The opportunity in Australian private debt markets

The Australian lending market is often described as being highly inefficient, as lending is traditionally dominated by an oligopoly of domestic banks, with limited competition from foreign banks and other high net-worth investors.

At IFM Investors, we believe this market inefficiency has resulted in the opportunity for investors to capture relatively attractive risk-adjusted returns versus comparable developed market private debt, particularly from reliable lenders who are able to meet capital-starved businesses with bespoke financing solutions. IFM has operated in Australia’s private debt market for the past 25 years, and we believe we are well-positioned to partner with institutional investors and help them take advantage of the current shifting investment landscape and opportunity set.

Bank dominance and more favourable terms to lenders

The bank lending dominance in the Australian debt market remains an anomaly compared to North American and European debt markets. This is even more so when you consider that Australia and New Zealand’s lending market is largely concentrated amongst just four domestic banks, who collectively cover approximately 75% of its market.

We believe the result is a highly inefficient market given the supply/demand imbalance between the lender and borrower universe. The power imbalance between borrowers and lenders has led to credit being provided at far more favourable terms to lenders relative to the North American and European lending markets, where the scale is tipped in the opposite direction in the favour of borrowers. We believe this supply and demand dynamic can provide a significant opportunity for institutional investors.

Large-cap corporate lending in Australia is similar to offshore markets, in that it is typically unsecured, but unlike the markets in the US and Europe it does have senior ranking and protection against the ability for another lender to come in with security rights. Most other lending in Australia is generally provided on a fully secured basis with priority ranking over all other creditors. Further, tight lending standards have persisted, with loan structures retaining an extensive set of lender rights and covenant packages. This is contrary to the position within the North American and European markets, where lending standards have loosened significantly over recent years with covenant-lite and non-covenant transactions now the market standard.

For more, please read the full paper, The opportunity in Australian private debt markets.