Private credit investing has seen exponential growth in recent years, fueled by structural shifts in financial markets and a growing demand for flexible, non-bank lending solutions. Private credit is no longer a niche – it’s a major force in the market.
It’s the showdown of the equities funds management world: not value vs. growth, but long-only versus long-short. Do long-only managers fight with one hand pinned behind their backs, as their long-short counterparts assert? We tested a random pair.
ASIC right to get to grips with private markets
All around the developed world, private markets have burgeoned in importance; and regulators need to understand what’s going on. That’s where a landmark new paper from the Australian Securities and Investments Commission (ASIC) comes in.
As ASIC points out in its paper, assets under management (AUM) in the global private markets have tripled to an estimated US$14.6 trillion ($23.2 trillion) in the decade to June 2024. This growth has been driven by institutional investors such as superannuation and pension funds, insurance companies, family offices and high-net-worth individuals, all looking to gain access to opportunities not available in public markets.
ASIC is simultaneously concerned at the possibility that this growth, in its jurisdictional patch at least, coincides with an alarming contraction in the number of publicly listed companies. But in the first place, it wants to understand more closely the growth in private markets investment in Australia – which it estimates at almost $149 billion – and in particular, the private credit market.
In tune with their counterparts around the world, Australian institutional and wholesale investors have embraced non-bank lending, attracted by the income streams underpinned by the contractual obligation of interest payments; the access to the lowest-risk part of the capital structure (that is, as senior secured lender); the low correlation with equities; the lower volatility than publicly traded credit; the exposure to a market to which it has historically been difficult to gain access; and the inflation protection from the (typically) floating-rate nature of the investment.
But ASIC has stated its concerns around the opacity of the investments, conflicts of interest, valuation uncertainties, illiquidity and leverage, as well as the growing interest of retail investors in what many see as the bright new toy of private credit.
Of course, public markets will always be more transparent: listed companies report valuation-sensitive developments, publish their financial accounts and hold annual general meetings, with their governance closely scrutinised. Trading in their shares is liquid and closely regulated, with any anomalies investigated. In contrast, private markets are more opaque, less liquid – in fact, the illiquidity risk premium is often cited as one of the main attractions – and relatively lightly regulated. Being less liquid, private capital investments are generally speaking more risky; but they can deliver much higher returns (or losses).
It is no surprise that ASIC is looking more closely at private markets, and the scrutiny ought to be welcomed, says Kevin Toohey (pictured), partner at investment consultancy Atchison. “ASIC’s comments are welcome in the name of improving investor education, market transparency, and system-level contagion risks as private asset markets grow in percentage in most Australians’ portfolios,” says Toohey.
A key attribute of private markets is that they remain quite opaque, have huge information asymmetry across market participants, and valuation practices that on a day-to-day basis “typically depend on expert opinion versus that of actual clearing market transactions,” he says.
“These attributes are attractive for many investors – however, they obviously introduce a landscape of additional risks that investors need to manage, not least the incentives and robustness surrounding valuation practices and the ability to appropriately benchmark performance.”
The opacity of private market transactions is a feature, not, a bug. “A key narrative for private markets participants’ ‘alpha’ opportunity is that they hold either deal access or asset-level information advantages when compared to their competitor private market participants,” says Toohey.
“Existing participants in private markets, principally fund managers and institutional asset owners, are incentivised to continue to hold their cards close to their chest and not leak away their proprietary advantages,” he adds.
It is not as if private markets is a fad, says Daniel Kelly, chief investment officer at Viola Private Wealth. “The truth is that investment specialists who take a deep and holistic view on asset allocation have been successfully utilising the benefits of alternative investments for decades. It is far from a new ‘fad’ trade,” he says.
But this is where advisers can demonstrate their value.
“It is also true that it does require a deeper level of expertise to select, analyse and due-diligence these funds, which is why our clients look to outsource this work to us, who do it daily,” says Kelly. “Navigating the somewhat opaquer nature of alternatives is part and parcel with this. The opportunity cost of being stuck in an under-performing fund with limited liquidity is significantly greater than a stock you can sell and get your money back in T+2 days.”
Never before have the barriers to entry been lower for those wanting to invest into private markets, says Kelly, but it has also “never been harder for an individual investor to know the good funds from the bad.
“That’s where we step in,” he says.
