The rise of private debt in Australia: An exciting opportunity for investors
The rise of private debt in Australia: An exciting opportunity for investors
Over the past decade, superannuation funds, insurance companies, charities, universities, and family offices have increased their allocations to this growing asset class. Thanks to private debt funds, individual investors now have access, sparking a surge in interest and private lenders.
So, what’s driving the growth of private debt in Australia? And more importantly, should you be paying attention?
What is private debt?
At its core, private debt is fairly straightforward. It occurs when a company borrows money from a private lender instead of a bank. These lenders could be investment funds, institutional investors, or even high-net-worth individuals.
Why is private debt growing in Australia?
To understand the rise of private debt, we need to go back to the Global Financial Crisis (GFC, 2007 – 2009). After the GFC, Australia’s financial regulators tightened the rules for banks, making them adopt more conservative lending practices. This meant lending to certain sectors, like medium and large businesses, real estate developments, and infrastructure projects, became less attractive for traditional banks.
While this was great for financial stability, it created a gap in the market. Businesses still needed funding, but banks were no longer the go-to option. Enter private lenders, who stepped in to fill the void.
The market share of Australia’s Big Four banks (CBA, ANZ, NAB, and Westpac) in corporate debt markets has been declining, while private lending has been on the rise. The numbers tell the story:
Figure 1: Composition of Australian corporate debt markets
Source: Metrics Credit Partners Investor Presentation, 2024
A market with room to grow
Although private debt is expanding rapidly in Australia, it’s still relatively young compared to mature markets in Europe and the United States. This means there’s significant potential for further growth, making it an exciting space for investors looking to get in on the rising trend.
Figure 2: Bank coverage in international debt markets
Source: Private Credit: An Australian Perspective, ROC Partners
Balancing risk and return
One of the biggest reasons private debt is drawing attention is its return potential. When compared to traditional public debt investments, private debt has delivered attractive yields over a number of years.
But like any investment, it’s not without risks. Below are two key risks to be aware of:
- Credit risk: The risk that a borrower may not be able to repay their loan, leading to potential capital losses for investors
- Liquidity risk: Unlike public debt, which can be easily bought and sold, private debt is less liquid. Investors need to be comfortable with longer holding periods and the possibility that their capital may not be readily available when needed.
The best way to manage these risks is to choose an experienced private debt manager. Factors like diversification, risk management, size/*scale, and a strong track record make all the difference.
Figure 3: Australian corporate debt benchmark (Bloomberg AusBond Credit FRN 0+ Yr Index) vs private debt investment returns over one, five and seven year periods to 28 February 2025
Source: Lonsec
Scrutiny in the media
The industry has faced increasing scrutiny in the media. Ongoing coverage in a popular newspaper has highlighted concerns around some private debt managers, particularly regarding transparency, governance, and potential risks to investors. While this bad press shouldn't deter investors entirely, it does reinforce the importance of conducting thorough due diligence before committing capital.
BDO comment
Adding private debt to a long-term investment strategy can offer diversification and higher returns. But, as with any financial decision, it’s essential to ensure it aligns with your overall goals and risk tolerance.
If you're curious about whether private debt might be a good fit for you, our private wealth advisers can help. We offer tailored advice based on your personal situation and investment strategy. Contact us for a no-obligation chat - we’d love to help you explore your options.