As interest in private credit investments increases, Pengana Credit CEO Nehemiah Richardson has argued for a clearer distinction between Australian and global private credit due to their different risk and return profiles. This clarity will help investors avoid comparing “apples to oranges” when evaluating allocations to this asset class, he said in a recent market note.
In 2023, Australia’s private credit market was valued at $188 billion, according to EY, while BlackRock estimates the global market at $1.6 trillion. Richardson pointed out that despite this large disparity in size, local and global private credit are often “clumped together,” even though their differences go beyond simple scale.
“In reality, the asset class is much more nuanced, and this is particularly evident when looking at the Australian banking sector compared to that of the US and Europe,” he said.
In Australia, major banks service 90 percent of business loans, with private credit providers accounting for around 10 percent. On the other hand, other large markets often experience an opposite trend.
“In the United States and Europe, it’s almost exactly the opposite. Around 84 percent of business loans are provided by private credit providers, and around 16 percent by banks,” he said.
These differences result in varying risk profiles between local and global private credit markets, with global markets generally characterized by greater borrower and investor acceptance, older managers, structural dynamics that favor innovation and greater diversification.
In contrast, Australian private credit is primarily focused on commercial real estate and subordinated positions in asset-backed structured finance vehicles, which are not yet tested by economic cycles and for which banks have an appetite for limited risk, Richardson explained.
“In the United States and Europe, private credit plays a major role in their economies,” he said.
“There is a huge market of loans available, including relatively lower risk positions in bilateral loans to quality companies. »
Richardson noted that since 2005, including the global financial crisis, the historical annualized loss rate for global private credit direct lending strategies is approximately 1.03 percent, while the average loss rates for the sector Australian private credit are less well documented, highlighting the need for investors to be well informed before investing.
Earlier this month, the opaque nature of Australia’s private credit landscape was compared to the “Wild West”, with one trader pointing out that investors do not have access to key information such as outstanding debts, arrears, ratios loan/value and restructurings.
For Richardson, the rapid growth of private credit, which is expected to reach some $2.8 trillion by 2028, is a reminder of how managers and investors must remain disciplined.
“It is likely that we will see greater variability in complexity and risk profile as more products enter the market,” he said.
