According to Scarcity Partners’ latest white paper, private credit in Australia remains a small but rapidly expanding segment, set to take market share from traditional banks.
The report highlighted that while private lenders currently hold only around 5 per cent of total credit in Australia, compared to 50–70 per cent in some global markets, the sector is on track for strong growth.
“The growth rate in private credit in Australia is strong and exceeds the growth rate in system-wide credit. This is likely to continue with private credit slowly taking market share from banks,” the report reads.
“The gradual displacement of banks by private lenders by virtue of private lenders’ relatively higher growth rates is the most likely scenario when considering the outlook for growth in private credit in Australia.”
This expansion is being fuelled by several key factors, including regulatory constraints on banks, increased demand for alternative lending solutions, and investor appetite for higher-yielding fixed-income alternatives.
“The ability of private credit to fill gaps left by banks – particularly in mid-market corporate lending and specialist credit segments – makes it an appealing asset class for investors seeking alternative sources of yield and diversification,” Scarcity Partners said.
Mid-tier corporate lending is emerging as one of the strongest opportunities within private credit, the report highlighted.
“Private credit lending to mid-tier corporates in Australia or via consumer credit housed in specialist warehouse facilities offers attractive risk-adjusted returns,” the paper noted. However, it stresses that “manager selection is the critical issue, as not all managers operating in this sector have the requisite skills and experience to succeed.”
While corporate credit remains a key growth area, the report warned that property-backed lending, particularly in real estate development, carries significant risks due to valuation pressures and liquidity constraints.
“We observe elevated risks in property-related private credit and in property-backed lending generally. In the current circumstances, we would recommend an underweight exposure to property-related lending, whether through private credit or other vehicles,” Scarcity Partners said.
Moreover, the firm suggested private credit could gain significant market share if banks face capital constraints, especially in the event of a downturn in Australia’s housing market.
“The most likely catalyst that could significantly accelerate the take-up of private credit relative to bank lending would be an event that caused banks to become capital constrained and change their lending practices. A potential risk event would be a period of sustained falls in residential property prices,” the report said.
Despite recent concerns from regulators that the growing role of private credit could heighten systemic risks, Scarcity Partners maintains that the risk remains limited.
“We see no likely potential for systemic risks posed by private credit providers in Australia,” the firm said, adding that its view is based on private credit’s relatively small share of total lending, its limited exposure to high-risk sectors like residential mortgages, and structural advantages over banks, including fixed-term lending and a predominantly wholesale investor base.
With strong market tailwinds, Scarcity Partners admitted it is actively targeting Australia’s private credit sector.
“Scarcity Partners is focused on identifying high growth investment management businesses in which to take minority stakes. We are particularly interested in the Australian private credit sector due to the substantial tailwinds driving growth for superior private credit managers,” it said.
Another indication of escalating global interest in Australia’s private credit market emerged on Thursday, as Korea's National Pension Service (NPS) and the Townsend Group acquired a 4.17 per cent stake in Metrics Credit Holdings for $50 million.
Anthony Frammartino, CEO and chairman of Townsend, emphasised Australia's appeal, describing it as “an attractive and diverse market we have been actively focused on”.
