Commentary On Reserve Bank Board Interest Rate Decision - 7 May
08 May 2024
The risk-adjusted returns in Australia’s emerging private debt sector consistently beat comparable investments in the more sophisticated markets of Europe and the US, says Christian Brehm, CEO of FC Capital.
Australia’s investors migrate to private debt.
Q. The size of Australia’s private debt market is still far smaller than that of countries such as the UK or the US. Would you expect this to change at all?
It is changing, but only slowly. The overall lending landscape in Australia has long been dominated by four major banks. Their core business model is mortgage lending, thereby rarely offloading mortgages or commercial loans into conduits, CLOs or other equivalent structures, as seen in the US and UK. Most Australian banks engage with offshore distressed investors when offloading troubled loans. As a result, Australia lags the UK and US in terms of developing a sophisticated private debt market.
Banks do not typically look to understand a firm’s business model, instead focusing on ratios and secured collateral. There is no understanding of how the business operates, cashflow structure or business performance. Lending on receivables, which is very common in the US banking system, is only rarely offered by Australian banks, or where this is possible it would only be offered for larger institutional clients with the right investment-grade rating. The business unit of a traditional bank might only be prepared to lend one times EBITDA with additional property security. Borrowers, small and medium-size companies that require more leverage are basically lost in the process and increasingly without banking support.
Q. To what extent is private debt making its way into the portfolios of Australian investors?
Q. What is the outlook for private debt investment in Australia?
Q. How should investors think about structuring private debt in order to achieve optimal returns and protection?
Q. What about the risk embedded in the asset class, particularly in terms of credit quality and the danger of underlying firms defaulting?
Q. US pension funds are showing a lot of interest in private debt investment at the moment. Is a similar trend being seen within Australia’s superannuation sector?
Q. Did covid-19 impact the market for private debt?