- Significant emergence in private debt over the past 5 years, and non-bank lending in particular
- And it’s not gone unnoticed globally, with US fund management giant Apollo Global Management taking a 50% stake in a local non-bank lender Max Cap this month.
- Globally, private debt is projected to increase 11.4% annually to $1.46 trillion by the end of 2025.
- According to Preqin, Australia’s private capital market offers one of the most attractive risk/return profiles globally, and assets under management rose steadily in 2020 to a record $77 billion.
From "fringe asset class to backbone of Australia's booming non-bank and construction sector
From ‘fringe’ asset class to nimble backbone of Australia’s booming non-bank and construction sector, the growth of Australia’s private debt market has been nothing short of phenomenal over the last decade. And it’s not gone unnoticed globally, with US fund management giant Apollo Global Management taking a 50% stake in a local non-bank lender Max Cap this month.
“It’s certainly a sign the sector is coming of age,” says AltX Co-CEO Nick Raphaely, who founded his alternative investment platform in the aftermath of the GFC. “Investors no longer question whether the asset class has merits – they are more interested in whether the deal matches what they’re looking for in terms of risk and return.”
And what they’re looking for right now is yield.
“When we think about our mandate, our first job is to protect capital for worth clients, and in a low interest environment they are happy to dedicate a significant proportion to private debt because it has a reasonable return,” says Nick..
Investors in this asset class can earn up to three or four times what retail investors might get on conservative fixed income positions. For wholesale clients who can manage semi-liquidity, private debt deals and fund structures are very attractive.
As Director of KPMG’s Debt Advisory Services, Matt McKenna has seen what he calls a “significant” emergence in private debt over the past 5 years, and non-bank lending in particular. “Increasingly, we are seeing alternative pools of capital fund our clients’ transactions, as they seek greater levels of flexibility than more traditional financing arrangements can provide,” he says.
“From an investor perspective, there’s also limited cash returns in the current interest rate environment. So we’re seeing investors seeking out the yield they’re missing in aspects of their portfolio through other asset classes, which includes private debt funds.”
Rapid growth post-GFC
Globally, private debt is projected to increase 11.4% annually to $1.46 trillion by the end of 2025. According to Preqin, Australia’s private capital market offers one of the most attractive risk/return profiles globally, and assets under management rose steadily in 2020 to a record $77 billion.
“We estimate the commercial lending market is around $300 billion, and non-bank lending is about 10% of that,” says Domenic Lo Surdo, Joint Managing Director Stamford Capital. “I think it could easily double in the next five years.”
As one of Australia’s leading commercial brokers, Stamford Capital has seen a steady shift in borrower appetite to work with non-bank lenders. “It’s all about speed of execution and flexibility, as well as capacity to deliver on terms outside where banks are able to trade,” Domenic says.
The private debt market was effectively decimated by the GFC, when government-guaranteed bank deposits ended the traditional debenture model and foreign banks exited the market. So how has the new non-bank sector grown so quickly?
“Australia has a limited number of large banks, and they can never cover the entire commercial lending landscape – they would simply be over-concentrated in one asset class,” explains Nick. “But without debt funding, the bricks and mortar of Australia simply wouldn’t exist.”
Domenic says there were no non-bank lenders operating in construction funding immediately after the GFC. “With policy and regulatory constraints on the banking sector, the private debt market has evolved to include new entrants, different products and a growing appetite for risk. And as it matures, the price gap between bank and non-bank capital continues to compress.”
Stamford Capital’s 2021 Debt Capital Markets Survey highlighted the intensifying competition for deals amongst non-bank lenders, with two-thirds of respondents expecting non-banks to increase construction lending activity.
Domenic says Stamford gets calls every week from new private lenders and is very careful to only work with those who will keep delivering certainty through a project. “There are opportunistic players, very short-term in their thinking. We only want to work with those who will still be around in 10 years’ time.”
Matt agrees, saying “it almost feels like every week someone is calling me from a new credit fund… while we expect the borrower demand for private debt to continue to expand, at the same time I expect to see a level of consolidation on the supply side given there are so many alternative capital providers chasing similar opportunities.”
The hunt for yield
While demand for capital has remained constant, it’s clear the supply side of the equation has taken off. “There’s a huge amount of liquidity in the market at the moment, looking to find a home,” says Matt.
“Even private equity houses, which have traditionally focused on acquisitions and equity investments, are establishing credit funds to deploy excess capital into other asset classes on behalf of investors.”
“Money goes where it’s treated best, and money is getting a lot of love in private real estate debt these days,” notes Nick. He’s seeing investors funding single deals through platforms like AltX, or through funds. SMSFs and super funds are turning more and more to this asset class. Listed vehicles are also raising debt capital on the ASX.
“This will only lead to further growth and market participation,” he says.
A recent survey of AltX investors indicated that 56% intend to increase their allocation to this asset class over the next 12 months.
“Investors we speak to want to feel comfortable if they end up owning the asset,” says Nick. “And real estate is very easy to understand and clarify risk around. People tend to be a lot more patient with this asset class, because there is a certain outcome.”
Matt agrees the structural protection of real estate debt is a plus for investors. “There’s a lot of familiarity with the underlying asset class, and whether it’s residential or commercial real estate investors have a better understanding of the mortgage security.”
Nick says institutional interest in private debt is an indication this asset class is at a tipping point.
“It’s like any cycle: first to engage are the early adopters, then investors with bigger cheques who want to wait and see, and eventually the institutional money arrives when it’s fully proven. We’re now fast approaching the third wave.”
AltX (www.altx.com.au) is a market-leading alternative investment platform. Founded in 2012 and headquartered in Sydney, AltX provides bespoke access to alternative income-generating products which have traditionally been inaccessible to individual investors. AltX has funded in excess of $2bn of transactions since inception with zero loss of investor capital.
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