Private credit has experienced remarkable growth in recent years, emerging as a popular asset class for investors seeking stability, security, and attractive returns.
During InvestmentMarkets recent investor webinar Frances MacDonald, Co-Founder and Director of Capstone Funds highlighted the meteoric rise of private credit globally, noting that since the Global Financial Crisis (GFC), the asset class has grown tenfold, achieving a compound annual growth rate (CAGR) of over 15% in the last five or six years alone.1
According to MacDonald, Australia’s private credit market lags behind markets in Europe and the US, comprising around 10% of the total debt market compared to well over 50% elsewhere.2,3 However, this disparity does present a significant growth opportunity in Australia. “The sector has been analysed as the best performing and fastest-growing alternative asset class,” MacDonald noted. “It has been particularly appealing to investors for its stability, low correlation to public markets, and resilience through market cycles.”
From an investor’s perspective, private credit offers several compelling benefits. These include a high degree of diversification, tangible security on investments, and the potential for double-digit returns with comparatively lower risk than other asset classes. As traditional fixed income instruments have faced challenges amid high inflation and interest rates, many investors are now turning to private credit to bolster their portfolios.
Darren Connolly, Chief Marketing Officer at InvestmentMarkets, acknowledges that private credit is popular amongst investors. “Private credit is one of the most popular asset classes on the InvestmentMarkets platform. 40% of the sophisticated investors surveyed who attended the webinar indicated it was their next investment,” Connolly said.
Private credit provides reliable income streams when other asset classes have been volatile, and a shift towards direct lending, particularly in mid-market opportunities where banks have reduced their lending activity, has contributed to the expansion of the market.
While the appeal of private credit is evident, MacDonald cautioned that not all private credit is created equal. “It’s an incredibly diverse landscape,” she said. “Understanding where you sit on the risk-return spectrum is crucial.”
The spectrum of private credit options ranges from established real estate lending where assets are valued on an ‘as is’ basis and can offer returns between 6-10%, to more complex categories like business lending, construction lending, and distressed or opportunistic debt, where returns are much higher. Each presents unique risks and requires careful assessment.
MacDonald advised investors to consider the underlying asset, the capital structure of the investment, understanding the loan-to-value ratio (LVR), and ensuring that the collateral’s value is independently verified. “Doing your homework is essential,” she stated.
Additionally, investors should consider governance mechanisms, the manager’s track record, and whether the management team has “skin in the game.” Risk management, diversification, and proactive oversight are essential elements in navigating the market.
Looking ahead, private credit in Australia continues to grow at a rapid pace, with an estimated valuation of up to $200 billion. As regulatory scrutiny increases, ensuring that investments are made with robust oversight and risk management practices in place will be essential for investors seeking to capitalise on the potential of the asset class.
“Understanding the complexities and nuances of private credit is important,” Connolly said. “A sharper focus on due diligence, risk management, and selecting managers with proven track records will be essential. One way to do this is to stay abreast of the latest market commentary and education material found on platforms like InvestmentMarkets,” he added.
In addition to Capstone, Dean Weinbren, Managing Executive, from TermPlus, Roger Montgomery, Founder and Chairman from Montgomery Investment Management, and Lauren Ryan, National Manager - Investments, from Thinktank also covered the private credit market. Their presentations can be found here.
1 https://www.linkedin.com/pulse/growth-private-credit-its-impact-australian-property-market-j1enc
2 https://www.rocp.com/insights/private-credit-an-australian-perspective