Against a backdrop of global economic uncertainty and more volatile share markets, the local private credit market is poised to offer investors attractive yields and resilience, Tanarra Credit Partners managing director Peter Szekely has said.
"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," Szekely noted in a recent market update.
In October, the Reserve Bank of Australia (RBA) estimated that the private credit market in Australia stands at some $40 billion and is worth around 2.5 per cent of total business debt. Meanwhile, work by ASIC to improve transparency will assist in monitoring growth in private credit.
While acknowledging the small size of the Australian private credit market relative to global counterparts, Szekely emphasised its resilience and its relative insulation from international volatility.
"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," he explained.
Szekely further cited reports from the International Monetary Fund (IMF) and the US Federal Reserve, both of which have highlighted the strong historical returns and low volatility associated with private credit.
"Indeed, the IMF has reported that private credit funds have delivered comparatively higher gross returns than other asset classes historically have delivered.”
Despite the positive outlook, Szekely acknowledged potential challenges.
Namely, he pointed to the anticipated policies of president-elect Donald Trump’s incoming administration, which could trigger global economic volatility and prompt some investors to shift towards private cred to avoid volatility in share markets.
"In this environment, it will be important for investors to focus on industries with inherent resilience and domestic support within the private credit market.
“Despite potential headwinds from rising interest rates, the financial services sector remains a cornerstone of the Australian economy, offering opportunities for private credit investments in areas like non-bank lending and specialised financial services,” Szekely underscored.
“Education and childcare also enjoy significant government support, providing a stable demand base. Healthcare, as Australia's largest and continually growing industry, offers long-term growth potential and relatively stable cash flows. Infrastructure benefits from government investment and long-term contracts, providing stability and reducing exposure to economic fluctuations.”
Looking ahead, the managing director believes that the Australian private credit market is poised to see continued deal activity in 2025, building on the momentum from late 2024.
"I expect this momentum to continue into 2025, with a robust pipeline of deals in the sponsor-backed market,” he concluded.
Transparency concerns remain
As the asset class continues to gain prominence locally, the RBA reiterated that while current risks in private credit locally remain low, they are not to be underestimated.
Most of the RBA’s concerns centre on the lack of transparency in the market, with the central bank drawing attention to the limited amount of information available regarding leverage in the local private credit market.
“Although private credit funds’ leverage appears low compared with other lenders, end borrowers tend to be more highly leveraged than those in public markets, increasing the risks to financial stability,” the central bank cautioned.
Moreover, the bank flagged that private credit valuations are less frequent and subjective, posing risks of reassessment during economic shocks. While default rates have been low, the sector’s resilience to a major downturn remains untested, with higher losses often incurred during defaults, it said.
