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Australia’s $4tn retirement funds pour into private credit to capitalise on steady returns
by Kellie Ell
Funds that make up one of the world’s largest pools of cash are allocating to private credit. Australia’s retirement funds, which hold nearly AUD 4tn (USD 2.6tn), are increasingly attracted to the steady returns provided by the fast-growing asset class, says superannuation fund UniSuper.
UniSuper has raised its AUD 135bn fund’s commitment to private credit by 1.2%, or AUD 1.5bn, according to Mathew McCrum, head of fixed interest at UniSuper. And there may be more to come. “That’s just going to depend on opportunities, the market situation and relative value,” said McCrum.
UniSuper isn’t alone in finding private credit attractive. Many of Australia’s retirement systems and pension funds are upping their allocations to the USD 1.7tn global market. Together, they manage a huge amount of cash because superannuation funds are the main way Australian workers save for retirement.
McCrum, who is based in Melbourne, Australia, said the country’s compulsory superannuation system, where employers are obliged to contribute, coupled with an ageing population, is helping drive demand for consistent returns.
Private credit is particularly appealing to the Australian pension market
Mathew McCrum
Head of fixed interest
UniSuper
“In Australia, the predominant investors are superannuation funds,” McCrum said. “As a sector, if you look at a long-term, 10-year horizon, private credit is a growing asset class; it’s particularly appealing to the Australian pension market.”
In December, AustralianSuper revealed plans to triple its exposure to private credit in the medium term and increased its investment with Churchill Asset Management to USD 1.5bn. Two months later, Australian superannuation fund Cbus laid out plans to grow its private credit allocations threefold over the next year and a half. Australian Retirement Trust recently said it would up allocations from 1.5% to 2.5% in the coming year.
The increased allocation is bucking trends among institutional investors. Global fundraising in private credit slowed slightly in 2024’s first quarter, thanks in part to high interest rates. However, if the interest in Australia is anything to go by, last quarter’s lacklustre figures may just be a blip for the asset class, according to market participants.
McCrum believes private credit is attractive compared to other options. “If you look at public investment grade credit versus the private markets, the private markets represent better relative value at the moment. Looking at investment grade credit on a historical basis and on a relative value basis, it looks expensive,” he said.
The Australian funds are allocating in a period when the so-called ‘golden era’ of private credit may be a thing of the past. In part, this is because competition is eating returns: more private credit funds have entered the space; global banks have seen a return of risk appetite; and capital markets have reopened for lending to below-investment grade companies.
Colm Kelleher, chairman of the board at UBS, has warned of a bubble in the space. And JPMorgan Chase’s Jamie Dimon said “there could be hell to pay” in private credit due to the influx of retail money.
UniSuper doesn’t believe the bubble chatter — for now. The retirement fund is watchful and “very mindful of the credit cycle”, McCrum said. “In any industry that’s gone through rapid growth, there will be periods of too much growth. But we don’t think private credit is at that point yet.”
Exactly which credit funds are seeing inflows from Australia’s superannuation system is unclear, although sources say superannuation funds have allocated to US and European managers. Australian-based managers have benefited too, especially as some have recently set up credit funds aimed at Australian investors.
Private debt deals with Australian companies totalled AUD 4.18bn in 1Q24, up from AUD 1.34bn a year earlier, according to data from Creditflux’s sister publication Debtwire.
