A shift in market mood
A series of high-profile business failures in the US and the UK – amid allegations of fraudulent conduct – are raising legitimate investor questions about private credit strategies. As a result, some investors are being more cautious with capital inflows.
A canary in the coal mine?
The key investor concern relates to the broader credit market. Are there other yet-to-be-reported business failures in the wings? Are there more instances of fraud? Will the AI boom fizzle out, removing a key source of US borrower demand?
A necessary shakeout
From our perspective, this is a necessary shakeout for the industry, removing lenders that have aggressively deployed at diminished margins and higher risks. Out of this, we will see a renewed industry focus on pricing risk and underwriting quality.
Different horses
Importantly, there are many types of private credit. Australia focuses more on real-asset-backed finance, with shorter loan terms, less use of back leverage and real estate collateral that generate real income and have a tangible resale value.
Different courses
Key aspects of the Australian economy are tracking differently compared to Europe and the US. There is stronger population growth underpinning demand in Australia. Local interest rates are rising more quickly, to the benefit of floating rate lenders.
Being selective
After a golden age, we are seeing an age of reason and discernment for private credit. Australian credit segments are still delivering for investors, with consistent and diversified asset-backed incomes. Investors need to be more selective and discerning ahead.
