research^[2] indicates that the global private credit market passed the US$3 trillion milestone in late-2024.  Within that, US middle market private credit represents a significant and expanding subset (figure two), driven by both structural shifts in lending and increased investor demand for yield and diversification.

One of the key catalysts for this growth has been the retreat of traditional banks from middle market lending. In the wake of the GFC and the tighter regulatory environment that resulted from the implementation of Basel III regulations, commercial banks faced stricter capital requirements and risk-weighted asset constraints. This regulatory shift made it less attractive and, in some cases unfeasible, for banks to continue to provide capital to middle market borrowers. This created a significant funding gap.

Private credit funds, often backed by institutional capital, stepped in to fill this void. They offer a more agile and tailored approach to underwriting and can move quickly on deals, providing certainty of execution—an increasingly valuable trait in complex transactions such as buyouts, growth financings, and recapitalisations.

Another major driver for the growth in US middle market private credit is the expansion of private equity activity. Private equity firms rely heavily on debt financing to support leveraged buyouts (LBOs) and growth investments. As middle market private equity deals have proliferated, so has the demand for flexible, non-bank lending solutions.

However, private equity fundraising has meaningfully outpaced middle market private debt fundraising, creating a significant “dry powder gap” and sustainable demand ahead (figure three). Private credit managers with strong private equity sponsor relationships are well-positioned to capitalise on this sustained trend.

Strong tailwinds for growth in the middle market are evident. The ongoing turmoil in the banking sector and dislocation in the public credit markets is likely to see direct lending continue taking share across the middle market (figure four).

These growth drivers demonstrate that the growth of middle market private credit is not a temporary phenomenon. Instead, it’s the result of a long-term structural evolution in capital markets.

The investment case

Middle market private credit offers several benefits for those clients who seek stable, risk-adjusted returns and portfolio diversification. As public financial markets become more volatile and fixed income yields fluctuate with the macroeconomic uncertainty unleashed by Trump 2.0, this asset class can be viewed as a strategic solution for income generation and capital preservation. Several factors support the investment case, including:

1. Market assessment

• Significant white space for private equity and debt investment, with over 200,000 private businesses^[3] and less than 10,000<^[4] with private equity sponsor backing
• Highly diverse and fragmented, with a multitude of opportunities to grow organically and through acquisitions

2. Sourcing

• Large target universe of companies
• Fragmented nature of intermediaries, funds and financing sources places a premium on relationship development; those managers with the best relationships will be well placed to source the greatest opportunities
• Quality managers with a strong sourcing network can uncover deals unavailable to the broader market

3. Capital structure

• Lower total leverage multiples than buyouts of large corporates^[5], potentially resulting in meaningful sponsor equity commitment and attractive prospects for equity co-investment
• A focus on senior secured positions; middle market lenders often negotiate these positions to give them first claim on assets in the event of default
• Loans are typically collateralised, which means the borrower has pledged assets as security for the loan. If the borrower fails to repay, the lender can seize the asset/s to recover the money owed

4. Value creation

• Consistent opportunities to improve business models and professionalise operations
• Middle market sponsors have multiple ways to create and drive substantially higher growth rates

5. Monetisation

• Investors receive an illiquidity premium that compensates for the lack of daily liquidity
• Middle market companies can be attractive acquisition candidates to strategic buyers and a maturing private equity ecosystem
• Little to no reliance on volatile exit channels such as IPOs
• Importantly, US middle market private credit delivers returns that often exceed those of traditional fixed income, such as high-yield bonds or syndicated loans.

Middle market lending allows managers to directly negotiate terms and often underwrite deals off-market, resulting in bespoke structures with favourable pricing and covenants. The existence of financial covenants and reporting requirements that allow lenders to monitor borrower performance closely; this structuring offers more control and early warning mechanisms than public credit markets generally provide.

Importantly, returns from US middle market private credit have exhibited relatively low volatility across credit cycles and have demonstrated low correlation with traditional public equities and fixed income, making it a powerful contributor to diversification in a balanced portfolio. Because these loans are not traded on public markets, they are less susceptible to mark-to-market volatility driven by sentiment or macro shocks.

A note on risk and other considerations

While US middle market private credit offers many advantages, like all investments, it is not without some risk. It is important that you and your clients understand these risk factors.

1. Liquidity risk

Private credit investments are typically held in closed-end structures with multi-year lock-up periods. However, investing via a unitised structure – such as a managed fund – generally provides regular access to invested capital (for example, on a monthly basis).

2. Credit risk and default potential

Despite lender protections, middle market borrowers are inherently riskier than large-cap public companies. They may have more concentrated revenue streams, less diversified operations and limited access to capital markets. During economic downturns, defaults may rise, particularly among businesses in cyclical industries. Consequently, it is important to select an experienced investment manager with strong underwriting, sector expertise and a focus on companies with positive attributes – such as quality management teams and competitively positioned companies with strong financial histories – to mitigate these risks.

3. Transparency and valuation challenges

Unlike public markets, private credit lacks real-time pricing. Valuations are typically mark-to-model and may lag actual changes in borrower performance or market conditions. This opacity can sometimes mask emerging risks or overstate asset values during periods of stress. Investors must rely on the investment manager to undertake rigorous due diligence and carefully manage ongoing governance.

Performance in private credit is highly dependent on manager quality. Top quartile managers may deliver consistently strong returns with low losses, while bottom-quartile managers can face elevated defaults, poor performance and weaker deal sourcing. The dispersion of outcomes underscores the importance manager selection.

As banks retreat from the middle market and private equity continues to drive demand for non-bank financing, the sector’s growth trajectory looks set to continue. US middle market private credit has emerged as a powerful complement to traditional fixed income and other private credit sectors and offers compelling risk-adjusted returns and a proven track record through credit cycles.

In an era of volatile public markets and uncertain interest rate trajectories, private credit’s floating-rate and senior-secured loans provide both inflation resilience and mitigation of downside risks. By including US middle market private credit in a diversified portfolio, investors can unlock a sustainable income stream and fortify their holdings against future market turbulence.

The information included in this article is provided for informational purposes only. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. PAN-Tribal Asset Management Pty Ltd, its related bodies and its associates do not give any warranty nor make any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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Notes:
[1] S&P LCD
[2] Alternative Credit Council, Financing the Economy 2024, November 2024
[3] National Center for the Middle Market’s Year-End 2022 Middle Market Indicator report
[4] PitchBook; as of Q2 2023
[5] Refinitiv LPC

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Investors are increasingly allocating to private debt markets to insulate against volatility.

Private credit has been the topic de jour, with new funds being launched regularly over the past two to three years. What’s behind the sudden rise in the number of funds and its popularity as a growing segment of alternative investments?

Private credit refers to non-bank lending. Instead of borrowing from a bank or issuing bonds on a public exchange, a company gets a loan from a private lender, such as a private credit fund or an institutional investor. It encompasses privately negotiated debt instruments extended to corporate borrowers.

Operating outside the regulated banking system, private credit serves as a capital source for privately held or non-investment grade companies. It encompasses a broad spectrum of investment strategies beyond direct lending, offering diverse opportunities for investors. Key types of private credit include:​

• Direct lending – provides loans directly to middle-market companies, often filling the financing gap left by traditional banks.
• Mezzanine debt – a hybrid of debt and equity, mezzanine debt is typically unsecured and subordinated to senior debt, offers higher interest rates and potential equity conversion options.
• Distressed debt and special situations – investing in the debt of companies that face financial challenges, but with the potential for significant returns through restructuring or turnaround efforts. ​
• Specialty finance – involves securitising pools of collateral, for example aircraft financing or music royalties, and bundling these assets to sell in the private credit market. ​
• Real estate credit – provides loans secured by real estate assets and offers exposure to property markets without direct ownership. ​

These instruments are typically illiquid, carry varying degrees of credit risk and are often customised to meet the specific capital structure or liquidity needs of the borrower.

Public credit versus private credit

In public credit markets, financing a leveraged buyout (LBO) for example, would typically involve a major bank underwriting a substantial loan, often ranging from $600 million to over $5 billion. The bank then syndicates this loan by selling portions to numerous institutional lenders, such as fund managers, insurance companies and superannuation funds.

This process results in a large syndicate where each lender holds a share of the loan. Public credit markets are characterised by their transactional nature, allowing these syndicated loans to be bought and sold among investors. This provides liquidity and enables active trading.

In contrast to public credit markets, private credit operates in a distinct environment, primarily focusing on financing smaller, middle-market companies through non-bank institutions. Typically, these deals involve businesses with earnings before interest, taxes, depreciation, and amortisation (EBITDA) between US$40 million and US$60 million.

Private credit generally offers greater flexibility and expedited closings, as banks are not involved. The borrower – be it a corporate or private equity sponsor – benefits from knowing the exact composition of the lending group and gains assurance that these lenders will retain the loan throughout its duration, avoiding the public market’s requirement for public ratings and the complexities of syndicated loans. This structure ensures a more streamlined and predictable financing process in the private credit space.

Growth in the private credit sector

Industry-led research^[1] indicates that the global private credit market passed the US$3 trillion milestone in late-2024. Respondents were optimistic about further growth prospects in core US, European and Asian private credit markets. This growth has made private credit available a differentiated asset class for Australian investors.

The most significant expansion in private credit began after the Global Financial Crisis (GFC), particularly around 2009. A key driver was the retreat of traditional banks from certain types of lending. Faced with stricter regulatory requirements around leverage and capital adequacy, banks began pulling back from financing leveraged buyouts and other riskier lending activities. This created a significant gap in the market – one that private credit managers were well-positioned to fill. While this type of lending existed before, the volume and scale increased dramatically in the post-GFC environment.

Another major catalyst was the growing preference of private equity firms for private credit over the syndicated loan market. This is because private credit offers greater execution certainty, involves fewer counterparties and aligns well with the long-term, relationship-driven approach favoured by private equity managers. This has made private credit a more attractive option for sponsors seeking efficient and flexible financing solutions.

The expansion of private credit into new asset classes also played a meaningful role. This includes asset-backed financings such as pools of home improvement loans and aircraft financing – areas that were not traditionally part of the private credit universe but have grown rapidly in recent years. Together, bank retrenchment, private equity demand and asset class diversification have fuelled the robust growth of the private credit market.

Private credit growth is expected to continue in the years ahead, largely driven by a significant gap in “dry powder” – capital raised but not yet deployed – between private equity sponsors and private credit managers.

Another key driver of growth in the private credit market is the vast untapped potential – or “white space” – in US direct lending. The US middle market, surprisingly the third-largest economy globally behind the US and China, consists of over 200,000 businesses generating more than $10 trillion in revenue. Yet, only about 10 percent of these companies are currently backed by private equity sponsors, leaving significant room for future investment. Additionally, private credit in the US middle market has grown over 26 times, far outpacing the 2.7 times growth of the US public market cap, highlighting the sector’s rapid expansion and long-term potential.

Why invest in private credit?

Including an allocation to private credit in portfolios can help enhance returns, manage risk and diversify away from public markets, especially important given today’s evolving macroeconomic landscape.

Private credit offers several compelling benefits that make it an attractive addition to a diversified portfolio:

• It provides consistent income, often through monthly distributions, which appeals to income-focused investors.
• It delivers risk-adjusted total returns by offering premium yields while maintaining a senior secured position in the capital structure, reducing downside risk.
• Private credit offers interest rate protection through floating-rate loans, which adjust with base rates like the Secured Overnight Financing Rate^[1] (SOFR), helping investors navigate interest rate volatility.
• It contributes to diversification and low correlation with traditional asset classes such as fixed income and equities, enhancing portfolio resilience.
• It aids in volatility management, as private loans are valued by independent third-party firms based on credit fundamentals, not market sentiment, resulting in more stable pricing.

Importantly, private credit has historically delivered strong yields and maintained a significant return premium over syndicated and high-yield bonds, while experiencing lower default rates and higher recovery rates.

Private credit opens the door to private market lending and bespoke financing deals not available in public markets, which adds another layer of portfolio depth. Loans are typically secured and senior in the capital stack; this offers downside protection and improved recovery prospects in the rare event of default. Overall, private credit combines high income, low volatility and strong downside protection, making it a robust alternative investment.

What to look for in a private credit manager

When assessing private credit managers, there are several key factors you must consider, to ensure you select a strong and reliable partner as stewards of your clients’ capital.

1. Evaluate the manager’s experience and track record, particularly how they’ve performed through economic cycles and at challenging times such as the GFC and COVID.
2. Understand their investment strategy – do they focus on the lower, traditional or upper middle market? Each segment has a different risk and return profile.
3. How do they source their deals? Managers with strong relationships, particularly with private equity sponsors, are more likely to access high-quality, proprietary opportunities.
4. Scale and presence in the market matter too, as larger managers often have better access, broader resources, and deeper insights. For example, Churchill Asset Management manages over $50 billion in committed capital.
5. Assess the health of the manager’s current portfolio, including non-accrual rates and watchlist exposure, as well as the presence of a dedicated workout team to manage any distressed assets.
6. People are important and team stability and firm culture are crucial; after all, the investment team is the core asset of any credit platform.
7. Understand the fund structure. Is it open- or closed-ended, levered or unlevered? Structure can significantly impact liquidity, risk and returns.

Private credit in 2025

At the beginning of 2025, the US Federal Reserve had seemingly orchestrated a soft landing: interest rates were lower and inflation had fallen. Most economists and market commentators believed the US economy’s persistent strength would keep rates higher than markets expected through 2025.

However, 2 April 2025 – ‘Liberation Day’ – introduced a new set of uncertainties for the global economy. Despite this – and the geopolitical tensions in the ascendent – private capital’s active management style and long-term investment horizons should offer investor portfolios shelter, diversification and added resilience in the face of current and future risks.

A recent survey by Churchill Asset Management found that investors are increasingly allocating to private debt markets to insulate against volatility: 20 percent said this was a main reason for investing in private credit, up from six percent in 20221 (figure one).

In this uncertain environment, the team at Churchill Asset Management believes four main tenets should underpin successful private credit managers:

• Maintain discipline when capitalising on what looks set to be a strong vintage. That means sticking to the strategies that have historically made them successful and investing based on fundamentals and cash flow generation. It also means being prepared to walk away if a deal does not make sense and, for those that do, allowing for a margin of error in earnings and valuations, while building in multiple ways out.
• Build all-weather portfolios that perform well regardless of external conditions. Diversification is an essential element here for all private credit investors – diversifying by industry sector, position size, deal structure, leverage profile, sponsor relationship and company model are all critical. Successful managers will also be constructing their portfolios for a different, less buoyant, environment, running detailed performance sensitivity analysis according to a variety of scenarios.
• Be active and proactive capital providers that support value creation in the businesses they back, while also being prepared to course-correct on existing investments when necessary. Experience and lessons learned help investors see round corners to identify potential opportunities and pre-emptively strike as new risks emerge. Decisiveness will win out in a fast-moving market.
• Work with trusted partners who have been through cycles and are closely aligned. Lenders and sponsors with strong relationships can work collaboratively through good and bad times to build and protect value in the portfolio.

Private credit represents a powerful and increasingly important asset class for your clients’ portfolios. As you seek to build resilient, income-generating and diversified portfolios for clients, private credit offers a compelling combination of attractive risk-adjusted returns, regular income through floating-rate structures and lower volatility compared to traditional public markets. Its low correlation to equities and bonds, alongside strong historical performance, even through challenging economic cycles, makes it a valuable diversifier.

With growing demand from private equity sponsors and a significant amount of untapped opportunity in the US middle market, the private credit space is poised for continued expansion. For advisers looking to deliver long-term value and stability to clients, allocating to high-quality private credit managers should be a strategic consideration within a well-rounded investment approach.

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Notes:
[1] Alternative Credit Council, Financing the Economy 2024, November 2024
[2] The Secured Overnight Financing Rate is a benchmark interest rate used in the US and reflects the cost of borrowing cash overnight

Important information: This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals. The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index. Important information on risk: Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Please note investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk. This information represents the opinion of Nuveen, LLC and its investment specialists and is not intended to be a forecast of future events and or guarantee of any future result. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time. Nuveen, LLC provides investment solutions through its investment specialists. Churchill Asset Management is a registered investment advisor and an affiliate of Nuveen, LLC. This information does not constitute investment research as defined under MiFID.

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Colin Woods

PAN-Tribal Asset Management has announced the recent launch of the Nuveen Churchill Private Credit Income Fund, which will provide Australian investors access to Churchill Asset Management’s US middle market private capital platform.

As part of Nuveen, a global asset manager with over US$1.3 trillion in assets under management (at 30 September 2024), Churchill Asset Management has an award-winning team with a proven 18-year track record.

The investment strategy offers indirect access to the booming US private capital market, allowing investors to benefit from a unique and differentiated approach to financing solutions for US-based middle market companies.

The Fund will invest substantially all of its assets in Nuveen Churchill Private Capital Income Fund (PCAP) which was established in March 2022 and now has more than US $1 billion under management invested across 230 portfolio companies among a range of sectors including business services, high tech, healthcare and pharmaceuticals, and construction and building.

Commenting on the new Fund, PAN-Tribal CEO Colin Woods said, “We are delighted to work with Nuveen to distribute this Fund in the Australian market.”

“The Fund’s management team focuses on the traditional US middle market to seek diversification, reliability and attractive risk adjusted returns as a complement to other private market loan segments.”

Andrew Kleinig, Head of Australia at Nuveen, said: “Access to the benefits of private capital have long been the purview of institutional investors alone.”

The launch of the Nuveen Churchill Private Credit Income Fund and our collaboration with PAN-Tribal Asset Management is the latest step in Nuveen’s journey to unlock the power of alternative and innovative investment solutions to, and beyond, its established institutional investor base.”

The Fund has a “Recommended” rating from Lonsec and its research report notes that Churchill is a private credit manager with an established pedigree, has an appropriately structured, reasonably sized and experienced investment team and that notable thought has been given to the structuring of the Australian feeder-vehicle.

The Nuveen Churchill Private Credit Income Fund is available on BT Panorama, Hub24 and netwealth.

Since the PAN-Tribal Global Equity Fund was launched in 2015, PAN-Tribal’s line up has been expanded to include the Ashmore Emerging Markets Equity Fund, the ATLAS Infrastructure Australian Feeder Fund, the Barwon Global Listed Private Equity Fund, the Jennison Global Equity Opp

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Listed Private Equity spans a range of assets, including alternative asset managers, buyouts, private equity-backed listed companies and private debt.

Private equity (PE) is ownership of, or interest in, a corporate entity that’s generally not publicly listed or traded, although PE is increasingly backing listed companies where there are opportunities for transformative growth and, in some cases, taking them from public to private.

PE managers typically raise capital from high-net-worth individuals or institutions into PE funds, then use that capital to purchase stakes in private companies or acquire control of public companies with plans to execute long-term value creation strategies.

Private equity investment vehicles can be listed or unlisted. Listed Private Equity (LPE) comprises entities listed on global stock exchanges whose main activity is investing in private companies, private equity funds or the investment managers of private equity funds.

LPE managers typically invest in a range of assets. These include:

• buyouts
• private equity backed listed companies
• alternative asset managers
• private debt.

Each of these asset types will now be explored in greater detail.

Buyouts

Many of us are familiar with private equity buyouts; such transactions have long been a feature of the Australian corporate landscape. In 2021, KKR acquired a 55 percent stake in Colonial First State Investments for $1.7 billion and, more recently, CFS was scouring the market to buy sub-scale superannuation providers in a bid to consolidate the sector^[1]. KKR also made headlines earlier this year with its $1.5 billion purchase of the Perpetual name, along with the firm’s corporate trust and wealth management businesses^[2].

A buyout refers to an investment transaction where one party acquires control of a company, either through an outright purchase or by obtaining a controlling equity interest. The buyout can be funded through debt or equity financing – usually a structured combination of both^[3].

The transaction typically occurs when the buyer views the firm as undervalued or underperforming, with potential for operational or financial improvement under new ownership. Like any investment, a buyout happens when the acquiring party sees an opportunity for a positive return on investment.

For some companies, a buyout may form part of its exit strategy, whether it be by a PE firm or a competitor. For others, a buyout may arise as the unintended consequences of poor management, unexpected circumstances or an unforeseen opportunity that arises.

While buyouts can take several forms, the two most common are:

1. Management Buyouts (MBOs) and Management Buy-ins (MBIs)

A management team, whether the current firm’s leadership or incoming, leads the acquisition of a company. Both provide an exit strategy for corporations that want to sell off divisions that are not part of the core business, or where owners may want to exit the business.

2. Leveraged Buyouts (LBOs)

A financial or corporate buyer leads the acquisition of a company. Significant amounts of borrowed money can be used to acquire the company, with the assets of the company being acquired often used as collateral for the loan.

For a PE-backed buyout to succeed, it is crucial that the acquired company also conducts thorough due diligence on its new owners or partners. This isn’t just another transaction – both sides are entering a long-term, symbiotic partnership. As a result, ensuring the right fit between the parties is essential.

What is a buyout fund?

The acquisition of a company, i.e. a buyout, requires substantial capital. Typically, the private equity (PE) firm raises funds from a range of investors, traditionally large institutional investors such as pension or superannuation funds or sovereign wealth funds, to establish a PE fund with pooled assets. The PE firm then seeks potential businesses as buyout opportunities and works to close these deals.

PE firms often specialise in specific industries or sectors, employing professionals with relevant skills and experience who can be leveraged once a company is acquired. Over the following years, the PE firm collaborates with the companies in its portfolio, the focus to drive operational and transformational improvements. Each phase of this process is funded through either the acquired company’s assets or the PE fund itself.

To return capital to investors, the PE firm will eventually seek to exit its investments. The exit may occur through various strategies, such as taking the company public or selling it to a trade buyer. Figure one illustrates the typical lifecycle of a PE fund, along with the typical cycle for each portfolio company.

PE managers charge 1.5-2.0% per annum management fee, and take a share of the profits from the PE fund of typically circa 20%.

The investors stand to make a multiple on their invested capital. Good PE firms that can affect significant transformational change on the underlying companies are capable of generating attractive multiples on invested capital. The attractive nature of the return potential from private equity has been a significant driver of growing investor demand and inflows into this alternative asset class.

As with all investments, investors need to be cognisant of the associated risks with the underlying assets in which they are investing. In the case of PE, the risks one should consider are that:

• Invested capital is locked up for a long time – PE funds have a lifecycle often nearing 10 years
• Many PE funds are concentrated on a small handful of companies (and potentially focused on a certain sector or industry)
• The returns for investors are significantly weighted to the back end of the PE fund’s lifecycle

Traditionally, PE funds have been in unlisted, closed-end structures where the investor’s capital is locked up for the duration of the lifecycle of the fund. However, access to PE and buyouts continues to evolve, as an increasing number of PE funds operate as listed vehicles. This creates an ecosystem where the PE firm has access to permanent capital to fund buyouts, and where the investors have the ability to exit more flexibly, because there is the liquidity that comes from a broader shareholder base behind the listed vehicle.

PE backed listed companies

A PE-backed listed company is one where a PE manager holds significant equity ownership, or a controlling stake, of that listed public company’s shares. Typically the PE manager would have representation on the company’s board.

Although the number of PE led IPOs had fallen in 2021-23, the resurgence of private equity or venture capital backed IPOs has been a notable trend in 2024. These offerings accounted for 41 percent of IPO proceeds in the first half of 2024, a significant increase from 9 percent in the same period of 2023. This trend was especially evident in the Americas, where PE/VC-backed companies contributed 74 percent of IPO proceeds^[4].

What is the relationship between a company and a private equity partner?

Whether a company is private or public, it’s possible that any business can come to a junction in its lifecycle where the current management team may lack the specific skills or knowledge to successfully navigate the company going forward or to tackle the next phase of growth. A PE-backer does not simply provide a funding source; it’s a symbiotic relationship that forms between a company and the PE manager.

There is substantial empirical evidence to suggest that more companies are welcoming of PE-backing, whether they be private or public; it can be argued that the governance model is more conducive for PE-backed companies to plan and operate effectively.

While the comparisons presented in figure two specifically reflect the differences between PE-backed private companies versus public companies, the same positive characteristics and governance strengths would also be present in PE-backed public companies as well^[5].

Increasingly, PE firms – whether looking for buyout opportunities or to back a public company – have become more specialised with managers often focusing on specific industries, sectors or aspects of the businesses lifecycle. Often the manager brings with them a broad range of skills and capabilities that management can draw upon, such as:

• Knowledge of specific industries
• Operational experience
• Financial modelling and analytical skill
• Customer, competition and market research

Each of these factors can be leveraged to benefit the strategy and shape the direction of the company the PE firm is backing.

What is the investor’s perspective of PE-backed listed companies?

As a growing universe, PE-backed listed companies can provide investors access to listed companies where the PE manager still has a significant equity ownership, board representation and ultimately the same transformational approach to affect positive change in the company. It is not dissimilar to a private equity ‘co-investment’, where other investors might sit alongside a PE manager in a traditional buyout of a private company.

While this universe is growing, it is not easy for an investor to identify a PE-backed public company as there is no global database or benchmark/index that consolidates and tracks these businesses. These companies are not well covered by the broader research community.

There are only a few specialist private equity firms and global equity fund managers that have identified this investment opportunity and spent the time and resources to (a) mine the market in an attempt to identify these companies and (b) undertake in depth coverage and research of these companies. Needless to say, investment management firms that pursue these investment opportunities tend to be active, research driven organisations.

Alternative asset managers

An alternative asset manager (AAM) is a fund manager that manages capital invested in alternative assets, i.e. assets that sit outside of the traditional asset classes of shares, bonds or cash. Alternative investments can include private equity, venture capital, hedge funds, real assets, commodities, derivatives and private debt.

AAMs specialise in these investments, which historically have been the domain of institutional investors or high-net-worth individuals because of their complex nature. Despite the complexity, they are attractive to investors due to the potential for superior returns. These investments typically have common characteristics and are generally:

• illiquid
• in need of large injections of capital
• long duration, in that it can take time to generate returns.

Historically AAMs haven’t typically been accessible on public markets. However, over the past 15 years there has been a trend that has seen an increasing number publicly list; as a result, a number of AAMs are now accessible to smaller, non-institutional investors. Examples of such companies include Blackstone Group (BX), Apollo Global Management Inc (APO), Carlyle Group (CG) and Kohlberg Kravis Roberts/KKR & Co. (KKR).

There are several factors at play when an AAM considers listing, with the primary drivers being succession planning and attracting an increased amount of permanent capital.

Unlike traditional fund managers, AAMs – particularly in private equity – manage the asset. These companies provide the resourcing and guidance to the private (or public) companies they buy, with the aim to transform them to be better and more profitable businesses.

AAMs tend to have well-resourced teams with specialists across a range of sectors and industries, providing skilled guidance to the private companies they source and financially back^[6].

AAMs provide diversification of returns

AAMs generate earnings from several sources, including management fees, performance fees, transaction fees and returns from balance sheet portfolio investments. Management fees are charged on assets under management (AUM) at a contractually set rate, typically ranging from 1-2 percent.

Unlike traditional asset managers who primarily charge a fixed fee on AUM, alternative managers also earn performance fees – usually around 20 percent – on profits that exceed a predetermined hurdle rate. This means the better a fund performs, the higher its potential earnings.

Some AAMs who have an in-house corporate finance team may also earn transaction fees from companies they acquire. These fees compensate the AAM for taking a company private, restructuring or recapitalising it, and preparing it for a return to public markets or a sale to another buyer. Such fees can be highly lucrative.

AAM shareholders will have claim on the return from the AAM’s participation in all deals, plus the management and performance fees, less the cost of running the business^[7].

Private debt

Private debt, specifically corporate direct lending, describes a transaction in which the lender provides a loan directly to the borrower without involving a bank or intermediary.  In most cases, the lender originates the loan by working directly with private equity sponsors or business owners, such as those in commercial real estate.

These loans are typically held until maturity, and the lender has the right to take control in the event of repayment issues, as specified in the loan agreement. Unlike traditional loans, private debt loans are not rated by credit agencies and are usually secured by the business’s cash flow or assets. However, they do not typically amortise over the loan’s duration.

How has the private debt market grown?

Institutional investors that invest in private equity programs have long included allocations to mezzanine debt and distressed debt funds. However, the hunt for yield in a lower interest rate environment has fuelled growth in other types of private debt funds, particularly private debt funds that make direct, hold-to-maturity loans to businesses. Australian investors have seen a plethora of private debt funds become available over the past two-three years.

Increased regulation imposed on the more traditional banking system has created opportunities for nonbank lenders such as private debt funds. As banks have dramatically scaled back their direct lending in response to a raft of regulatory reforms, private debt funds offering very attractive risk-adjusted returns have stepped in and are filling the void.

According to the IMF, global private credit assets under management have quadrupled over the past decade to US$2.1 trillion in 2023^[8].. Private debt and private credit are terms that are often used interchangeably. The growth of the broader private debt market is supporting the growth of listed private debt funds. Listed private debt provides a liquid way to access an otherwise illiquid institutional market.

What are the advantages of private debt?

• The illiquidity premium: a return premium earned for holding non-traded debt.
• Hold-to-maturity and step-in rights: non-syndicated, hold-to-maturity loans give lenders greater control in workouts and alignment with the borrower
• Tighter deal terms: tighter covenants and lower leverage
• Alignment with a private equity sponsor: advantage of access to “top-up” equity in times of stress
• Stronger credit performance: historically middle-market loans have experienced lower loss rates vs the broader institutional loan market.

Why choose listed private debt?

In a world of lower cash rates, listed private debt funds stand out as offering attractive yields (8-10 percent), floating-rate interest exposure and compelling risk-adjusted returns. The growth of the broader private debt market – driven by the lower interest environment and the vacuum created by the traditional lenders (i.e. banks) focusing elsewhere – supports the growth of listed private debt funds, particularly as broader set of investors seek more liquid ways to access an otherwise illiquid ‘institutional’ market.

Compared to traditional high yielding investments such as high yield bonds, REITs and utilities, which are trading at very low yields, many of the listed private debt funds currently represent very good value.

What are listed private debt funds?

Listed private debt funds are publicly traded on major exchanges and provide direct loans to businesses, infrastructure projects, commercial properties, or specialised sectors such as venture capital and resource-based investments.

Unlike many listed credit funds, which invest in highly traded credit securities such as corporate or government bonds, mortgage-backed securities, or syndicated debt, listed private debt funds primarily focus on non-traded, non-syndicated, self-originated loans held until maturity. This approach allows investors to benefit from an additional illiquidity premium.

What are business development companies (BDCs)?

Within listed private debt funds, the largest category of funds making direct, hold-to-maturity loans are the US-listed Business Development Companies (BDCs). The BDC model was created by US Congress in the 1980s to facilitate lending to small and middle-market companies. BDCs are regulated under the Investment Company Act of 1940.

BDCs are closed-end investment companies that typically focus on direct, hold-to-maturity loans to US middle-market private companies with EBITDA typically in the range of US$10-$150 million. A number of the BDCs focus on specialty finance niches such as asset backed finance, equipment leasing or venture lending and offer running yields of circa 10-12 percent per annum, which compare favourably to other fixed income investments. The underlying senior secured loans in most listed private debt funds are generally regarded as having a credit risk of BB (i.e. sub-investment grade).

What are the advantages of BDCs?

• Private equity backed borrowers: Middle-market lenders tend to invest mostly in private equity sponsored deals. The private equity companies’ ability to provide “top-up” equity in periods of market stress offers better risk adjusted returns. Private equity backed borrowers are also less likely to default.
• Lower default rate and stronger recovery rate: vs syndicated and leveraged loans. We believe the close interaction between borrower and lender, and the ability of lenders to assume control, have been major drivers of this stronger credit performance.
• Illiquidity premium: Given that direct loans to midsized businesses are less liquid than high yield bonds or leveraged loans to larger companies, investors can expect an extra return for the illiquidity.
• Tighter covenants and lower leverage: vs syndicated and leveraged loans.
• Stronger credit performance: vs syndicated and leveraged loans.

Access to private equity and the broader ecosystem of private market opportunities continues to expand, with listed PE funds now increasingly available to investors. This provides PE firms with permanent capital to support their investment activities while offering investors greater flexibility due to the liquidity that comes with a publicly traded vehicle. In essence, listed private equity has made PE more accessible to a broader range of investors.

Beyond liquidity, investors in listed PE funds gain immediate exposure to a diversified portfolio of companies at various stages of operational improvement, which helps smooth returns over time. Historically, private equity has delivered higher returns compared to public equities, with lower volatility due to its illiquid nature. Listed private equity offers the potential for capturing the private equity return premium while providing daily liquidity. However, LPE carries higher market-like volatility due to its daily pricing on public exchanges.

Many argue that the PE model, with its focus on skilled management, a balanced mix of equity and debt (leverage), as well as more favourable pricing in private markets, offers superior governance and ownership structures, which enable stronger returns. As a result, a growing number of investors are turning to PE and LPE as a way to diversify their portfolios and tap into meaningful returns, driven by a governance model designed for long-term success.

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References:
[1] https://www.afr.com/companies/financial-services/kkr-s-colonial-first-state-wants-to-buy-up-sub-scale-super-funds-20241015-p5kigx
[2] https://www.afr.com/companies/financial-services/perpetual-to-be-broken-up-name-sold-to-kkr-in-1-5b-deal-20240507-p5fqh0
[3] Corporate Finance Institute, What is a Buyout?, 2020
[4] https://www.forbes.com/sites/robertdaugherty/2024/09/16/ipo-market-rebounds-tech-unicorns-lead-charge-amid-global-uncertainties/
[5] Brown & Kraeussl, Risk and Return Characteristics of Listed Private Equity, 2010
[6] Investopedia, Alternative Assets, 2019
[7] Forbes, Alternative ways to tap into Alternative Investments, 2014
[8] https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html

Important information: While every care has been taken in the preparation of this document, neither Barwon Investment Partners Pty Limited ABN 19 116 012 009 AFSL 298445 nor PAN-Tribal Asset Management Pty Limited ABN 35 600 756 41 AFSL 462065 make any representation as to the accuracy or completeness of any statement in it, including without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document has been prepared for use by sophisticated investors and investment professionals only and is solely for the use of the party to whom it is provided.

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Colin Woods

PAN-Tribal Asset Management has announced the recent launch of the Jennison Global Equity Opportunities Fund, which will invest primarily into the AUD unhedged share class of a UCITS fund managed by Jennison in its global growth equity strategy. Founded in 1969, New York-based Jennison Associates (Jennison) has a long history of focusing on delivering consistent and sustainable outperformance for its clients.

Jennison specialises in a select range of active equity and fixed income investment strategies. The firm’s equity expertise spans style disciplines, geographies, and market capitalisations. It had $US214 billion under management at 30 September 2024.

The Jennison Global Equity Opportunities Fund is a high conviction, alpha concentrated global growth equity fund that is sector and region agnostic.

Commenting on the new Fund, PAN-Tribal CEO Colin Woods said, “We are delighted to work with Jennison and distribute this Fund in the Australian market.”

“For more than 50 years, Jennison has consistently applied its investment principles to build insights and judgment that help them identify opportunities and construct portfolios.”

Mark Baribeau, Jennison’s Head of Global Equity and Managing Director, said “PAN-Tribal Asset Management has a well-established brand, with a quality team and a strong track record in distribution in Australia. We look forward to a successful partnership with them.”

“Jennison’s investment approach is differentiated from other global equity growth funds available in the Australian market and, importantly, complements our existing suite of funds,” commented Woods.

Since its launch, the Fund has been reviewed by Lonsec and Zenith Investment Partners, receiving a “Recommended” rating from each research house.

Zenith’s conviction in the Fund is driven by the depth and experience of Jennison’s investment team, which has produced a strong track record that dates back to 2011. The research house also notes that the investment team is highly experienced and long tenured, and comments favourably on the depth and experience of the investment team.

Likewise, Lonsec notes the experience of the investment team and the Fund’s well-established investment process with a track record of success.

The Fund is available on AMP North, BT Panorama, HUB24 and netwealth.

Since the PAN-Tribal Global Equity Fund was launched in 2015, PAN-Tribal’s line up has been expanded to include the Ashmore Emerging Markets Equity Fund, the ATLAS Infrastructure Australian Feeder Fund, the Barwon Global Listed Private Equity Fund and now the Jennison Global Equity Opportunities Fund.

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What are the differences between private companies and listed public companies, the growing trend from public to private and the factors driving it.

Listed equities are the cornerstone of most diversified investment portfolios. Whether held directly, via an exchange traded fund or an unlisted managed investment, even those investors with a lower tolerance to risk tend to have some exposure to equities.

What most diversified portfolios don’t have is an exposure to private companies, or more specifically, private equity (PE) investments; this has traditionally been the domain of institutional investors. However, the advent of listed private equity (LPE) – entities listed on international stock exchanges whose main activity is investing in private companies, private equity funds or the investment managers of private equity funds – makes this asset class more accessible to all investors.

Listed public companies and private companies each has strengths and weaknesses, and both can add value to a diversified portfolio. PE has typically provided better returns than those offered by listed equities, with lower levels of volatility.

Listed public companies

Shares in companies such as Nvidia, CBA or Apple are purchased on major stock exchanges. If a company wishes to ‘go public’ it will typically go through an ‘initial public offering’ (IPO) process, with the primary objective to raise capital for the business, which can then be used for a range of purposes. These may include implementing expansion plans, product research and development, or simply so the company’s founders can cash out. Daily trading in the market typically determines the valuation of the company. As outlined in figure one, there are advantages and disadvantages to taking a company public.

 Trends for listed public companies

Over recent decades the number of listed public companies has decreased. Although predominantly a US phenomenon (figure two), this trend is also occurring more broadly across global equity markets. While bankruptcies and mergers and acquisitions are in part responsible for the disappearance of some companies, there are also other forces at play.

At a peak 1996, there were over 8,000 publicly traded companies in the US…today there are approximately 4,300. It’s not that the US has 40 percent fewer companies than it did 30 years ago, its that companies are increasingly choosing to stay private^[2]

The increasing drawbacks and distractions in going public, has coincided with tremendous growth in private capital allowing private businesses to remain private, and listed public companies to be delisted and become private once again.

With one of the main advantages of being a listed public company – i.e. a forum to raise capital – becoming more difficult to access for some market segments, many participants quite simply see fewer benefit of being public and choose to delist and become a private company once again^[3]

Private companies

A private company can be a corporation, a limited liability company, a partnership, or a sole proprietorship, as long as the shares are privately held and not traded publicly. A private company may issue stock and have shareholders, however their shares do not trade on public exchanges and are not issued through an IPO.

While private companies tend to be synonymous with smaller to medium size businesses, there are some well-known big businesses that are private companies. Examples include: Mars, known for manufacturing confectionary and Visy, an Australian company established in Melbourne in 1948 that’s since grown to become one of the world’s largest paper, packaging and recycling companies. Private companies are commonly owned by founders, families or private equity firms.

Private companies owned and run by a family tend to prefer staying private and therefore maintain majority or sole ownership of the business. Figure three outlines some of the advantages and disadvantage to keeping a company private.

One of the major reasons a company stays private is that there are less onerous reporting requirements. While private companies must practice accurate and current accounting, they may not need to meet the stringent and complex accounting rules and standards applied to listed public companies, which can be a significant expense.

Companies don’t always need to go public to access capital. Private companies can access growth capital and growth debt/finance through private equity and venture channels, as well as bank financing and non-bank debt providers such as Business Development Companies (BDCs).

From the perspective of a private company business owner, they are able to access capital via a sophisticated capital partner (PE company), on terms which are directly negotiated, without necessarily having to be in the public spotlight and having to report to public shareholders every quarter. Having PE backing allows private companies to access capital as required, not just when public markets are doing well or have an appetite for capital raisings.

How many private companies are there?

World Bank data estimates that in 2018 there were close to 43,300 listed public companies globally, with India, USA, Japan, China and Canada having the most public companies on their respective stock exchanges^[5].

While there is no aggregate data that accurately captures all private companies around the world, private companies vastly outnumber public companies globally. This has implications for investors; there are many great businesses not easily accessible to most investors, who are limited to investing via public exchanges or fund managers with access only to public companies.

The trend from public to private – and its implications for investors

The trend from public to private companies “is important because it changes the nature of an investor’s opportunity set. The companies that are listed on exchanges are bigger, older, and in more concentrated sectors than two decades ago. This likely contributes to [a view that] public markets are more informationally efficient than ever before”^[6].

This trend is occurring across broader public markets; public companies continue to decrease relative to private companies (figure five). There is an argument and evidence to suggest this concentration of bigger companies in public markets, coupled with the trend toward passive investing, are greatly increasing the efficiencies of public markets.

“In 2017, new capital raised from private markets exceeded capital raised in public markets for the first time in US history. It was a development that went largely unnoticed, yet the implications are significant, wide ranging and ongoing. Indeed, it is becoming increasingly apparent that we are in the middle of one of the most profound shifts in the capital markets since the 19th century”^[7]

Investors need to be aware that the public market pool they have traditionally invested within has changed over time and that they are potentially overlooking diversification options beyond publicly listed companies. Today, that means considering investing in a broader universe of quality companies, particularly private companies and private equity.

An additional consideration is the ‘growth’ opportunity investors may miss out on by not investing in private companies. Traditionally, a company would appear to have “made it” when the founders were able to ring the bell when listing in the public market via an IPO. Fast forward to today, and there has been a significant change in the investment landscape with companies staying private for much longer.

Companies that have remained private can focus on the growth of their business; this can have huge rewards for early-stage investors who can capitalise on growth valuations once the company lists on an exchange.

Today there are more institutions that want to invest in private companies, and changes in regulations have both made it more convenient to stay private and less convenient to go public. The reality is that the structure of the market has changed, and companies can afford to wait a lot longer to go public.

How companies raise capital

One of the major differences between private and public companies is the way they raise capital. The need for capital is not limited to establishing a business, most will need to raise or access capital as the company evolves, grows or transitions into new market segments.

Equity financing vs. debt financing: what’s the difference?

Once a company has decided it needs to source capital, it usually has two choices: debt or equity financing. The choice made will often depend upon which funding source is most easily accessible to the company. This is impacted by its cash flow, stage in its lifecycle, and the importance of maintaining control to its principal owners.

Most companies use a combination of debt and equity financing, as there are distinct advantages and disadvantages with each. Principal among them is that equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business, however it does dilute existing equity ownership, which is often held by the founders.

Whereas with debt financing, the lender has no control over your business, but the business has to commit to regular repayment obligations; these may prove testing during times of economic stress or business specific headwinds where a company’s cashflow is adversely impacted.

Company lifecycle and funding

All companies start as an idea and, along the way, there will come points in the company’s lifecycle where access to capital is required. There are specific types of investors that can help companies each step of the way.

When a business first gets up and running, often it is the founders who will contribute their own capital to get things started. As time progresses and the company begins to grow and increase sales, it often needs to raise external capital funding to expand the businesses into new markets or locations, to invest in research and development, or to fend off the competition.

While companies do aim to use the profits from ongoing business operations to fund such projects, it is often more favourable to seek external lenders or investors. Despite all the differences among the thousands of companies in the world across various industry sectors, there’s only a few types of funding available to all firms (figure seven).

Funding a Start-up [FFF]: Friends and family members may want to support the business venture by lending or gifting funds to the business. In some cases, friends or family may want to invest or purchase an ownership interest in the business venture. This is the most basic form of crowdsource funding and is commonly called “friends, family and fools” rather than founders, friends and family [FFF].

Fools are grouped into this category because of the risk associated with lending or investing in a seed venture. Generally, these individuals are not sophisticated investors and there’s typically less due diligence involved in committing capital to the venture.^[8]

Venture Capital: This is a form of private equity financing provided by venture capital firms or funds to start-up companies deemed to have high growth potential, or that have demonstrated high growth. Venture capital firms or funds, typically backed by high net wealth investors and institutions, invest in these early-stage companies in exchange for equity or an ownership stake. Venture capitalists take on the risk of financing start-ups in anticipation that some of the firms they support will become successful.

Venture capital may be attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering^[9].

Private Equity: PE typically refers to investment funds that buy and restructure companies that are not publicly traded. PE is an asset class comprised of equity securities and debt in operating companies that are not publicly traded on a stock exchange. However, the term has come to be used to describe the business of taking a company into private ownership to restructure it before selling it again at a hoped-for profit.

A private equity investment is generally made by a private equity or venture capital firm, each of which has its goals, preferences and investment strategies; however, all provide working capital to a target company to nurture expansion, new-product development, or a restructure of the company’s operations, management, or ownership^[10].

IPO: An IPO refers to the process of offering shares of a private company to the public; this share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realise gains from their investment – investors in private companies are typically unable to easily ‘cash out’. Meanwhile, it also allows public investors to participate in future growth of the business.

A company planning an IPO will typically select an underwriter or underwriters. They will also choose an exchange in which the shares will be issued and subsequently traded publicly^[11].

Why might a company benefit from having a private equity partner?

Whether a company is private or public, it’s possible that any business can come to a junction in its journey where current management might simply not have the specific skills or knowledge to successfully pilot the company going forward or to tackle the next phase of growth. A private equity partner does not simply provide funding; it can provide a range of experience and expertise.

PE managers have become more specialised, with firms often focused on specific industries, sectors or aspects of the businesses lifecycle. Often PE firms will have capability and knowledge of specific industries, operational experience, financial modelling and analytical skill, insight into how businesses are performing and understand how management interventions could help the business grow.

PE firms also bring the ability to research markets, competition and customers, all of which benefits the strategic direction of the company they are backing. For the company, it means a better business model and improved revenues and profits. For the PE manager, it means generating a meaningful return on invested capital when they choose to realise their stake in the business.

The role of private equity in investor portfolios

When used as part of a diversified portfolio, PE provides diversification benefits by providing investors with exposure to an investment universe that sits outside of the types of businesses that underlay the traditional asset class options. For example, companies in the earlier stages of their growth lifecycle that are private companies not listed on public stock exchanges. Noting that an increased number of companies are staying private for longer, advisers should consider how their clients can access that growth opportunity.

There are also sectors and regions where PE is able to provide better access to investment opportunities relative to listed equity markets – for example, industries such as consumer facing businesses, healthcare and information technology.

As well diversification benefits and growth opportunities, there is the attractive return profile that PE has demonstrated over many years relative to public equity returns. The PE model typically provides a superior governance and ownership model, which allows the PE managers to take a genuine and strategic long-term view to execute on value creation and maximise returns on capital for PE fund investors.

Access to PE investing has evolved over many years, particularly as an increased number of investors develop interest in this asset class. Many investors don’t have the capacity to own illiquid, long term PE investments, or the capital required to meet the minimum investment levels for PE opportunities. This has resulted in the notable growth in the LPE universe. Publicly traded entities that invest in privately held businesses and PE backed listed companies are an attractive gateway for a broader range of investors to access the diversification and risk/reward characteristics of PE. LPE securities are liquid, regulated, diversified, and easily investable^[12].

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Notes:
[1] Investopedia, Initial Public Offering (IPO), 2019
[2] https://edition.cnn.com/2024/04/09/investing/premarket-stocks-trading/index.html
[3] Investopedia, Why Companies Stay Private, 2019
[4] Crystal Vogt on Chron, The Advantages of Being a Private Company, 2019
[5] The Global Economy, Listed Companies – Country Rankings
[6] Mauboussain, Callahan & Majd, The Incredible Shrinking Universe of Stocks, 2017
[7] EY, A New Equilibrium, 2019
[8] The Business Professor, Funding from friends family and fools, 2015
[9] Investopedia, Venture Capital, 2020
[10] truCrowd, Private Equity Financing, 2016
[11] Investopedia, Initial Public Offering (IPO), 2019
[12]  JANA Investment Advisers Pty Ltd, MyConsultant, 2016

Important information: While every care has been taken in the preparation of this document, neither Barwon Investment Partners Pty Limited ABN 19 116 012 009 AFSL 298445 nor PAN-Tribal Asset Management Pty Limited ABN 35 600 756 41 AFSL 462065 make any representation as to the accuracy or completeness of any statement in it, including without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document has been prepared for use by sophisticated investors and investment professionals only and is solely for the use of the party to whom it is provided.

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Jordan Thurlow

PAN-Tribal Asset Management has announced the appointment of experienced business development executive Jordan Thurlow as Key Account Manager in NSW and WA.

Jordan joins an already strong Key Account team of Mark Aufderheide (NSW), Matthew Mantle (QLD) and Nick Baring (VIC) in leading the distribution of the PAN-Tribal’s funds.

Commenting on the appointment, PAN-Tribal Asset Management CEO Colin Woods says this appointment further strengthens the firm’s business development team.

“Jordan brings extensive experience and knowledge to this role; he knows the advisory community and has a strong track record of building strong, productive relationships.”

Jordan joins PAN-Tribal from Clinton Capital Partners, a venture capital advisory business where he led its expansion into startup communities across Australia.

Prior experience includes business development roles in boutique private wealth management and ten years at Man Group, the world’s largest alternative investment manager, where he was responsible for business development across several regions.

“Jordan is a wealth management specialist with strong market knowledge spanning macro trends, fixed income, equities and alternatives and will add value to our adviser relationships,” said Woods.

PAN-Tribal’s product suite currently includes the PAN-Tribal Global Equity Fund, the Ashmore Emerging Markets Equity Fund, the ATLAS Infrastructure Australian Feeder Fund and the Barwon Global Listed Private Equity Fund.

“We’re set to add two differentiated new strategies to PAN-Tribal’s lineup in the coming months – stay tuned,” said Woods.

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