Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
The ongoing resilience of Australian private debt
Despite being classified as an alternative investment, record growth has been witnessed in the Australian private debt market together with a rise in non-bank lenders exploiting lending opportunities previously only offered by the big banks.
“Australian private debt is still classified as an alternative investment because it is a nascent market,” highlighted Pete Robinson, head of investment strategy, fixed income at CIP Asset Management.
Speaking at the Inside Network’s Alternatives Symposium, Robinson used a family-owned supermarket chain as a case study to explain the reasons behind the private lending boom and how this business went from bank loan borrowing to private debt funding.
“The family-owned business had a succession event, which created an opportunity for the new generation to take over and expand their footprint,” Robinson said. “A big capex plan was required that paid a dividend to the founder and raised additional debt to expand the business footprint.
“The reason borrowers are shifting away from the big banks is that they’re going for speed. Although it’s not the case here; when acquiring a business speed is of the essence. Banks aren’t highly speed efficient.”
Robinson also points at flexibility, risk tolerance and scale as some of the other reasons causing borrowers to look at non-bank lending.
“Flexibility is so crucial and banks have focused on simplifying their business models and dealing directly with customers. Risk tolerance was elevated during Covid to help support the economy but in essence, it was against a broader trend that we’ve been seeing where the risk tolerance has been reducing over time as banks have simplified their businesses.”
Robinson suggests the end result is, greater demand for flexibility and risk tolerance that doesn’t reside with the banks. He believes there is greater potential for non-bank lenders to buddy up with the big banks rather than working against them.
“In this current environment, there is greater potential for opportunities for non-bank lenders to partner with banks so they don’t have that risk tolerance. Non-bank lenders bridge the risk tolerance gap by providing additional flexibility and bespoke terms to allow borrowers to receive the solution they’re looking for.”
According to Robinson, that’s exactly what happened in the supermarket chain case study.
“The reason the banks want to partner with a non-bank lender is that they aren’t competing for the same relationship banking business. Non-banks have experience working with big banks and have scale benefits. The banks to go to one source for a solution rather than multiple sources helps provide a lower cost of debt.”
CIP Asset Management was able to construct a solution by partnering with one of the big banks, he explained. The result was one senior and junior debt position with senior debt terms.
Robinson pointed out private debt and its diversification advantages from a portfolio construction point of view.
“Lending to unlisted borrowers, there is no other way of gaining exposure through any listed means.”
“In this period of uncertainty expect the flow of private opportunities to grow as banks tighten criteria and more borrowers require tailored solutions. In addition to higher returns, the attractiveness of private credit is strong structural protections and diversification relative to more traditional strategies.”
