Speaking on a private credit panel, Qualitas group managing director Andrew Schwartz said sector misconceptions range from “dodgy” to “expensive”.
“All of those things don’t hold true in segments of the market, particularly the institutional end of the market,” Schwartz said.
ASIC recently described private credit as a $200 billion industry, with real estate private credit accounting for approximately 50 per cent of the sector.
“It continues to be a very high growth story and the main factors for that is the availability of large-scale capital that’s really looking to invest in private credit and also conducive markets where you have growing levels of assets in terms of absolute values,” Schwartz said.
Schwartz believes there is a compelling case for private credit over bank lending.
“The reason why [clients] come to a firm like a Qualitas or a Cbus is because you can deliver one line of capital, you don’t need to syndicate, you can get there in much faster terms, you’ve got more certainty of capital, you’ve got greater flexibility, you’re not back leveraging your capital – you’re seen as a very safe option for the delivery of large volumes of capital.”
The industry has recently come under the microscope, with ASIC in September calling on industry bodies to lift their standards across the board.
Schwartz, along with other panellists – Ares’ John Knox and Cbus Super Fund’s Linda Cunningham – welcomed ASIC’s recent report.
“There’s certainly been a lot in the media about things like, ‘Is this a bubble?’ and ‘How sustainable is private credit?’,” Schwartz said. “Private credit has been very well understood in offshore markets for decades. In Australia, it’s a relatively nascent story that is gaining very significant momentum.”
Ares partner and head of Australia and New Zealand, John Knox, believes Australia is following in the footsteps of the US and the UK when it comes to private credit adoption.
“There’s no reason why Australia won’t have exactly the same set of dynamics that has been experienced in offshore markets. I think the reason people think potentially this is a here and now story is because it’s still a relatively new story for many in Australia – but that’s not the global experience.”
He described Australia as a “terrific market” to be a senior secured lender.
“In addition to that, we’re achieving higher returns than the US,” he said. “We’re a strong believer that if you’re investing in credit, you’re investing to never lose a dollar.”
Knox noted that local corporate lending slowed down after the bank royal commission of 2018.
“That led to banks pulling back capital and accelerated the growth for private credit in the Australian market,” he said.
“There is a significant reduction in capital that is being provided by the banks which has led to and will continue to lead to significant growth in the private credit market in Australia,” Knox said.
Schwartz noted that operators in the space need to distinguish themselves from banks.
“Qualitas at current date is purely focused on real estate finance. In real estate finance, it’s a bifurcated market with many segments to it.”
“Qualitas is working on transactions in the order of $300 million up to $1 billion dollar cheque sizes,” he said. “It’s really at the large end where we can deliver very significant amounts of capital.
“I think there that we can earn commensurate returns for risks that we’re taking.”
Schwartz said there is an area he prefers to avoid: “I think there is a grubby end to real estate finance ... which is down at that 20 to 30 million dollar level, banks are very efficient at financing people at that level.
“You’ve got to really ask yourself – what is it that you’re trying to do if you’re going head to head with [banks]?”
Cbus Super Fund’s head of debt and alternatives, Linda Cunningham, said the firm has been investing in private credit for over 25 years.
“The balance of our book here in Australia is some of the leveraged loans, Term Loan B’s if you like, but there’s also a mix of investment grade bonds, loans to corporates that are sitting on the banks’ balance sheet as well – so it’s quite a diversified portfolio,” Cunningham said.
She said Australia’s private credit space began by filling a gap in real estate financing.
“Private credit kicked off here in Australia probably in the late ’90s and that was really driven by RBA at that stage, before APRA, with the capital adequacy rules,” she said.
“The Australian private credit space has so much real estate in it, because at that particular time, the banks were penalised for having corporate loans on their books, compared to, say, residential mortgages,” Cunningham said.
She said real estate became a “stranded asset” and banks were cutting back on their property exposure.
“At that particular time, banks were still keen to finance corporates, but we didn’t really have a lot of private equity transactions happening in the market.
“That’s where the non-bank side of things started kicking in in Australia.”
