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In under a decade, private credit has experienced a significant surge in popularity.
One study revealed that the Australian private credit market was valued at $33 billion in 2016. This grew to $205 billion in 2024. This represents growth of around 15 per cent each year.
Residential lending leads as the most popular investment for private lenders, followed by commercial, industrial, and retail.
Frances MacDonald, co-founder and director of Capstone Funds, said the increasing popularity is due to private credit addressing the needs of the modern investor.
“It is less correlated to the noise, volatility and returns we see in the public equity markets – something that was on full display just this week when Trump’s tariff headlines sent equities into a spin overnight,” said MacDonald.
“Further, the environment of high inflation and high interests has made traditional fixed income products a less reliable diversifier to equities than in the past. This instability is prompting investors to rethink where they’re placing their capital.
“Private credit, particularly when it’s backed by real property assets and structured conservatively, has emerged as very popular in providing predictable regular income for investors that can be in the double digits without the volatility of the equities market.”
Still, it is largely underutilised in Australia. According to InvestmentMarkets, private credit makes up around 10 per cent of the total debt nationally, while 90 per cent is handled by banks and non-banks.
While it certainly shouldn’t be the default option for a borrower, for those who fit a niche, private lenders provide an important service.
“Private credit can be a great option for borrowers who need capital quickly, don’t fit the box of a traditional lender, or require bespoke terms. It’s especially useful in transitional projects – think development, bridging, or repositioning an asset, or small to medium business finance,” said MacDonald.
“But it’s not for everyone. If a borrower fits a bank’s criteria, doesn’t require speed or flexibility, then traditional finance is usually cheaper. Private credit fills the gaps the banks leave behind – it’s not there to compete on price, it competes on certainty, speed and flexibility.”
The boosted popularity in private lenders is partly due to inflated interest rates, said MacDonald.
With February seeing the first cut in four years and more expected throughout 2025, the demand for private credit could shift.
However, MacDonald believes it won’t result in dampened growth for private credit. In fact, she expects it to continue to surge.
“Private credit has thrived in the higher-for-longer rate environment, with experts predicting its growth will not be curtailed by easing interest rates. The appeal of private credit goes beyond the headline rate,” she said.
“For investors, it’s about predictability and security as well as yield. Even in a lower-rate environment, those qualities will continue to stand out, especially as volatility in public markets persists or increases, and private credit will continue to outperform traditional fixed income.
“It should be noted that the markets are not expecting substantial rate cuts in 2025. From the borrowers’ perspective, the pipeline for private credit remains strong and a lower-rate environment is likely to lead to greater lending activity.”
[Related: Brokers should stay on their toes amid the private credit ‘boom’]
