The global financial landscape has shifted dramatically since the Global Financial Crisis (GFC), with one of the lasting effects being the contraction of bank lending, especially for small and medium-sized businesses (SMEs). Regulatory changes, particularly Basel III, forced banks to maintain more capital for certain types of loans, prompting them to scale back lending to smaller borrowers. This shift has left a significant funding gap, one that the Reserve Bank of Australia (RBA) estimates to be worth around $400 billion—roughly 2.5% of total business lending in the country.
This funding gap has provided a perfect storm for the burgeoning private credit sector. With banks focusing on residential mortgages and large corporate loans, the door has opened for private lenders to step in and provide capital to the underserved SME market. The private credit landscape has since seen a surge in market entrants, and Australia’s corporate lending environment is now being shaped by a growing demand for alternative financing options.
The rise of private credit is closely tied to shifting investor needs, particularly the growing number of baby boomers seeking consistent income streams. With equity markets growing increasingly volatile, investors have increasingly turned to private credit funds that offer attractive yields with less exposure to market swings.
One prominent player in this space is the Aura Private Credit Income Fund. The fund, with a portfolio of about 13,000 small loans across 40 industries, is capitalizing on the funding gap and providing a solution for investors seeking stability amid economic uncertainty. Notably, 75% of the fund’s loans have terms of less than three months, offering more liquidity in contrast to many private credit funds that lock up funds for longer periods. Since its inception, the Aura fund has posted a consistent return of 9.64% per annum after fees, with no volatility or loss of capital.
Brett Craig, Director at Aura Credit Holdings, emphasizes that private credit is no longer just a “last-resort” option for distressed companies. As equity markets become more unpredictable, private credit is emerging as a distinct asset class, appealing to mature investors who prefer the stability of fixed-income investments but without the risks associated with public markets. The rise in interest rates has further boosted the appeal of private credit, particularly in a floating-rate environment, making it an increasingly attractive proposition.
Aura isn’t alone in its pursuit of private credit opportunities. New entrants like MA Financial and Pengana have also set their sights on the sector. MA Financial is planning to raise $300 million for a private credit trust, while Pengana Credit has committed significant capital to private lending and launched various funds to cater to both retail and wholesale investors. Pengana’s ASX-listed Pengana Private Credit Trust (ASX: PCX) offers access to over 2,000 loans across 19 underlying funds, further expanding the reach of private credit in the Australian market.
Despite challenges in global private credit markets, particularly with banks pulling back from lending to SMEs, experts like Roger Montgomery of Montgomery Investment Management believe that private credit will continue to grow. Its lower correlation to equity markets and stable returns make it a viable asset class for diverse investment portfolios, offering both protection from market volatility and attractive yields.
As the funding gap continues to widen, the private credit sector is poised to play an increasingly central role in global finance, offering both investors and small businesses viable solutions for capital and growth in an evolving economic landscape.
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