Some of Australia’s big institutional investors seek growth in nascent local private debt market to take advantage of high interest rates and banks’ rejection of riskier loans.
IFM Investors, owned by the country’s main pension funds, has seen its Australian debt portfolio grow to 12 billion Australian dollars (US$8 billion), which includes private credit, around 20% annually in the last two years. QIC Ltd., for its part, aims to double its A$1.5 billion private debt business in the next two to three years as both companies look for alternatives to traditional bond and loan markets.
Private credit funds are benefiting from banks’ reluctance to lend money to the sector due to potential risks, and regulators are stepping up oversight of the asset class. In Australia, the market has become a 40 billion Australian dollar industry, according to data collected by the Reserve Bank of Australia, and offers growth potential, representing just 2.5% of total corporate debt.
Interest rates, which are at their highest level in twelve years, offer good returns for national pension funds, and recent strong employment data give policymakers little reason to ease borrowing costs.
“We have seen a lot of capital flows in the last 12 to 18 months,” Hiran Wanigasekera, co-head of Australian diversified credit at IFM, said in an interview. “Right now, the relative value opportunity is that base rates are rising and credit offers a very good alternative and a more stable return.” IFM’s private credit funds aim for returns of 10-11% annually.
As the industry grows, the Australian Securities and Investments Commission has said it will create a specialist unit to engage with private markets amid persistent concerns about valuations. Asic, one of two pensions industry regulators, is engaging with market participants to examine where improvements need to be made.
Asic is overseeing pension funds’ financial reporting and disclosures, commissioner Simone Constant told Bloomberg last month, adding that as banks retreat, pensions face a more complex risk. “We might ask what it means for members, in the case of private credit for commercial real estate, that it is outside the risk appetite of the banks, but within the appetite of the pension funds.”
QIC, which manages money for the Queensland state government as well as institutional investors, He said they were seeing better quality deals in a high interest rate environment. Companies have more equity, which means they have less debt to pay off, leading to “better balance sheets with more conservative capital structures,” Australia’s head of private debt, Phil Miall, said in an interview. QIC is targeting returns of 9-10% in Australia.
Australian private credit investments, previously the mainstay of pension funds and institutions due to high barriers to entryare now becoming more accessible to wealthy people, but they come with risks.
“Private credit is interesting, but I think the selection of managers is incredibly important,” said Jacqueline Fernley, chief investment officer at wealth manager Mason Stevens, at the CFA Society Australia conference in Melbourne on Thursday. “You have to be very careful.”
