Private Credit in Australia Booms as Interest Rates Rise, Banks Retreat

Australia's burgeoning private credit market is experiencing a surge of interest from institutional investors seeking higher returns amidst rising interest rates and a cautious banking sector, reports Bloomberg.

This trend is driven by the attractive yields offered by private credit funds, which have become a compelling alternative to traditional bond and loan markets. With interest rates at a 12-year high, pension funds are actively seeking opportunities for stable returns, particularly as banks become more risk-averse.

"We’ve seen quite a lot of flows come in over the last 12 to 18 months," said Hiran Wanigasekera, co-head of Australian diversified credit at IFM Investors Pty, in an interview with Bloomberg. "It’s the relative value opportunity right now that base rates are up and credit offers a very good alternative and a more stable return." IFM, owned by Australia's leading pension funds, has witnessed a 20% annual growth in its A$12 billion Australian debt portfolio, including private credit, over the past two years.

This trend is mirrored by QIC Ltd., which is aiming to double its A$1.5 billion private debt business over the next two to three years. The company, which manages funds for the Queensland government and institutional investors, sees a favorable environment for private credit investments.

QIC told Bloomberg that they were seeing better quality deals under a high interest rate environment. Companies are operating with more equity and less debt, leading to better balance sheets with more conservative capital structures.

The Australian private credit market, valued at A$40 billion, has grown significantly due to banks' reluctance to extend credit in certain sectors. With just 2.5% of total business debt currently allocated to private credit, there is considerable potential for expansion.

While the growth is promising, regulators like the Australian Securities and Investments Commission (ASIC) are closely monitoring the sector due to concerns about valuations and complex risks. ASIC is establishing a specialized unit to engage with the private market and is actively reviewing financial reporting and disclosures by superannuation funds.

The heightened interest in private credit has also made it more accessible to wealthy individuals, but investors are advised to exercise caution.

"Private credit is interesting but I think manager selection is incredibly important," said Jacqueline Fernley, chief investment officer at wealth manager Mason Stevens, as quoted by Bloomberg. "You have to be very, very careful."