One of my first jobs as an analyst in capital markets was to write a paper on why the Australian private debt market was about to explode. This was almost 30 years ago.when once again, the hype indicates now is the time for this market to grow.But it’s more than conjecture. The traditional rationale for private debt is well understood, but there are now compelling regulatory and macro-economic reasons for this “explosive growth” call.
Further, even with these concerns, we are still very much in a low interest rate environment and the higher returns, due to an illiquidity premium in private debt relative to traditional fixed income, is compelling for many. The characteristics of private debt, including its defensiveness, high risk-adjusted returns, steady income production and the natural liquidity points afforded by the short-weighted average life of loans -- compared to longer-dated real assets -- all help position it as a desirable investment.
The recent release of the Reporting Standard on Asset Allocation may indicate how APRA wants to see private debt’s asset allocation defined, as it clearly shows mezzanine debt and private debt falling into the fixed income asset class hierarchy. Therefore, it seems the traditional fixed income benchmarks would apply and due to its illiquidity premium, private debt should strongly add to portfolio outperformance.
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