Unlike in the US, where non-banks now provide about 70 per cent of credit, Australia’s private credit market is still emerging.
But as banks retreat from property and consumer lending, and super funds and private wealth managers hunt for alternatives to equities and bonds, the asset class is moving quickly to the mainstream.
InvestmentMarkets chief executive Darren Connolly said this growth is creating both opportunity and complexity.
“Private credit has been the most popular asset class on our platform year-to-date,” he said this week. “The growth is providing investors with greater choice but also a greater need to interrogate the risks and rewards of each opportunity.”
InvestorDaily understands the need for scrutiny is most acute where lenders are also managers of investor funds, given this model often blurs the lines between the interests of borrowers and investors unless governance structures are robust and transparent.
Speaking to InvestorDaily, Kev Toohey, principal at Atchison, said: “With respect of private credit managers that also act as non-bank lenders – detailed scrutiny of the internal decision process of allocation of deals across client portfolios and their own balance sheet is required.”
Remara, one of the largest players in the space, has argued that any risks can be mitigated by independent oversight.
Wayne Richardson, the group’s head of distribution – direct, said conflicts at the firm are addressed through an internal committee.
“Where conflicts are present, Remara has a conflict committee with independent members who are not incentivised by way of Remara equity ownership,” he said.
Richardson said cash flow structures were also designed to protect investors.
“Notes are independently managed with oversight by third-party trustees and governance,” he said.
“The end-to-end cash flow structure is run through warehouse mechanisms that ensure cash flows are appropriately managed and investors get the benefit of appropriate fee and interest income. Warehouse documents clearly articulate cash flow allocations to beneficiaries and these documents are approved by all warehouse participants.”
This type of securitisation structure, long familiar in wholesale credit markets, is becoming standard among non-bank lenders. But for retail and high-net-worth investors accessing private credit through managed funds, the layers of governance can be opaque.
Toohey noted a major issue for investors is the presence of information gaps – or what he referred to as “an asymmetry of information”.
“The investor is often largely dependent on the manager of the asset or transaction for relevant information – and given the idiosyncratic nature of each asset – it is often difficult for investors to verify or test suitably the information provided by prospective investment managers at a deal-by-deal level,” he said.
Andrew McVeigh, Remara’s managing partner, said the diversification of loans is key to maintaining confidence.
“Our portfolio has over 27,000 loans, with most exposures under $10 million,” he said. “That diversification, coupled with securitisation and genuine manager co-investment, means the risk of any single obligor impacting outcomes is very slim. We put our own capital on the line first. That’s a structural safeguard that resonates with investors.”
Even so, McVeigh acknowledged parts of the market have attracted scrutiny, particularly real estate loans, which dominate headlines when they sour.
“Real estate loans have attracted headlines, often because they involve larger obligors and slower workouts when things go wrong,” he said. “But when you look at the broader credit environment, Australians are holding up remarkably well. Consumers are meeting their obligations, defaults are low, and well-structured credit continues to deliver consistent returns.”
For more conservative investors, liquidity remains the main constraint.
“It can be difficult to compare credit funds on the surface,” McVeigh said. “Investors need to ask: what’s in the underlying pool? What’s the rating profile? How liquid is it?”
However, Connolly noted the demographic backdrop serves as a tailwind. Namely, retirees and younger investors alike are seeking steady, income-based strategies in an environment of volatile equities and thin government bond yields.
“The demographic bulge of retirees and the next generation of investors are both searching for income substitutes,” he said. “Private credit is well placed to meet that need but it’s essential investors look beyond the headline returns and do their homework.”
The question now is whether governance frameworks can keep pace with inflows.
Looking forward, both Connolly and McVeigh see long-term tailwinds supporting the growth of private credit.
“Private credit removes the day-to-day noise of markets,” McVeigh said. “It’s about steady, compounding returns over time and we’re only at the beginning of its growth in Australia. With a $3.8 trillion credit market and a superannuation system hungry for yield, there are clear tailwinds behind the sector.”
But for managers like Remara, the test will come not in today’s benign default environment but in the next downturn, when the alignment between lenders and investors will matter most.
