The structure of Australian private credit funds means they are typically less likely to experience the software-centred problems currently being seen in the US. In recent weeks, several US private credit funds have been affected by problems around their investments in AI and software companies which has caused a greater sense of caution and bearishness around the asset class.
But speaking to Investor Daily, Bruce Wan, head of research at MaxCap, said the structure of the Australian market means a similar scenario is unlikely to occur here.
Domestically, private credit has less use of back leverage with shorter loan terms of around 18-24 months compared to seven to 10 years in the US. Evergreen funds work best when they are backed by shorter‑term loans from different vintages that roll off regularly, helping to support ongoing liquidity for investors.
Another matter is the use of lending via venture capital into AI and software which has led to several US vehicles facing problems such as overvaluation, liquidity shortages, rising default risk, dependence on continued investor funding, and difficulty generating sustainable profits.
“In the US, a lot of what has been driving private credit growth is your venture capital and business development companies (BDCs) and a lot of that exposure is via AI and software companies in the US and Europe as well as healthcare companies.
“That is largely corporate, cash‑flow lending, whereas in Australia the private credit market is still predominantly asset‑backed, especially commercial real estate and other secured lending.
“When things go wrong, as you are seeing in the US, they are business failures and there isn’t enough collateral on those business cashflows and that’s where the strain is as they aren’t generating enough cashflow to fund the repayments.
“In Australia, we don’t see that same type of lending here, there’s a lot of real estate-backed lending around commercial, offices, retail, industrial etc or residential developments to address population growth and housing shortages.
“So the recovery process is quite different as you have a real asset that is producing rental income. If a borrower is unable to make those repayments, you can recover investor value that by taking hold of those assets and re-selling them. So that’s a very big point of difference for Australia.”
Wan also discussed how the recent problems in the US may be viewed negatively but they also represent a time for the sector to grow and mature through these market cycles. While not all sub-scale managers will survive, it presents an opportunity for a market shake-out by removing lenders who have aggressive deployed capital at diminished margins and higher risk.
The ASIC review in Australia has also helped by shining a light on the activities of what is typically a more opaque sector than public markets. Released last November alongside a thematic fund surveillance, this covered areas such as retail access, transparency, evolving investor needs and regulatory guidance.
“During the early days, anything could be labelled as ‘private credit’ and it would raise capital. Now the times are a bit different and the sentiment has changed,” Wan said.
“Part of that comes from a period of maturation as well as the ASIC review which pointed out the good operators and the ones that were falling short. That’s driving people to be more selective about picking a good manager and strategy, they want those with a track record who can demonstrate the relevant skills.
“This is a prime opportunity for maturation, amid loud calls from investors and regulators for more transparency on performance, greater disclosures on conflicts, and better standards of governance across the sector. A disruption to global private credit is a timely catalyst for these necessary changes.”