Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Private lending gains public approval as credit conditions tighten and banks lose favour
Small and mid-sized companies are eyeing direct lending sources instead of traditional bank lending channels as inflation impacts access to capital and the notion of private lending becomes an increasingly mainstream alternative.
The Reserve Bank of Australia’s credit tightening program, which follows that of other nations world-wide, has inflated the cost of public credit channels for domestic companies over the course of 12 months.
Businesses that need capital to grow are being nudged towards other options, with established private lending outfits seeing record levels of interest according to Epsilon Direct Lending co-founder Mick Wright-Smith, who says the pressure on public credit could be a potential tailwind for non-bank credit providers.
“As we head towards the mid-year mark, it’s clear that the rising interest rate environment is making room for non-bank lending and private credit to play a greater role,” he says.
Epsilon specialises in direct lending to growth-seeking Australian middle-market businesses such as sleep apnea device maker Somnomed and IT professional training company EdventureCo. The firm, started by Wright-Smith (pictured) and ex-CBA corporate finance executives Paul Nagy and Joe Millward, targets the $70 billion mid-market sector of the $1 trillion plus domestic corporate loan market.
Wright-Smith believes small and mid-sized companies could trend towards a single non-bank funding channel rather than sourcing loans from multiple banks, with what he says are often better terms and more attractive rates.
Direct lenders like Epsilon are focussed on catering to the lending needs of robust, growing businesses that aren’t subject to cycles, he adds. These companies are the ones that are doing much better in an economic environment characterised by high interest rates and tighter credit conditions.
“We continue to see high quality, performing companies in non-cyclical sectors continue to attract loan funding to finance step-changes in their business whilst lower quality companies, and those in cyclical sectors are having a much harder time,” he explains. “Over the last six months there is a renewed respect for capital among Australian companies, be it sourced via debt or equity.
“After 12 interest rate rises in 14 months, the days of cheap and easy money have passed, and we are now in a more regular or normal part of the business and finance cycle which favours better quality businesses with thoughtful growth plans,” Wright-Smith adds.
“The good news is there a great many sound and successful companies out there who are seeking and attracting funds at reasonable rates on reasonable terms from non- bank lenders such as ourselves.”
According to Millward, the first six months of the calendar year has seen a “notable uptick” in lending activity compared to the corresponding period in 2022.
“The significant downturn in Covid and the corresponding upturn in business activity combined with materially increased interest rates has been a net plus for our firm,” he says.
“We continue to focus on non-cyclical sectors including telcos, healthcare and IT and B2B services and to avoid the more cyclical industry sectors such as hospitality, commodities and property,” Millward continues. “Businesses continue to value funding from non-bank sources such as ours due to the speed and efficiency of dealing with us and our deep and ongoing level of engagement with portfolio of borrowers.”
