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Private credit has surpassed USD$2 trillion globally and is catching on in New Zealand too, emerging as an established alternative to traditional bank lending for a range of borrowers. The future direction largely rests with private credit fund managers, who serve as the vital link between investors with capital and businesses looking to raise debt to support their growth ambitions.
Chapman Tripp sat down with Nick Whitwell from Aotea Asset Management (AAM) – a locally owned and operated private credit manager focused on corporate lending – to discuss the state of the private credit market in New Zealand, and where AAM sees its future.
The current state of the market
“Private credit has been a feature of the New Zealand property market for many years and is a material contributor to that sector [but] is still in its infancy with respect to corporate lending”.
Historically, private credit funds targeting New Zealand’s corporate sector were largely based offshore and tended to focus on large-scale mergers and acquisitions deals, often involving overseas financial sponsors and higher leverage. There was little engagement with mid-market borrowers — the so-called “engine room of the NZ economy” — who have traditionally found it difficult to access tailored financing solutions.
However, that is now changing: “Following the post-COVID inflationary, and then recessionary, environment, we are starting to see positive shifts in investor appetite and a growing acceptance from mid-market and corporate borrowers that private credit provides a compelling alternative to traditional bank financing”.
Attracting investors and borrowers
AAM thinks the key to attracting investors to New Zealand’s private credit market is to address investor concerns around illiquidity, especially for KiwiSaver funds.
The “illiquidity issue” arises as corporate loans and asset-backed securities are typically held for two to five years and lack an active secondary market. This means that investors acquiring these assets are often doing so on the basis that they will need to take-and-hold their position.
But private credit offers a sufficient return premium to compensate for this, and robust mechanisms are in place to manage investor redemption requests (including via repayment of loans, investment income received from the portfolio, standby liquidity facilities and transferring units to other investors).
Another factor AAM considers important to building investor confidence is increased transparency: “As the New Zealand market develops and private credit becomes more mainstream and available to retail investors, the level of disclosure will obviously increase for funds with retail offerings, providing the market with more data and greater insights”.
For borrowers, the attraction of private credit is that it offers flexibility and tailored solutions.
Nick notes that private credit is particularly valuable for event-driven financing, such as M&A or growth capital expenditure, where higher leverage or bespoke terms can be required. While private credit may carry a premium over standard bank pricing, more borrowers are recognising the value of flexible structures and quicker turnaround times and are willing to pay a slightly higher interest rate to secure the right funding solution.
These “tailored solutions” can both complement or compete with traditional bank lending (i.e. they’re not mutually exclusive). “AAM competes with banks on some transactions but on several deals we have partnered with banks to deliver an optimal debt financing solution to the borrower.”
Nick also challenges the classic borrower concern that credit funds are not relationship-focused, emphasising (as it relates to AAM), “we are a proudly New Zealand owned and operated business and are committed to New Zealand’s capital markets for the long term… we’re prepared to roll our sleeves up and support [borrowers’ and their business] through challenging periods.”
Future of the market
A key hurdle to overcome before private credit can reach its full potential in New Zealand is the limited mandate from KiwiSaver funds to invest: “Increased inflows from KiwiSaver funds would provide a significant boost to domestic fundraising capacity and enable managers like AAM to support more great Kiwi businesses, while opening up new markets for KiwiSaver investors.”
On sizing of recent opportunities, Nick notes an increase in minimum loan sizes for offshore funds, potentially out-growing the New Zealand mid-market space, a more aggressive approach to financial leverage, and a relaxation of covenants in larger transactions (although the New Zealand market is far from a standardised documentary approach).
Key takeaways
- The private credit market is strong in New Zealand in the property space and, in relation to corporate financing, is becoming more active among mid-market borrowers, particularly those who need event driven financing.
- Investor illiquidity concerns can be managed, and the illiquidity premium should also provide sufficient incentives.
- The private credit market would likely benefit from better data collection and reporting.
- With on-going hard work from New Zealand private credit fund managers, the New Zealand market should broadly follow offshore trends with private credit evolving to become a mainstream feature of New Zealand capital markets.
Interested in knowing more?
Chapman Tripp is publishing a series on private credit from various stakeholders perspectives. Please contact our following experts to be a part of the discussion, and/or with any queries you may have.
