Why Private Lenders in Australia can Ride the Storm

increase in private lenders australia key players in the industry

Can private lenders in Australia overcome new difficulties brought on by inflation, rising interest rates, and a deteriorating macroeconomic outlook? 

According to banks, businesses are using their existing credit lines to boost liquidity in the face of soaring inflation and increasing interest rates. Australia’s cash rate is anticipated to increase to 2.85%, while inflation is predicted to reach 7¾% by the end of 2022 and will only start to decline by early 2023.

Inflation-adjusted real rates of return are still a primary long-term concern for investors. Despite a slowdown in deal flow and pressure on portfolio values, private markets remain to benefit from investors’ appetite for consistent yield. Unprecedented amounts of private capital are in retreat, with $13 billion of dry powder providing a liquidity buffer in Australia. 

Economic moat of private lenders in Australia

Higher levels of distress are expected in a weakening macroeconomic environment, compounded by rising debt servicing costs and deteriorating borrower profiles. However, proven private lenders in Australia now have better alternatives to mitigate losses and boost recoveries. 

Traditional banks were bound by a drawn-out and tedious workout process, while private lenders have been more skilful and creative in their approach to distressed credits. This leads to a more effective capital reallocation. 

Private lenders in Australia are flexible, quick to assess risk, and able to offer specialised forms of funding. They are filling the void as high-yield bond and leveraged loan issuance come to a halt. Private lending, essentially non-existent during the previous deleveraging event, now accounts for $133 billion or 11% of the overall corporate and business lending market in the country. It is quickly catching up to the size of the more established leveraged loan market. 

Why investors remain drawn into private lending

In an environment of rising interest rates, investors are looking at private lending for rate protection and a hedge for inflation. And whilst facing a complex set of choices, longer-term investors will tell you that some of the best opportunities occur in times of uncertainty or market disruption. 

In our experience, several investors are flexible in their investment strategies, depending on their appetite for risk. These investors know that various market conditions present opportunities for different tactics. In the current market, private lending may be attractive for those who want to adopt an “opportunistic” investing strategy in a sector where market disruption has resulted in an unexpected rise in demand. Investors should embrace diversity and consider the broadest range of strategies that are appropriate for their goals. 

The community of private lenders Australia wide has dramatically changed with the rapid increase of private lending players due to investors’ growing appetites. The future of private lending becomes more exciting with the liquidity options it presents. 

The banking industry, which has historically dominated the finance market, has a limited capacity and may even need to curb its appetite in an environment where the economy is more erratic. 

Remember, each market upheaval presents both possibilities and difficulties. Private lenders in Australia are thriving and advancing on the territory that mainstream leveraged finance institutions gave up due to regulatory influences. 

The key selling point is to offer borrowers greater commercial freedom and deal certainty to justify the premium charged (typically 1.5 to 2 per cent) over the margins common in larger markets. 

Vado Private has already demonstrated strength within Australia’s private lending industry

Vado Private has operated in Australia’s private lending market since 2017 and partners with investors to provide debt and equity funding solutions to property investors and property developers. We have an established track record, having circulated $230 million of capital into the market with zero losses. 

Capital preservation remains to be our fundamental principle for our investors. 

If you are interested, I welcome you to get in touch for a confidential discussion.