Growth in Global Private Credit

Abstract

Global private credit has grown rapidly over the past two decades, providing an alternative source of financing for businesses. This article introduces a new estimate of the size of private credit outstanding in Australia, based on data collected by the Australian Prudential Regulation Authority and London Stock Exchange Group. It is estimated that there is around $40 billion in private credit outstanding in Australia, which is around 2½ per cent of total business debt. Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market. For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely.

Introduction

Private credit is bilaterally negotiated lending to businesses arranged by non-banks. The lenders in the private credit market are typically asset managers that intermediate between end investors and borrowers. End investors – like pension funds and insurance firms – provide funds to these intermediaries or, in some cases, lend directly to borrowers. Private credit provides an alternative source of finance for businesses to borrowing from banks or issuing bonds, particularly for firms with unique financing needs or irregular cash flows that are too risky for banks or too small for public markets.

Understanding the use of private credit is important for assessing the nature and availability of business funding and potential risks to financial stability. As private credit is sourced from non-banks, it can be difficult to measure. This article introduces a new estimate of the size of private credit outstanding in Australia based on data collected by the Australian Prudential Regulation Authority (APRA) and London Stock Exchange Group (LSEG) on lending to Australian businesses facilitated by asset management firms. This measure indicates that the Australian private credit sector has grown strongly over recent years, though it accounts for a small share of total business debt.

The global private credit market

Global private credit assets under management have quadrupled over the past decade to US$2.1 trillion in 2023 (IMF 2024). In the United States, the stock of private credit is now around the same size as either of the high-yield bond and leveraged loan markets (IMF 2024). North America accounts for around 70 per cent of global private credit raised since 2008, while Europe represents about one-quarter (PitchBook 2024).

Private credit has an attractive risk-return trade-off for some investors. It pays a relatively high interest rate – generating higher returns than other similar assets such as leveraged loans – and to date has exhibited low volatility relative to publicly traded assets, like corporate bonds (Cai and Haque 2024). Non-bank lenders have played an increasingly large role in lending to risky companies, in part because some business lending has become more expensive for banks; regulatory reforms after the global financial crisis raised banks’ capital requirements and made them more sensitive to risk (IMF 2024).

The structure of private credit lending

Private credit loans are in many ways similar to syndicated loans by banks. That is, they are generally senior secured, variable rate, larger than standard bank loans, and may comprise multiple credit facilities. Unlike syndicated lending, however, most private credit lending involves a private credit fund that intermediates between the ultimate lender and borrower. Private credit loans are typically not traded in secondary markets or publicly rated, and lenders tend to hold private credit deals to maturity. The key roles in the private credit market are:

End investors, which provide funds to intermediaries. These include pension funds, insurance companies, family offices, sovereign wealth funds and high net worth individuals. Some investors also lend directly to borrowers without a fund intermediating. In Australia, superannuation funds primarily invest in private credit via funds, though they also lend directly.
Intermediaries, which take funds from end investors and lend to borrowers. The most common lenders in the global market are unlisted private credit funds, but lenders also include business development companies (BDCs) and off-balance sheet securitised loan pools, known as collateralised loan obligations. The most common private credit investment vehicle outside Australia is a closed-end fund, with a limited life cycle that prevents redemptions during its life span. Notably, in Australia, open-ended funds are more common (Preqin and AIC 2024).
Borrowers, which are typically highly leveraged medium-sized businesses. Globally, most of these businesses have been acquired by private equity firms, which tend to increase debt levels to enhance investor returns (Haque 2023). Borrowers’ earnings are typically between US$10 million and $100 million, and they often have irregular cashflows or limited collateral, thus necessitating bilateral loan negotiations. Some borrowers access both private credit and other markets, with recent instances of banks and private credit funds jointly providing finance to borrowers (ACC undated; Tan and Seligson 2023).

The Australian private credit market

The scope of lending varies across estimates of Australian private credit:

RBA (A$40 billion) (Graph 1): This estimate captures lending to Australian businesses facilitated by asset management firms from investor money pooled into managed funds. It also includes direct lending from superannuation funds as part of a syndicated loan. The estimate does not capture non-syndicated direct lending by superannuation funds. The data are sourced from data reported by registered financial corporations (RFCs) to APRA and from LSEG syndicated lending data. APRA and LSEG data are timely and consistent with other aggregates, but coverage is not universal (see Appendix A).
EY (A$188 billion): This estimate captures privately disclosed or publicly reported assets under management of private debt funds and other non-bank investors (Paphitis and Lowe 2022; Paphitis and Gaede 2024). Assets under management may differ from lending reported to APRA; for example, RFCs only report the portion of their business lending that is to Australian residents, and some types of fund structures may not be in scope to report to APRA.
Preqin and Australian Investment Council (AIC) (A$1.8 billion): This estimate captures assets under management of closed-ended private credit funds using Preqin data.

The RBA estimate focuses on business lenders with a managed fund structure to distinguish from other types of non-bank lenders in Australia (see Hudson, Kurian and Lewis 2023). Private credit is typically funded with equity, whereas many Australian non-banks operate similarly to banks, raising funds from debt and securitisation markets but without access to deposit funding. These non-banks tend to provide standardised loans for specialised purposes like finance for vehicles or other equipment.

The Australian private credit market is small relative to other lending to businesses but it is growing rapidly (Graph 2). Private credit accounts for around 2½ per cent of total business debt (which includes both intermediated lending and corporate bond issuance outstanding). Private credit grew faster than business debt over the past few years; growth has slowed in 2024 but is still around 2 percentage points higher than growth of business debt (Graph 3).

Domestic private credit funds account for around 70 per cent of private credit outstanding and have contributed the most to growth in lending (Graph 4). Superannuation funds’ direct holdings of private credit via syndicated deals are relatively small, though our estimate does not capture their non-syndicated direct lending. Australian superannuation funds primarily invest indirectly in the private credit sector via investment in private credit funds; this investment is captured in our estimate.