ASX funds & firms riding private credit wave

Private credit being boosted as banks tighten lending standards, offering high-yield opportunties for investors
VanEck has an ETF offering investors exposure to 25 of the largest globally listed companies involved in private credit
Finexia Financial Group’s strategy is to become the leading private lender to Australia’s childcare sector

Private credit is receiving a significant boost as banks tighten lending standards, particularly among the commercial real estate sector, offering opportunities for investors chasing higher yields.

Experts involved in private credit say private credit remains a relatively unknown asset class in Australia, despite offering yields above the risk-free rate.

RW Capital’s Head of Institutional Capital and Research, Luke Dixon, told Stockhead private credit in Australia is benefiting from long-term structural tailwinds, supported by robust domestic economic fundamentals and the continuous retreat of major banks from the commercial real estate lending market.

“This convergence is creating the perfect storm, leading to an estimated $100 billion liquidity gap over the next decade,” he says.

Non-bank lender Credit Connect Group (CCG) says its main investor demographics comprise retirees chasing a decent return with monthly distributions and self-managed super funds seeking a transparent investment so they can undertake their own due-diligence paying returns well above institutional deposit rates,

Read: Private credit stakes commercial property claim

There are several ASX-listed funds and companies that provide investors access to the burgeoning private credit market. Here are some we’ve noticed.

VanEck Australia

The fund manager launched the VanEck Global Listed Private Credit (AUD Hedged) ETF (ASX:LEND) on January 31, 2024 with the ETF available to trade on the ASX from February 2.

The dividend yield of the LEND portfolio is currently 9.94% and delivered a return of 3.60% in Q2, FY24.

LEND gives investors exposure to a portfolio of 25 of the largest globally listed companies involved in private credit.

VanEck Asia-Pacific CEO and managing director Arian Neiron told Stockhead LEND is the first and only ETF that provides Australian investors with access to a portfolio of that nature.

Neiron says in Australia these companies may be listed investment companies (LICs), while in the US, listed companies involved in private credit are known as business development companies (BDCs).

“These BDCs are often run by the biggest names in private credit such as Blackstone, Blue Owl and Goldman Sachs,” he said.

“Most of the companies LEND currently invests in are US-listed BDCs, so while there is credit risk associated with BDCs, investing in an ETF like LEND allows investors to access the private credit market and limit single LIT/BDC credit risk and increase diversification.

“Unlike Australian listed investment trusts (LITS), which are closed-ended and may trade at a premium or discount to the NAV, LEND is an open-ended ETF which provides exposure to a range of lenders, borrowers and sectors,” Neiron says.

Neiron says private credit has become particularly attractive to institutional investors.

“Private credit’s high returns versus risk profile has proven irresistible to institutional asset owners such as pension funds and insurance companies, who have seen their private credit AUM increase six-fold over the last seven years,” he says.

“More than a third of outstanding private credit (35%) is held by these asset owners.”

Finexia Financial Group (ASX:FNX)

FNX’s strategy is to become the leading private lender to Australia’s childcare sector.

CEO and director Patrick Bell told Stockhead many private credit businesses are specialising and focusing in specific industries like childcare or loans to medical professionals, with other examples invoice discounting or loans for particular vehicle or machinery types.

Initially private credit centred on property development or other pure property transactions but the range of lending now has widened substantially and is delving deeper into specialised sectors.

“We’re seeing a clear trend in the expanding private credit market towards specialisation by industry and loan type,” Bell says.

Bell says with higher capital costs and a focus on cost-efficiency, in the SME market banks are leaning towards loans that don’t require deep specialist knowledge or skills, or for the need for extensive on-going engagement.

“This shift opens up opportunities for specialised private credit solutions to better address niche markets and specific borrower needs,” he says.

“Plus, this specialisation brings added benefits like faster speed to market and improved credit risk outcomes, enhancing value and fostering growth across various sectors.”

FNX sees childcare as a significant opportunity as in the past 20 years, the childcare sector in Australia has boomed, a trend the organisation refers to as ‘the childcare generation’.

Bell says growth in its Finexia Childcare Income Fund has been bolstered by several independent ratings, highlighting its unique market position.

He says FNX is well on the way to achieving its first target for the fund of reaching $100 million.

Pengana Capital Group (ASX:PCG)

PCG has three global private credit funds in the market in the form of a wholesale fund, listed invested trust – the Pengana Global Private Credit Trust (ASX:PCX) – and a retail term account provider (TermPlus).

PCG co-founder and CEO Russel Pillemer told Stockhead each fund has different characteristics based on the risk-return profile, fund objective, and typical investor of the fund, and all feed into the Pengana Global Private Credit Trust, which was seeded last year with an initial investment of $200m.

The products offer the most diversified access points into global private credit for Australian investors, and Pengana has appointed one of the world’s largest investment leaders, Mercer, as the investment consultant. It is highly diversified across more than 2000 underlying loans to mid-market corporate businesses primarily in the US and Europe.

Pillemer says private credit has played an important role in the US economy since the Global Financial Crisis as the banks retreated from corporate lending due to tightening in the regulatory environment, while Europe has had the same dynamic.

“The banks’ withdrawal from this market created a significant liquidity gap – this liquidity gap is being filled by private credit managers, and is well recognised and accepted by investors and companies in the US and Europe,” he says.

Pillemer says the Australian and global private credit markets are vastly different, with Australia being much smaller given Australian banks continue to provide 90%+ of credit lending.

He says 85% of mid-market corporate lending in the US and Europe is now done by investment managers, rather than the banks, and provides investment opportunities characterised by high risk-adjusted returns, floating rate yields, diversification, and capital stability.

“As global private credit continues to grow and attract investment, Pengana is working to ensure greater accessibility for Australian investors,” he says.

“Typically, global private credit has been out of reach for investors without very deep pockets, very long time horizons, and the network to access the private credit managers with proven experience in the space.

“We are changing that with our new range of global private credit access points.”

At Stockhead, we tell it like it is. While Finexia Financial Group is a Stockhead advertiser, the company did not sponsor this article.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.