Written by Paul Miron, Managing Director, Msquared Capital
At the beginning of 2022, I posed the following question to an audience of sophisticated self-directed investors:
Is Private Credit the new megatrend in Australia?
It is important to remember these were carefree times when the official cash rate was at a historic low of 0.10%, and terms such as ‘cost of living pressure’, ‘mortgage stress’, ‘inflation’ and ‘recession’ were not part of our vernacular.
I learnt a few lessons that day:
1) Howard Marks’ philosophy regarding market cycles was once again on the money!
It should not be a surprise that most investors want to avoid hearing words of caution in good times. We conducted a survey in which most attendees believed that the equity and property markets would continue their stellar post-COVID economic trajectories without investors having to adjust their portfolio for future risk.
However, the premise of Howard Marks’ proposition is that market cycles are better correlated with the collective mood of the market participants than pure economics.
2) Private credit is at an embryonic stage in Australia.
Despite private credit funds being so dominant in both the US and Europe, it is still at the embryonic stages of its evolution here in Australia constituting circa 8% of all business debt.2
By comparison, in 2019, 50% of business debt in Europe was financed by private credit.3 The biggest traction however, is in the US where in 2020 private credit providers took a 68% share of the mortgage market (residential and commercial).4
There is no question that there needs to be more awareness and understanding of private credit funds in Australia the — the benefits, the variety of options, the attractive risk-reward relationship, and most importantly, the diversification away from Australian equities.
3) There is a poor understanding of the market.
In Australia, only a few truly understand how commercial (Small to Medium Enterprise, SME) loans work combined with the true value proposition of private credit funds.
4) The revolution has already started within the Australian debt Market.
It is no longer a matter of IF; it is a matter of WHEN. It is only a matter of time before private credit funds will be recognised as a mainstream asset class and not labelled ambiguously as an alternative investment class.
Upon reflection, over the past 18 months there has been a significant increase new interest in the sector; a day does not go by without a fresh news article regarding a new entrant into the industry or a new mandate from either a superannuation fund or another financial institution, specifically focusing on allocating funds towards private credit.5
Current Economic Environment
Market expectations on whether we are going into recession or not, or whether interest rates will stay in place, go down or continue to go up this year, are in limbo. Not to mention the even larger questions, such as whether monetary policy will be enough to bring inflation at bay, or whether Trump’s next move will be going to prison or back into the White House. Expectations regarding these events change daily.
Perhaps the biggest surprise despite the chaos and 11 official interest rate increases is that property is emerging as quite a resilient asset class, recently bucking the negative trend. According to CoreLogic, nationwide median house prices rose by 0.6% in March and 0.5% in April.6 As many economists, politicians and media have now concluded, the reintroduction of net migration and a slow planning system are contributing to keeping prices high, coupled with an overall lack of supply.7
To read Msquared Capital’s full piece on whether Private Credit is the New Megatrend in Australia, please click on the button below.
2. Non-bank Lending in Australia and the Implications for Financial Stability | Bulletin – March 2023 | RBA
3. Financing-European-Business-NBL-and-the-Economic-Recovery.pdf
4. Nonbank Lenders Are Dominating the Mortgage Market – WSJ
5. Big super wakes up to private debt | Investor Strategy News (ioandc.com).
6. https://www.corelogic.com.au/news-research/news/2023/corelogic-home-value-index-further-evidence-australias-housing-downturn-is-over.
7. https://www.realestate.com.au/news/whos-to-blame-for-australias-exploding-property-prices-and-housing-affordability-crisis/.
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