ASIC has released its Annual Report for 2023–24, acknowledging “the flow of capital from public to private markets” and the expansion of private finance.
Meanwhile, the Reserve Bank of Australia (RBA) has valued the country’s private credit market at $40 billion, providing a cautious endorsement regarding financial stability risks.
These developments could pave the way for retail investors seeking higher yields, according to Simon Arraj, managing director of Vado Private.
“I welcome the comments from ASIC on the expected regulation of private credit, which will help to boost transparency in the sector,” Arraj said.
In its annual report, the Australian Securities and Investments Commission (ASIC) indicated plans to enhance collaboration with the Australian Prudential Regulation Authority (APRA) in newer and more complex areas of financial services regulation, including private finance.
“By building on the foundations laid in recent years and addressing new and existing challenges, APRA and ASIC can continue to effectively protect the financial interests of Australians,” ASIC said.
The RBA’s recent bulletin revealed that private credit now accounts for 2.5 per cent of total business debt in Australia, growing faster than traditional lending channels.
While acknowledging the sector’s rapid expansion, the central bank remains vigilant about potential risks to financial stability.
“The Australian private credit market is small relative to other lending to businesses but it is growing rapidly,” the RBA said.
“Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market.
“For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely.”
With a $40 billion market and contained risks, private credit is emerging as an attractive option for retail and retirement investors seeking higher income returns, Arraj said.
“The central bank has acknowledged that the private credit market is growing rapidly because it is offering superior yields compared to many other fixed income investments. The RBA is closely monitoring its growth and potential risks, which is welcome news for the market,” Arraj said.
The RBA indicated that the local private credit market has expanded more quickly than overall business debt, providing an alternative source of financing for businesses. The size of private credit outstanding in Australia has been estimated based on data collected by APRA and the London Stock Exchange Group.
Private credit funds have historically delivered higher returns compared to traditional debt markets such as corporate bonds, high-yield bonds, and leveraged loans, offering returns in the range of 8–12 per cent, said Arraj.
“These returns are very attractive for investors with private credit funds providing consistent income, driven by corporate and real estate-backed loans,” he said.
“However, it’s crucial for investors to assess their financial needs before diving into any new asset class. Although not as liquid, private credit offers higher returns and diversification compared to low-yield cash investments.
“For many Australians, particularly those that are yield-hungry, portfolio allocation into private credit could be a compelling proposition.”
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