Private Credit: PR problem leaves asset class misunderstood

Pallas Capital says private credit remains largely misunderstood by investors despite its strong growth
According to International Monetary Fund, private credit has evolved into another major asset class
Metrics Credit Partners says the GFC fuelled the private lending sector in two main ways

Private credit specialist Pallas Capital’s executive director and head of distribution Craig Bannister reckons there is a strong investment case for the burgeoning asset class but it remains largely misunderstood by investors.

Now industry figures are leveraging years of growth and a growing foothold in the market to stamp their claim to legitimacy in the broader lending sector.

The International Monetary Fund has described private credit – also known as private debt – as having evolved into another major asset class which has become “an increasingly important and interconnected part of the financial system”.

“Private credit has provided significant economic benefits during its approximately 30-year existence,” the IMF said.

Research firm Preqin has forecast that assets under management in global private debt funds would rise from US$1.2 trillion in 2021 to US$2.3 trillion by the end of 2027.

Global asset manager powerhouse UBS said “the growth of the private credit market has been nothing short of breathtaking”.

Meanwhile multinational US investment firm Blackrock said “at more than US$1.3 trillion in assets under management, the global private credit market has established itself as a sizable and scalable asset class for a wide range of buy-and-hold investors.”

In Australia, global accounting firm EY estimated the size of the private debt market to be $188bn in assets under management at the end of 2023, despite challenges.

EY said AUM in 2024 could be split into $112bn in business-related loans (all mandates excluding commercial real estate) or ~12% of the total business and corporate lending markets and $76bn in commercial real estate-related loans or ~16% of this total lending segment.

‘Cowboy lending standards’

For all the positive figures and growth, private credit has come under scrutiny and attracted its fair share of negative headlines, including that the sector lacks transparency.

But experts in the sector believe private credit has matured over recent years, with Bannister among them.

He still has a clipping of a newspaper article from 2016 with a headline along the lines: ‘Shadow banking industry cowboy lending standards’.

“It was pretty much inferring we have the big four banks that do the majority of the lending here, maybe five if you include Macquarie, but this shadow banking industry which is starting to grow is really a bunch of cowboys doing lending and they will blow it up,” he said.

However, Bannister said now the strong position private credit has within the lending space is validation for the industry and its experts.

“A lot of people have left the big banks and are in positions of loan management and originations at private credit lenders,” he said.

“They are very experienced and we have (as stringent) if not more stringent lending criteria than what the banks do.

“We’re closer to the client, more reactionary and hands-on through good and bad times with greater expertise and specialists.”

Bannister said the leaders behind Pallas Capital have a strong history in the financial sector.

Chairman and co-founder Patrick Keenan has a career spanning more than 30 years as a lawyer, investment banker and business owner/manager.

“Patrick was an owner of a financial services company based out of London, co-founder and executive director Mark Spring was responsible for running that company across Asia and I was running the Singapore operations,” Bannister said.

He said co-founder, chief investment officer and executive director Dan Gallen has more than 20 years experience in debt lending.

Co-founder and executive director Charles Mellick has in-depth knowledge of the property industry with more than 30 years’ experience.

“We have 35 people in our credit and loan management team who are specialists in this area,” Bannister said.

GFC fuels rise of private credit

It was the Global Financial Crisis from 2007-2009 which experts agree fuelled the growth in private credit.

Bannister said before regulation changes following the GFC, private credit was less well known and accessible.

“There were solicitor-loans where solicitors would put the loans together, do asset backed lending and draw up the loan documents,” he said.

One of the largest private credit lenders in Australia, Metrics Credit Partners managing partner Andrew Lockhart told Stockhead the GFC helped the growth of private credit in two ways.

He said firstly banks adopted more conservative lending practices following the GFC.

“They were required to hold more capital against certain loan assets, limiting business credit availability and pushing borrowers to seek alternatives,” he said.

“Second, central banks, in an effort to stimulate post GFC economic growth, cut interest rates to near zero, prompting investors to move away from traditional investments like bonds and term deposits in search of higher returns.”

Lockhart said private credit emerged to meet these demands, leading to rapid global market growth, with an increasing number of private credit operators.

The IMF said private credit developed as a lending solution for middle-market companies deemed too risky or large for commercial banks and too small for public markets.

“Loans are typically negotiated directly between borrowers and one or more alternative asset managers,” the IMF said.

“Although usually more expensive than bank loans, private credit offers borrowers a value proposition through strong relationships and customised lending terms designed to provide flexibility in times of stress.”

The IMF said in contrast with most broadly syndicated loans, private credit offered terms that include enhanced covenants providing lenders with downside protection.

“Private credit managers also claim to have much greater resources to deal with problem loans than either banks or public markets, thereby enabling fewer sudden defaults, smoother restructurings, and lower costs of financial distress,” the IMF said.

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.

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