The Australian private credit market is poised to reach new heights in 2025, with strong business lending growth supporting the market’s growth and attractive returns for investors, with the Reserve Bank of Australia (RBA) likely to cut interest rates one more time in 2025 after Tuesday’s action, according to Peter Szekely managing partner of Tanarra Credit Partners.
Private credit has grown rapidly in popularity among investors, offering yields higher than those on Australian investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned just 6.3 per cent over the year to 7 February 2025.
Private credit consists of privately originated, largely comprised of higher yielding, loans across a range of risk/return profiles. These loans are not traded on the public markets, unlike corporate bonds, which are actively traded.
“Private credit offers investors an attractive opportunity in 2025. Investors currently benefit from regular income and yields of around 10 per cent a year-with strong investor protections and low volatility in an uncertain economic and political environment with less volatility than shares or corporate bonds,” Mr Szekely said.
“The market continues to pay close attention to US President Trump’s policies on trade, immigration and taxes with greater economic uncertainty reflected in increases in US Treasury yields despite last year’s interest rate cuts.
“At the same time, equity and residential property valuations appear stretched and at risk from continued, higher interest rates, both in the US and Australia. This risk could push investors into private credit, which offers lower volatility compared to stocks and higher yields than residential property. In this environment, private credit can make an important addition to investors’ portfolios.”
The Australian private credit market is predicted to see continued deal activity in 2025, building on the momentum from late 2024, offering additional investment opportunities, according to Mr Szekely.
“Interest rates too could remain elevated. The consensus is the RBA will cut rates twice in 2025. With above-target inflation resulting from higher energy and food prices, coupled with a tight labour market, the RBA will likely remain cautious about cutting rates too deep,” he said.
“This positions the Australian private credit market to offer attractive returns versus overseas markets such as the US, where the US Federal Reserve has already cut rates by 100 basis points, with an additional 50 basis points priced in for 2025,” he said.
“With Australian inflation remaining above the RBA’s targeted 2 per cent to 3 per cent band, the RBA is unlikely to drop rates as far or as fast as other central banks. In the US, there is also a risk of inflation accelerating given tariffs and tax cuts. A trade war, in particular, would be inflationary,” he said.
“As tight bank lending conditions endured through 2024, borrowers continued to appreciate the speed and adaptability of private credit solutions and so we expect the local market to exhibit robust growth this year,” he said.
“Australian investors value the role private credit can play to diversify portfolios, as well as the high cash income and low volatility of a senior secured credit product. Consequently, the private credit sector finished 2024 with strong performance. Strong business lending will also support the local market,” he said.
He said credit growth gradually accelerated through 2024 despite many economists’ prediction of a slowdown.
“RBA data shows both home and business lending are gaining strength, showing growth in business credit of 8.9 per cent over the year to December 31, 2024, the highest since May 2023, and up from 8.6 per cent in November.
“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 such as the US.
“This stability, coupled with the attractive yields offered by private credit, makes it an attractive investment proposition irrespective of the prevailing economic conditions in 2025,” Mr Szekely said.
