APAC investors target private credit opportunities in Australia after quitting China

Kellie Ell

Reporter

While Asia continues to play catch-up in global private credit, Australia and New Zealand are leading the charge in Asia Pacific — for both lenders and borrowers.

Peter Graf, a partner at Ares Asia who focuses on credit, believes the Australian and New Zealand private credit markets are the most developed in the region and are continuing to grow significantly.

“In Australia and New Zealand, there really is no high yield bond market,” says Graf. “Term loan Bs and the institutional liquid leveraged loan market are nascent at best. So private credit has really taken off in the last six to seven years and is one of the only solutions that private equity firms have, unlike the US, for example, where the market is deeper.”

In 2023, approximately AUD 12.48bn of private credit loans were issued in Australia, supporting 83 deals, according to data compiled by Debtwire. About 60% of Australia’s private credit market is direct lending, according to a report by KKR, while Australia’s total private debt market had AUD 188bn in assets under management at the end of 2023, up from AUD 175bn a year earlier, according to a private debt report published by EY in February.

The appeal of Australia and New Zealand is twofold: the region’s consistent growth over the past two to three decades, combined with increased uncertainty in other parts of the world, particularly the volatile US markets.

“There are a lot of private equity firms on the ground and globally that like Australia for investment,” says Graf. “Given the volatility in the world over the last 12 to 18 months, Australia has seen even more attention from private equity firms, because they feel they’ve got a better line of sight to good returns.

“Particularly in the last year, a lot of private credit funds have been coming in. We believe China was a big focus for them. Now we have seen that a lot of the private equity firms and the private debt providers that were investing there have largely pulled out. But they obviously still have capital. We think they’ve looked across the rest of the region and said, ‘Well, where are we going to invest?’”

“Increased scrutiny has contributed to bank retrenchment”

Peter Graf, Partner | Ares Asia

In February, Ares revealed it had raised AUD 2.6bn (USD 1.7bn) for its first direct lending strategy in the region. It is the largest pool of capital dedicated to the Australian and New Zealand private credit markets to date.

Australian pension systems are eager to up their allocations to the asset class as well. AustralianSuper, the nation’s largest pension system, said in December of last year that it plans to triple its USD 4.5bn invested in private credit in an effort to increase its presence internationally.

“Australia is definitely a more developed market from an investor perspective,” says Tim Warrick, head of alternative credit at Principal Asset Management, a Des Moines, Iowa-headquartered alternative asset manager. “The superannuation funds have been investing in direct lending opportunities to US managers. Now some are saying they want more exposure to local market lending through direct lenders that are in that market. It is definitely growing.”

Historically, Australia’s big four banks — Commonwealth Bank, Westpac, National Australia Bank, and Australia and New Zealand Banking Group — have been responsible for the bulk of loans in the region. Direct lending has only taken off in the country thanks to a review of the banking system after the Great Financial Crisis.

“This is just the beginning for the Australian private debt market,” says Graf. “The banking regulations keep getting tighter and increased scrutiny has contributed to bank retrenchment. Meanwhile, the rest of Asia is more of a commercial-bank driven market. It feels like Australia is only trending in one direction.”

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