Private credit flourishes as major banks recede

Private credit has been gathering pace both globally and in Australia, growing rapidly as businesses start to recognise the unique benefits of private lending and the opportunity that changing conditions in the banking sector provides.

Speaking with The Inside Adviser, Managing Director and Head of Private Credit at Northleaf Capital Partners, David Ross, said Australia’s historic reliance on the banking sector for credit has left a gap in the market, as major banks are projected to tighten access to capital further in the wake of increasing rates.

“Australia isn’t necessarily a unique market, but it is certainly what we call a ‘bank heavy’ market where the banking sector is dominant, which is actually similar to what we’ve seen in Canada and the Nordics,” said Mr Ross.

Mr Ross added, “The perception is that this type of market leaves less room for institutional capital in the private debt space as the banks effectively service that borrower demand, but we are seeing a dynamic change. Investors here are watching the retrenchment of banks across the global markets closely.”

Headquartered in Toronto, Canada, Northleaf is a global private markets investment firm with eight offices worldwide and US$20 billion in private equity, private credit and infrastructure commitments raised to date. Northleaf’s private credit program pursues a flexible strategy to build diversified portfolios of private credit investments, focusing on loans to middle market companies in North America, Europe, and Australia.

“We are seeing an opening for investment in Australian businesses through private markets. Capital is shifting from the public to private markets fuelling the growth of private credit, infrastructure, and private equity,” said Mr Ross.

“The opportunity for value creation in private markets, in our view, is now superseding what we see in the public markets. We have seen an enormous demand from borrowers for the type of flexible capital that comes from private investments, which gives businesses the ability to think about their business models over longer-term horizons, in years vs. quarter-to-quarter,” he said.

This longer time horizon by businesses makes private markets an attractive option for businesses seeking capital and as a result Northleaf says now is the ideal time for investors to be exploring avenues to access private markets, and private credit, in particular.

“As we look at volatility in the market today, whether driven by rates, inflation, or geopolitical risks, private businesses allow investors to generate stable returns without the same kind of volatility that comes from public markets,” said Ross.

“Within private credit, everything we do at Northleaf is floating rate. While rates are increasing, investors actually benefit and increase the returns they generate. This partially insulates them from one of the key risks we are all seeing in the market,” he added.

In addition, some segments of private credit, such as specialty finance can also add diversification to a portfolio. Specialty finance refers to a segment where the borrowers’ primary business and means of profit generation is the origination and servicing of some form of financial asset, such as music royalties, consumer and commercial litigation and healthcare receivables.

This is an area that traditional lenders have tended to overlook and where Northleaf has made several attractive investments in Australia.

“We look for business models that have high growth, good diversification and stable underlying performance,” said Mr Ross.

As a result, investors are drawn to specialty finance due to strong risk-adjusted returns, high cash yields, downside protection, and low correlation between the underlying cash flows and the broader economic environment.

Staff Writer