Private credit market to grow as investors seek yield and shelter from equity risk

Australia’s $40bn private credit market is set to reach new highs next year on the back of volatile sharemarkets, with investors being offered attractive yields.

Australia’s $40bn private credit market is set to reach new highs next year on the back of volatile sharemarkets, with investors being offered attractive yields, according to Tanarra Credit Partners managing director Peter Szekely.

Mr Szekely said there was a “robust pipeline” of private credit deals in the local market, which would build on the current momentum in the sector.

He said local investors were attracted by strong yields and resilience “amidst a backdrop of global economic uncertainty and more volatile share­markets.”

“As interest rates have risen in recent years, so too have the yields on floating-rate loans, which has made private credit an attractive investment proposition compared to other asset classes,” he said.

“While the Australian private credit market is not entirely immune to global economic forces, it exhibits a degree of insulation from the volatility experienced in larger markets like the US.

“This stability, coupled with the attractive yields offered by private credit, makes it a compelling investment proposition in the current environment.”

The Reserve Bank has estimated that the Australian private credit market has grown to around $40bn, or around 2.5 per cent of total business lending.

Stricter lending controls by the banks have seen small and medium-sized businesses forced to seek other sources of finance.

Mr Szekely said private credit offered a compelling alternative for investors, particularly in times of economic uncertainty.

It could also enhance portfolio diversification by providing exposure to a different risk and return profile than traditional asset classes, he said.

While the outlook for private credit was positive, Mr Szekely acknowledged it also had potential challenges.

He said the recent US presidential election could create global economic volatility and encourage some investors to move into private credit to avoid volatility in sharemarkets.

“In this environment, it will be important for investors to focus on industries with inherent resilience and domestic support within the private credit market,” he said.

Mr Szekely said sectors in Australia likely to remain resilient in the face of potential economic headwinds included financial services, education, childcare, healthcare and infrastructure.

He said infrastructure benefited from government investment and long-term contracts.

ASIC’s work to improve transparency in the private credit market would help in monitoring its growth, he said.

Mr Szekely said the Australian private credit market was still small relative to global markets, but offered investors stability and insulation from international volatility.

He said the International Monetary Fund had found that private credit funds have delivered comparatively higher gross returns than other asset classes.

But the IMF has also warned that there were risks in credit moving away from the banking system.

It warned recently that firms borrowing private credit tended to be smaller and riskier.