Entering 2025, the outlook for private credit is much more attractive than many would have expected at this time last year, investment specialists have underscored.
“At the end of 2023 and during the early months of 2024, we were seeing interest rates rise and remain higher than initially forecast in an effort to address inflation, and many in the market were uncertain as to whether Australia would be able to execute a soft landing, instead anticipating a recession,” said Lillian Nunez and Hiran Wanigasekera, co-heads of Australian diversified credit at IFM Investors.
Now, the super fund-backed asset manager forecasts base rates remaining relatively high throughout 2025, with the Reserve Bank of Australia’s first move towards monetary policy easing not expected before the bank’s May meeting.
According to them, Australia will be able to enjoy a credit spread that will offer private credit lenders attractive returns – returns that may not be found in other corners of the world.
“While the global central bank situation may see rates getting repeatedly cut, we do not see the Reserve Bank of Australia following suit, with inflation lurking around the corner,” Nunez and Wanigasekera said.
“In that regard, it means that the Australian private credit market will potentially be able to offer returns not available in overseas jurisdictions, including the US, where the Federal Reserve has already cut rates by 100 basis points.”
For IFM Investors, an improving economic outlook is a positive sign that business confidence will shift to suit, and as such, Australia could see a greater number of corporates re-investing in their own growth.
And while some of this financing will stem from equity, initial public offerings and capital raises, Nunez and Wanigasekera said that a significant portion will continue to be funded by debt.
“That said, we will remain cautious when lending to companies within the services sector that may struggle with staff shortages, as Australia continues to see peak employment,” they said.
“As the tight labour market will continue to cause inflationary pressures, this will also impact the financial health of companies within the services sector and act as a key impediment to growth and investment.”
Turning to sectors of interest, the duo pointed to businesses linked to trends of digitisation and decarbonisation as showing promise given predicted future growth. That said, they stressed the importance of seeking exposure to the economy as a whole, as opposed to adopting a sector-specific focus.
For the case of real estate, Nunez and Wanigasekera don’t believe the market has fully normalised, but that certain asset classes and locations have bottomed, or are at least close to it.
“We anticipate we will see the beginning of a recovery as commercial office assets begin to experience stabilised valuations and inflation continues to feed through contracted lease revenues,” they said.
“While the recovery in the segment may be modest, demand for real estate, as evidenced by capital-seeking opportunities, demonstrates a significant turnaround from the experience of the past few years.”
According to them, greater confidence in valuations and asset prices will likely continue to lead to further transaction activity, encouraging a greater number of investors to begin allocating to the sector.
“Crucially, while last year saw a tightening of pricing, as the demand for capital rises over the course of 2025, we expect this tightening to moderate,” the pair said.
“And while private credit pricing moderated, the changes are not as pronounced as in the public credit market – resulting in an improved premium in the private credit space compared to its public counterpart.”
