New options on horizon for borrowers

The borrower trends we identified in our 2023 report - intense competition for deposits, rising borrowing costs, payment innovations, heightened ESG (Environmental, Social, Governance) accountability, and decreased tolerance for risk – will persist over the next 12 months.

But there will be a new intensity to the disruption with new options on the horizon for borrowers as open banking gains traction and the technological juggernaut powers on. We expect that this will create opportunities for fintech in consumer finance and for private credit in the corporate market.

Private credit – a developing sector

Private credit by non-bank lenders remains niche in New Zealand, accounting for less than 5% of the banking sector according to Reserve Bank of New Zealand data. And issues of scalability in the small New Zealand market will continue to inhibit growth here relative to Australia.

But while overall lending volumes have been subdued as the economy has slowed, new non-bank lending enterprises have established a presence here, a trend we expect will continue as the market rebounds.

Recent entrants include: Private Capital Group, Aotea Asset Management, Peninsula Credit, and offerings from Australian firms like Revolution Asset Management and Metrics. Local fund managers are increasingly participating in securitization and direct lending activities focused on New Zealand.

According to Quin Casey, Portfolio Manager at Fisher Funds:

"Private capital is poised to meet growing demand for debt funding among medium to large New Zealand businesses, offering flexible debt structures tailored to borrowers' asset and cash flow profiles".

Recent finance deals involving non-bank lenders include:

• Pepper Money's acquisition of HSBC's NZ$1.4b retail mortgage portfolio
• New Zealand Green Investment Finance's capital raise from offshore institutional funds through its Solar Finance program to support solarZero
• The Local Government Funding Agency’s record-breaking bond issuance, and
• Increasing numbers of securitization term outs, under which institutional investors fund loan portfolios rather than banks.

Private credit markets have flourished internationally over the past two decades. They were integral to the post-GFC recovery in the US, are experiencing a resurgence now in Europe in response to rising interest rates and are on a solid growth curve in Australia. 

EY estimated the Australian private debt market at A$188bn in assets under management at the end of 2023: A$76bn in commercial real estate-related loans (approximately 16% of this lending segment); and A$112bn in other business-related loans (approximately 12% of total lending). That’s up from A$109b at the end of 2020.  

Free from the regulatory restraints and higher capital burden faced by banks, private debt lenders can be nimbler – responding to market gaps as they arise.  

The IMF report on The Rise and Risks of Private Credit shows private credit borrowers tend to be middle-market firms, more highly leveraged than typical loan borrowers or bond issuers.

We anticipate increased interest in New Zealand by offshore credit funds, but the limited deal flow in this market is likely to constrain their growth. Deals need to be big enough to be attractive and fit within credit funds’ specific investment mandates.

Simon Petris of Revolution Asset Management highlights their commitment to supporting New Zealand companies with scalable investment solutions:

"In the Australian market we have seen ongoing growth in private credit, including strong direct relationships with private equity sponsors. Where a bank might have otherwise been involved, private credit now commonly provides the cornerstone investment – something Revolution Asset Management is well suited to do.

“New Zealand has typically had smaller deal sizes and comparatively less activity, but when transactions arise that meet our scale and investment requirements, we are pleased to be able to support them. We continue to see the potential for growth in New Zealand, particularly once the lending market and system growth recovers, and we aim to bring our exposure to New Zealand companies up to about 20% of our flagship Fund II".

Domestic providers of private credit may have less issue with smaller deal sizes. Paul Carman from Private Capital Group sees them as well positioned to fill the market gap:

“New Zealand borrowers have historically relied on the domestic banking market for their short and long term debt requirements. RBNZ's 2019 capital review has changed this and we are seeing the impact play out with banks shifting their balance sheet allocations toward shorter duration and lower capital allocation co-efficient risk: this de-emphasises lending to NZ businesses. 

The resultant challenge for NZ's SME oriented economy is how can NZ borrowers continue to raise debt. These companies are too small to access the bond market and offshore private credit funds tend to focus on the large end of town.  PCG is one of a handful of domestic private credit managers positioned to address this imbalance by providing NZ businesses with access to debt from it's dedicated NZ oriented funds.”