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The private credit market in New Zealand is still small but has been on a growth trajectory in recent years and is expected to continue to grow, consistent with the experience of other jurisdictions, including Australia.
According to credit intelligence and data specialist Octus, global private credit assets are projected to more than double in value from $1.7 trillion currently to $3.5 trillion in 2028.
The causes behind this rapid expansion are multifaceted and will differ from country to country but in many cases – and certainly in New Zealand’s case - increased regulatory and capital restrictions on traditional banks are a key catalyst.
In New Zealand, a number of fund managers have raised funds with the mandate for investing in private credit. There is also appetite from offshore private credit funds to lend in New Zealand.
What is private credit?
Private credit refers to loans made directly to a borrower from a non-bank lender – e.g., private credit funds, private equity firms and asset managers. Private credit facilitates debt financing for borrowers who can’t (or don’t want to) access traditional bank loans or public markets.
What is attractive about private credit?
For borrowers:
- increased scope for capital raising, including in circumstances that the banks may avoid – e.g., distressed situations, highly leveraged opportunities and/or lending to small to medium-sized enterprises without a strong credit history. With private credit, borrowers can also access new capital without diluting ownership
- flexible lending - private credit can often provide tailored loans for specific needs in a shorter time frame than traditional banks and can provide customised solutions that work for a borrower’s specific business, and
- less onerous disclosures compared to public debt.
For lenders / investors:
- higher returns relative to other fixed-income assets, including fees and/or interest rates supported by call protections
- enhanced control and oversight of a borrower through bespoke covenants and information undertakings
- secured, usually by collateral that sits relatively high in a company’s debt structure, and
- portfolio diversification to an asset that typically provides regular returns with low volatility (noting private credit is often non-correlated with public market fluctuations).
What are the key risks relating to private credit?
For borrowers:
- refinancing risk - the appetite for non-bank lenders to refinance or roll-over debt as it comes to maturity remains untested in the New Zealand context (particularly given the small size of our economy and that the private debt market has not yet been tested across economic cycles), and
- untested in stress scenarios – specifically how private credit will react to financially challenged borrowers.
For lenders / investors:
- non-traded: private credit is usually privately originated and then held. Lenders / investors typically earn an ‘illiquid premium’ (via higher fees and interest rates), but the trade-off is that they may not be able to sell their investments easily
- riskier investments: private credit is often attracted to more highly leveraged opportunities where there is also perhaps a greater risk of failure
- limited transparency: the recent paper by the Australian Securities and Investments Commission (ASIC) flagged this as a concern, noting a lack of clarity over how asset managers are valuing their underlying assets (particularly in an illiquid market) and whether independent valuers are a part of the process. Accurate valuations are necessary to guide prudent investment strategy, and
- regulatory risk: the Financial Markets Authority (FMA) has not indicated any increased regulatory scrutiny towards the private credit industry at this stage but we can expect that it will be watching closely any developments from ASIC.
Interested in knowing more?
Chapman Tripp will be 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.
