The Australian private credit market is poised to reach new heights in 2025, offering investors attractive yields and resilience amidst a backdrop of global economic uncertainty and more volatile share markets, according to Peter Szekely, managing director of Tanarra Credit Partners.
"As interest rates have risen in recent years, so too have the yields on floating-rate loans, which has made private credit an attractive investment proposition compared to other asset classes," said Mr Szekely.
"While the Australian private credit market is not entirely immune to global economic forces, it exhibits a degree of insulation from the volatility experienced in larger markets like the US. This stability, coupled with the attractive yields offered by private credit, makes it a compelling investment proposition in the current environment," he said.
This positive outlook is reinforced by recent reports from the International Monetary Fund (IMF) and the US Federal Reserve, both of which have highlighted the strong historical returns and low volatility of private credit. "Indeed, the IMF has reported* that private credit funds have delivered comparatively higher gross returns than other asset classes historically have delivered," Mr Szekely said.
Private credit offers a compelling alternative to traditional investments, particularly in times of economic uncertainty. Private credit investments typically involve loans secured by tangible assets, offering a degree of downside protection compared to more volatile equity investments.
Furthermore, private credit can enhance portfolio diversification by providing exposure to a different risk and return profile than traditional asset classes. Direct lending, a key segment within private credit, allows investors to participate in financing businesses directly, often with greater protections and transparency.
While the outlook for private credit is positive, Mr Szekely acknowledged potential challenges. The recent US presidential election outcome and the anticipated policies of the incoming Trump administration could create global economic volatility and encourage some investors to move into private credit to avoid volatility in share markets.
"In this environment, it will be important for investors to focus on industries with inherent resilience and domestic support within the private credit market."
Mr Szekely identified several sectors within the Australian economy that are likely to remain resilient despite potential economic headwinds.
“Despite potential headwinds from rising interest rates, the financial services sector remains a cornerstone of the Australian economy, offering opportunities for private credit investments in areas like non-bank lending and specialised financial services,” said Mr Szekely.
“Education and childcare also enjoy significant government support, providing a stable demand base. Healthcare, as Australia's largest and continually growing industry, offers long-term growth potential and relatively stable cash flows. Infrastructure benefits from government investment and long-term contracts, providing stability and reducing exposure to economic fluctuations,” he said.
The Australian private credit market is predicted to see continued deal activity in 2025, building on the momentum from late 2024.
"I expect this momentum to continue into 2025, with a robust pipeline of deals in the sponsor-backed market, where Tanarra Credit Partners primarily focuses," he said.
According to the Reserve Bank of Australia, the size of the local private credit market is around $40 billion, or about 2.5% of all business lending, based on data collected by the APRA and London Stock Exchange Group. He also noted that work by the regulator ASIC to improve transparency will assist in monitoring growth in private credit.
While acknowledging the small size of the Australian private credit market relative to global markets, Mr Szekely said its stability and insulation from international volatility. He sees particular opportunities in the middle market, where Tanarra Credit Partners operates, due to its reliance on domestic capital and potential for attractive yields.
*https://www.elibrary.imf.org/display/book/9798400257704/CH002.xml
