19 February 2024
The global financial crisis of 2007 spawned the rapid evolution of the private credit industry. When banks pulled back from lending, amidst increased regulation on deposit-taking institutions, there was a need for private institutional money to fill the vacuum.
The asset class has since gone from strength to strength, growing seven-fold since the GFC, according to Goldman Sachs, and has proven to be a very popular investment amongst individuals and institutions alike.
The industry’s growth rate over the last 5 years stands out. At the beginning of 2019, global private credit AUM was approximately US$800 billion. At the end of 2023, it had grown to approximately USD$1.6 trillion. The growth is projected to continue, with some estimates suggesting it could grow to USD$2.3 trillion by 2027.
The growth of private credit AUM in Australia has also been significant. BDO Australia pointed out that Australia-focused private debt AUM more than tripled to $1.9 billion between 2020 and 2021. Whilst private credit, compared with global levels, still represents a small proportion of lending here, the Australian private credit industry is positioned for further growth.
What’s behind its popularity?
Private credit has been popular with individual investors because it has several advantages.
- It tends to generate a consistent income stream underpinned by the contractual obligation of interest payments between borrower and lender.
- It has historically delivered a reduced correlation with equities and related asset classes, allowing for diversification in uncorrelated assets.
- Investors gain exposure to the senior part of the capital structure and given private credit funds typically have floating rates, they can offer defensive protection against inflation if cash rates rise. This is exactly what happened in 2023. As interest rates rose rapidly, the returns on floating rate debt trended towards a range of 8 per cent–12 per cent (on a net basis). These were equity-like returns, for an asset class more senior in the capital structure.
VanEck ETF Global Listed Private Credit ETF
Traditionally, it has been difficult to invest in the asset class, though the proliferation of private credit funds has meant it has become much easier to get exposure. VanEck have recently listed LEND (ETF), designed to give investors exposure to a portfolio of 25 of the largest global listed companies involved in private credit. In this way, it provides both diversification and targeted exposure.
The ETF, and AUD hedged product, is easily accessible on the ASX and Cboe, removing the barriers traditionally associated with this asset class.
