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No longer a niche asset class for the few, private credit is rapidly becoming a mainstream income strategy for Australian investors seeking yield and diversification in a changing market.
According to Darren Connolly, CEO of InvestmentMarkets, the trend mirrors a more mature overseas market, but is accelerating locally.
“In the US, around 70 per cent of credit is provided by non-banks. In Australia, the share is smaller but growing quickly,” Connolly said.
“Private Credit has been the most popular asset class on our platform year-to-date. The growth is providing investors with greater choice but also a greater need to interrogate the risks and rewards of each opportunity.”
The driving forces behind the boom
So, what’s causing this surge? Andrew McVeigh, managing partner at specialist private credit firm Remara, said it’s a combination of regulatory changes and market evolution.
“Banks have stepped back from certain types of lending, this initially occurred post GFC in real estate development and construction lending and further amplified following APRA’s changes to risk weightings in 2023,” said McVeigh.
“This has created space for non-banks to originate and structure credit in areas where traditional lenders are less active.”
For investors, this means unprecedented access to asset classes and yield opportunities that were previously out of reach. Private credit providers can be nimbler and more innovative.
The sector has faced its challenges, with real estate lending making headlines when larger projects encounter difficulties. However, McVeigh urged investors to look at the broader picture.
“Real estate lending remains more vulnerable because of larger obligor sizes and slower work-outs when problems occur. There is also the broader challenge of ensuring that headline returns are properly aligned with the true risk being taken on, something ASIC has flagged as an area of focus,” McVeigh said.
Navigating the opportunities and challenges
The Australian credit market is worth a staggering $3.8 trillion, and the retreat of banks has opened new avenues in SME lending, consumer credit, and smaller-scale real estate.
However, the biggest challenge is the need for due diligence: “Not all private credit funds are created equal. It can be difficult for investors to compare them on the surface, as risk profiles and underlying exposures vary significantly,” McVeigh explained.
“Transparency and governance are critical – investors must look closely at what’s in the pool, how diversified it is, whether exposures are rated, and how liquid the structure is.”
Both Connolly and McVeigh see long-term tailwinds supporting the growth of private credit, viewing it as a permanent feature of the investment landscape.
“We see this as a structural shift rather than a cyclical one. In the US, around 70 per cent of credit is already provided by non-banks, and Europe is much further advanced than Australia too. Here, non-bank lending is only around 20-25 per cent of the market, which shows how much room there is for growth,” said McVeigh.
Connolly added that the demographic need is clear: “The demographic bulge of retirees and the next generation of investors are both searching for income substitutes. Private credit is well placed to meet that need, but it’s essential investors look beyond the headline returns and do their homework.”
As banks continue to refine their focus, private credit is poised to become the next growth engine for Australian portfolios. For investors willing to look under the hood and understand the mechanics, there is plenty of opportunity.
[Related: ASIC calls for higher standards in private credit sector]
