ROADNIGHT MUSING – MARCH 2025
PRIVATE DEBT – GAINING PROMINENCE IN AUSTRALIA
Private Market Trends
The long-term outperformance of private markets over public markets has seen a broad range of investors in Australia increasing their allocation to private and alternative assets as part of their active investment management. While private markets have been around for decades (i.e. Private Equity, Private Credit, Infrastructure, Property), the move by institutional & wholesale investors from public and into private markets has accelerated over the past decade. Globally, private markets have become important for companies and businesses and complement traditional capital markets as a critical source outside of the banks for raising funding. We expect Australia to continue along a similar trajectory.
As a subsector within private markets, private debt has played a key role in improving diversification and lifting income generation for investors particularly in a low-interest rate environment. Even within the private debt market there are a variety of sub segments, each with their own risks, returns and cycles, with property being the oldest and largest sub segment.
Australia’s private debt market is still relatively small and, in its infancy, compared with US and European markets. Much of Australia’s credit market is still intermediated through the banking sector i.e. around 5% of housing credit is provided by non-bank financial institutions, compared with 67% in the US. However, this is slowly changing. While Australia’s private debt markets may not get to the same relative levels as overseas, they will continue to grow and play an increasing prominence in investor portfolios.
With the growing emergence of private debt in Australia, a broader range of investors are now investing in the asset class. Large institutional investors such as superannuation funds have been investing directly in the sector for decades, with many having built internal teams to source and manage deals. However, in more recent times, wealthy families and individual wholesale investors have been increasing their exposure to private debt, typically using specialist managers such as Roadnight Capital to invest in the sector. We are now also seeing specialist managers looking to broaden their investor base by tapping into retail markets via ASX listed investment company structures. Historically, the ASX listed market has struggled to value private debt funds through the cycle, with most at some point trading at significant discounts to net asset value which has been hard to close with several being wound up or delisted.
With Australian private debt being a relatively new investable segment for wholesale and retail investors, both investors and financial advisers have not had deep experience in assessing or understanding the associated risks and managers capabilities. Consequently, some investors and financial advisers appear to have focused on historical returns and projected future returns, with less emphasis on fees, transparency, credit processes, asset valuation policies and risk management. We are currently seeing the consequences of this with the spate of stories in the AFR on private credit and regulatory review. This is not an unusual cycle for a newly investible segment as investors learn the hard lessons of experience and seek to better understand the associated risks and how to assess those who manage their private debt investments.
A Regulatory Response
ASIC’s recent publication – Australia’s evolving capital markets: a discussion paper on the dynamics between public and private markets - Feb 2025 (click on link to read) provides an overview on the various dynamics at play in Australia and globally for private assets generally and private debt specifically.
In the report, ASIC highlights that-
Recent declines in the number of public companies and listings in Australia is likely cyclical, but that any deterioration in quality and depth of public equity markets would have longer-term adverse impacts on Australia.
Both public and private markets are vital to meeting Australia’s future economic opportunities and challenges, and the future of capital markets is tied to developments in private markets.
The dominant and growing role of the A$4.1 trillion superannuation sector and large size of Australian superannuation funds will drive further growth in private markets.
Private markets carry different risks, including illiquidity, leverage, conflicts, and valuation uncertainty. The opacity of private markets does pose challenges for informed investor decision-making.
ASIC’s focus on private credit is not about constraining participation, but ensuring investment offers comply with existing laws, and determining whether appropriate regulation is in place to address the different risks and opacity in private markets.
Roadnight Observations
Roadnight welcomes the discussion paper and believes it is a reflection that private markets are now embedded and highly supportive of a deep and healthy functioning capital market in Australia. The fact that not only ASIC but also APRA are focusing on private credit and seeking to be proactive about how to regulate it supports our thesis on the long-term growth of private credit in Australia, that is following the trajectory shown broadly around the world.
As a result of the increasing prominence and size of private debt in Australia, we believe investors will benefit from greater transparency by managers and funds across the sector, encompassing –
Fund reporting
Valuation
Risk identification and management; and
Fee alignment with investors
Roadnight’s philosophy continues to focus on delivering exceptional risk adjusted investment returns and opportunities to our investors. While we are in the business of taking risk, our business and processes are designed to drive active strategies to yield a target return, while maintaining a strong focus on investor capital preservation.
If you would like more information about the Fund, please click on this link or email us at: investors@roadnightcapital.com