As interest in private credit investments grows, Nehemiah Richardson, CEO of Pengana Credit, has urged for a clearer distinction between Australian and global private credit due to their differing risk and return profiles. This clarity will help investors avoid comparing “apples with oranges” when evaluating allocations to this asset class, he said in a recent market note.
As of 2023, Australia’s private credit market was valued at $188 billion, according to EY, while BlackRock estimates the global market at US$1.6 trillion. Richardson stressed that despite this vast disparity in size, local and global private credit are often “lumped together,” though their differences extend beyond mere scale.
“In reality, the asset class is far more nuanced, and this is most apparent when you consider the banking sector in Australia in comparison to the USA and Europe,” he said.
In Australia, major banks handle 90 per cent of corporate lending, with private credit providers accounting for around 10 per cent. In contrast, other major markets often see the reverse trend.
“In the USA and Europe, it’s almost the exact opposite. Approximately 84 per cent of corporate lending is done by private credit providers, with around 16 per cent done by the banks,” he said.
These differences result in varying risk profiles between local and global private credit markets, with global markets typically featuring broader borrower and investor acceptance, longer tenured managers, structural dynamics that foster innovation, and greater diversification.
In contrast, Australian private credit is primarily focused on commercial property and subordinated positions in asset-backed structured finance vehicles, which are still untested by economic cycles and where banks have limited risk appetite, Richardson explained.
“In the USA and Europe, private credit plays a major role in their economies,” he said.
“There is a massive market of lending available including relatively lower risk positions in bilateral loans to quality companies.”
Richardson noted that since 2005, including the Global Financial Crisis, the historical annualised loss rate for global private credit direct lending strategies is around 1.03 per cent, whereas average loss rates for the Australian private credit sector are less well-documented, highlighting the need for investors to be well-informed before investing.
Earlier this month, the opaque nature of the Australian private credit landscape was compared to the “Wild West”, with a professional noting that investors lack access to essential information such as delinquencies, arrears, loan-to-value ratios, and restructurings.
For Richardson, the rapid growth of private credit, which is expected to reach some US$2.8 trillion by 2028, reiterates how managers and investors need to stay disciplined.
“It’s likely we’ll see more variability in complexity and risk profile as more product enters the market,” he said.
