Private Credit: A Strategic Investment for the Future

Private credit presents an attractive opportunity for investors by offering higher returns than similar options, such as leveraged loans, and showing more stability than publicly traded assets like corporate bonds. Non-bank lenders are increasingly supporting riskier businesses, filling a growing need for capital. This shift has been encouraged by bank regulations that make non-bank lending a flexible and valuable alternative in today’s financial landscape.

Private credit loans are similar to bank syndicated loans, being senior secured, variable rate, and larger than typical bank loans, but they are managed by private credit funds that connect lenders and borrowers. These loans are not traded on secondary markets and are held until maturity.

The private credit market involves three main players:

1. End Investors: Entities like pension funds, insurance companies, and high-net-worth individuals that provide funds, sometimes lending directly to borrowers.
2. Intermediaries: Organizations, primarily unlisted private credit funds, that manage funds from investors and lend to borrowers. In Australia, open-ended funds are common, while closed-end funds are more typical elsewhere.
3. Borrowers: Medium-sized, highly leveraged businesses often owned by private equity firms. They typically earn between $10 million and $100 million, requiring customized loan agreements. Some borrow from both private credit and traditional markets, with banks and private credit funds sometimes partnering to provide financing.

Private credit involves leverage at three levels: investors, intermediaries, and end borrowers, which can heighten financial stability concerns, especially since end borrowers are typically more leveraged than those in public markets.

Liquidity risks arise as private credit funds invest in illiquid assets but limit investor withdrawals. During economic downturns, these funds may quickly call on committed capital from investors, potentially leading to liquidity pressures and forcing them to sell other assets, which could destabilize financial markets.

While bank lending to private credit funds is moderate, these banks play a significant role in providing leverage, creating potentially complex and opaque connections within the financial system.

The value of private credit assets is generally stable, but infrequent and subjective valuations can lead to risks. Stale valuations may result in widespread reassessments during economic shocks. Although default rates are low, the sector has yet to face a recession, raising questions about its resilience, and defaults often lead to higher losses due to lower-quality collateral.

Mountain Asset Management offers cutting-edge solutions in real estate funds and strategic debt advisory services. With a team of seasoned professionals and a commitment to delivering sustainable growth, Mountain Asset Management is well-positioned to help investors navigate the complexities of private credit and property markets across Australia. Contact us to discover more about how we can support your investment goals.