Source: FS Super
Author: Alan Greenstein
Date: 14 March 2025
Amid growing economic, political, and market uncertainty, credit is proving a hot topic with investors.
The smart money – from institutions to high-net-worth-investors (HNWIs) – is recognising the need to defend wealth from rising volatility. With a selloff in US equities and domestic stocks heading for a correction, it is easy to see why defensive assets that deliver strong risk-adjusted returns are capturing attention. However, public markets alone are no longer providing the diversification or defence needed to ride out market turbulence.
Traditionally, multi-asset portfolios have relied on the negative correlation between bonds and equities for diversification. Yet, increasingly, we are seeing a positive correlation in public markets. 2022 was an extreme example, where we saw significant correlated dips in both bonds and equities.
The search for more effective diversification has driven the rise of alternative, uncorrelated asset classes, like private credit, with approximately $40 billion currently outstanding in Australia1. Institutional money is leading the way, with Australia’s largest super funds, like Australian Super and Aware Super, allocating billions to the sector. Cbus is on-record noting it wants to triple its exposure in the coming 18-months. Growing allocations from some of Australia’s largest investors drove year-on-year growth of more than six percent2 in the local private credit market last year. This exponential growth is set to continue, globally, with the sector expected to nearly double to US $2.8 trillion by end-20283.
With unrest and uncertainty rippling through markets and shaking investor confidence, we have seen a surge in private credit’s popularity – offering potential for reliable, steady income, protection against inflation, and diversification away from public markets. As this growth continues, private credit is set to become an even greater focus for investors, borrowers and regulators.
Strong growth drivers
While the floating rate nature of private credit has proven popular in a ‘higher-for-longer’ interest rate environment, we are seeing market expectations on rates start to shift. Australia has just enjoyed its first interest rate cut in years, with many economists predicting further cuts on the horizon. In the US, Trump has admitted to a ‘period of transition’ which could have recessionary impacts on the economy. While this rhetoric is wreaking havoc in equities, for private credit investors, a lower rate environment could still prove beneficial, leading to increased borrower demand and serviceability, renewed confidence locally to invest in new projects, and higher asset valuations.
This is particularly true in Australian real estate. We face a nation-wide housing shortage, yet traditional lenders continue to pull back from construction and project lending due to increased regulatory requirements and reduced risk appetite. Urban development projects and placemaking, driven by both the public and private sector, are also out of favour. Without investment from non-bank-lenders, Australia would lack critical infrastructure and housing needed for our growing population. This market environment has created unprecedented opportunities for experienced private credit managers to secure quality deals that historically would have gone to traditional funders, such as banks.
The unique strength of our market is capturing the attention of sophisticated investors offshore. This month, Zagga attended the PERE Conference in Singapore, and for the first time, Australia featured prominently on the agenda. We heard first-hand from some of the world’s largest institutional investors on how they were amping up allocations to private credit opportunities in Australia and New Zealand, with Blackrock flagging expected allocations of $500 million to the sector in the coming year. Institutional money is recognising the growing global volatility and the overexposure of portfolios to markets like the US and seeking out stable markets, like Australia, with well-developed legal and regulatory frameworks, robust governance, and resilient economies.
This is particularly true for APAC investors. For example, Foreign-Direct-Investment from Japan reached record highs in 2024, with real estate inflows rising sharply. Asia-based family offices are also increasing allocations to defensive strategies amidst rising geopolitical risks worldwide. This trend has been reflected in Zagga’s own investor base, with our two largest offshore institutional investors based in Japan and Singapore and offshore capital from key Asia markets now accounting for ~15 percent of our funds under management, and growing.
With growth comes attention
As private markets enjoy record growth and huge inflows from public markets, the sector has understandably captured the attentions of the regulator, both here and in many other jurisdictions. Naturally, the regulators want more insight into the investments and greater transparency.
Recently, the Australian Securities and Investments Commission (ASIC) released its report into private credit and called for greater engagement and transparency from industry participants. Yet, as ASIC rightly points out, investors vary from individuals to Australia’s largest super funds. This creates complexity because their level of sophistication, risk appetite, and capital allocations are vastly different. When it comes to regulation, one size does not fit all and it’s important to get the right regulatory oversight and mechanisms in place.
This presents an unprecedented opportunity for the industry to take initiative and come together to design a code of conduct that ensures widespread best practice and establishes a framework around pertinent issues like valuations, pricing, and liquidity. As private credit transitions from an ‘alternative’ to a staple in an increasing number of portfolios, a code of conduct would be instrumental in upholding integrity, trust, and credibility with both investors and the regulator while maintaining the speed, agility, and commerciality that define the real estate private credit market.
As we look ahead, volatility seems to be the theme of 2025 and the stage is set for private credit to continue its strong growth trajectory. For investors, it can protect, defend, and diversify portfolios, without compromising on returns. But, as uncertainty reigns, it pays to take a risk-off approach and remember not all credit is created equal. Transparency and due diligence – and the investment managers that prioritise this – will be the true cornerstones of our growing asset class.
- RBA, October 2024 (https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html?utm_source=chatgpt.com)
- Nuveen, December 2024 (https://www.afr.com/companies/financial-services/private-credit-continues-rapid-expansion-20241128-p5kuao)
- Future of Alternatives 2028, Preqin, 2023
