The Australian private debt market grew 21 per cent last year and now makes up more than 10 per cent of the overall corporate and business loan market, according to a new report.
EY has released its Australian Private Debt Market 2021 Update, reporting that the total market size grew to A$133 billion last year. It put the strong growth of the sector down to the appeal of more flexible structures and terms offered by private debt providers, faster turnaround on deals and the sector’s growing capital base.
“This flexibility has been well suited to the more uncertain economic environment which has led to material differences in earnings performance across the business community.”
A number of private credit fund managers completed capital raisings during the year, allowing them to play a more meaningful role in arranging larger ticket financing.
EY said institutional investors showed an increased appetite for Australian private debt, which has delivered good relative returns, with stable yields and moderate risk.
“Margins have remained relatively constant in comparison to bank and bond markets. This yield stability has helped to attract more investor capital.”
Market segments where private credit providers are gaining share include corporate lending, private equity, real estate, infrastructure, asset-backed funding, special and distressed situations and SME lending.
Lending to commercial real estate is the fastest growing segment of the private debt market. EY estimated that about 38 per cent of private debt assets are allocated to commercial real estate debt, including development and construction finance
Private credit providers benefited from strong conditions in the corporate debt market, which had a 55 per cent increase in loan volumes last year, according to EY. Companies were active in mergers and acquisitions, refinancing and taking up opportunities using green debt.
More flexible structures offered by private debt providers include unitranche, term loan B and asset-backed arrangements. In addition, private debt can come with higher leverage, lighter covenants and variations in repayment structures.
EY said that on top of this flexibility, private debt providers tend to approve deals more quickly that banks.