Why this booming, opaque corner of finance worries the watchdogs

Whenever there’s a boom in some lesser-known corner of finance, it will always grab the attention of regulators as they scour the landscape for potential dangers. If that market lacks transparency, that only adds to these worries. So it is with one of the great buzzwords of the financial world in 2024:You may not have heard of this fairly obscure part of the markets, but investors have been piling in so enthusiastically that this has been dubbed a “golden age” for private credit.

Thanks to our system of compulsory super, it’s a trend that many of as are exposed to indirectly, and events of the past week bear this out. First though, some background. The size of this market has surged since the 2008 global financial crisis, as banks have pulled back from riskier forms of lending. Globally, it’s been estimated private credit markets are worth about $US2.1 trillion, while in Australia, it’s estimated the market is worth about $188 billion. But we don’t know for sure, and that’s part of the problem.

When a super fund invests in a private company, or lends money to one, there may be little public information about how those assets are performing, which raises the risk of these assets being written down suddenly when things change. Even so, it’s also a reminder of why regulators appear concerned about the boom in private markets, including private credit.

APRA deputy chair Margaret Cole says banks, non-banks and super funds are all under scrutiny over their private credit activity.APRA deputy chair Margaret Cole last week said while super funds had made some private credit investments, these were “still seeking some level of safety rather than more speculative, niche areas of private finance, and the exposures they do have are low in terms of overall portfolio allocation”.

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