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.
Private credit not so alternative anymore: KeyInvest
Private credit has become the world’s fastest growing alternative asset class in the last five years, outstripping private equity and all its subsets (and especially venture capitalism) to become the hottest method of deploying capital in private markets.
While private equity is the legacy leader in global private markets (which tallied US$13.1 trillion in assets under management this time last year according to McKinsey), a confluence of factors headlined by the increasing cost of capital has stalled momentum in the PE sector. Meanwhile, those same forces, together with the collective reticence of the banks to offer mid-market and top-end lending, has been a tailwind for private credit.
Such is the magnitude of this market shift that private debt is threatening to scale itself out of the alternatives bucket according to KeyInvest, a domestic provider of investment bonds, funeral bonds and wholesale income products.
Speaking to The Inside Adviser, KeyInvest chief executive Craig Brooke argues that the private credit sector is outgrowing what financial advisers would typically characterise as the alternatives sleeve of client portfolios.
“If you look at the number behind private credit in Australia, we’ve gone from $130 billion in funds under management at the end of 2021 to $188 billion at the end of 2023,” Brooke says. “So the question for me becomes, is it big enough to be its own asset class? I think it’s increasingly likely that it’s becoming the latter.”
The KeyInvest team’s experience in private debt is deeper than your average retail bond provider. A proportion of the underlying investments in its cornerstone funeral bonds are “fully extended” on private debt within asset allocation ranges, Brooke explains, because the KeyInvest Executive has deep experience in the sector and stands by their own ability to select the right managers through proprietary settings developed over a long period.
“We did a lot of research and came up with 300 individual Australian private credit providers in October 2022, but if you take out ones that are sub-scale there are still 82 private credit providers that have been able to continuously preserve capital for their investors since inception. Every dollar invested has been returned. And while they’re not capital guaranteed funds they depict a lot of characteristics of them and I can see why.”
Private debt’s growth in Australia is only just beginning, Brooke believes, but is likely to follow the US market which has seen stratospheric growth in the sector.
“Eight per cent of all commercial-type lending in Australia is getting run through private credit, yet it’s in the high 40s in Europe and the US and not turning back. In fact, the US has now tipped over 50 per cent,” he explained, noting that the potential for private credit to grow in Australia is further underpinned by the $4 trillion pool of capital sitting in the superannuation, and the increasing appetite they have for deploying capital in risk-weighted sectors like debt.
“Of the top ten industry superannuation funds, they’re all investing between one and seven per cent into private credit, which is a very big bucket of capital,” he said. “But half of them are treating it as fixed income and the other half are treating it as it’s own asset class, and so are we. No one is really treating it as an alternative asset class any more.”
