With “huge tranches of capital” being released into the market, private credit firms are looking to make hay.
The rush of fund managers setting up listed vehicles allowing retail investors to gain exposure to private credit is expected to continue amid the phase out of the $43 billion bank hybrid securities market.
The Australian Prudential Regulation Authority announced late last year that banks will no longer be able to raise funding from hybrid securities – a product popular among retail investors, but one that the prudential regulator has deemed too risky for the financial system in the event of a crisis.
In June, Brookfield-owned La Trobe Financial raised $300 million for a new listed private credit fund, hitting its fund-raising target. Then in July, Revolution Asset Management, co-founded by Bob Sahota, launched a roadshow for its new Revolution Private Credit Income Trust.
These are known as listed investment companies (LICs) which invest in a portfolio of assets administered by a professional manager.
“The hybrid market is coming off, so several billion dollars – these huge tranches of capital – will be released into the market. That’s why so many LICs are being set up at the moment,” Patrick William, the co-founder of private credit firm Rixon Capital, says.
If you have scale as a fund manager, the smartest thing you can do is target the retail market [because] it’s a huge market.”
That segment is also attractive, William says, because investment platforms such as HUB24 and Netwealth, which are used by financial advisers to select products for investors, favour the retail versions of products.
Revolution’s Sahota says investors are also interested in private credit as it gives them diversification into industries not typically available on public markets.
One reason the firm launched its new income trust, he says, was to fill the hole left by the hybrid market.
“There are $40 billion in hybrids being returned to investors, so there is demand for an income product on an exchange traded basis,” he says. “We’ve never had a retail product at Revolution... this is a whole new target audience.”
Private credit firms, otherwise known as non-bank lenders, flourished after the 2018 banking royal commission, as banks pulled back from lending to riskier or less established parts of the market.
Businesses that had previously struggled to get loans, including commercial property, hospitality and small to medium-sized firms, then became the natural customers of the growing non-bank lending scene.
William says the variety of sectors now looking to private credit to fund their businesses is only expanding.
“Banks have become more conservative in a challenged economy,” he says. “It’s a bit like 2018 again. If you are in marine engineering, but you are doing some construction work, [it’s considered too risky so] no money for you. Or you’re in software, for example, which caters to the mining sector [which brings up ESG concerns for the bank].”
Rixon’s loan book has expanded from $100 million in January to $150 million, as they absorb more corporate borrowers.
During the private credit boom, rates rose, which meant operators and investors collected double-digit returns with little effort. Those returns are expected to soften slightly now that rates have stabilised.
These private credit opportunities have mostly been marketed to wholesale investors – an ever expanding category, as the test includes the value of one’s family home – and so it comes with fewer protections for investors. The share of the population that qualify as wholesale investorsincreased from 2 per cent in 2002 to 16 per cent in 2024.
But since the initial boom, the sector’s exposure to property has spurred loan defaults and put strain on certain private credit funds, as developers grapple with the high cost of construction and weaker office building valuations.
Sahota says Revolution was focused on corporate loans and asset-backed securities, and was not exposed to property development loans.
The corporate regulator is increasing scrutiny of the sector owing to concerns about the growth of the asset class, the opaque way some funds value assets they lend against and their high fees. So the entry of more retail investors into the private credit market comes amid the possibility of further regulation.
Louis Christopher, the founder of SQM Research, says investors need to be aware exactly how liquid the funds they invest in are.
“If [a fund] sees a surge in outflows, as the majority of their assets are illiquid, they are at risk of having to gate the fund,” he says. “There are risks when you are trying to produce an investment product which offers liquidity when the underlying assets are not liquid.”
Christopher says SQM are doing an out-of-cycle review of private credit firms they cover to ensure they have a handle on the risks.
“Advisers have become more cautious about the space and that’s warranted,” Christopher says. “For the sector to survive long term, we need to see more transparency.”
