Following the global financial crisis and the resulting regulatory changes, banks globally have reduced their appetite for lending to small-to-medium enterprises (SMEs). This, in turn, has accelerated the rapid rise of private credit as a non-dilutive source of funding to businesses operating in this part of the economy. Also known as private debt or direct lending, private credit simply involves non-bank institutions making loans to public or private companies.

Private credit is now well established in the US, with assets under management (AUM) growing from US$188 billion in 2008 to US$1.2 trillion in 2023 according to Preqin. Following the US, private credit has grown rapidly in Europe and is now expanding in APAC, with AUM growing from US$10 billion in December 2008 to US$123 billion in June 2023, per Preqin.

Gordon Morrison, partner at specialist advisory firm McGrathNicol, says private credit transactions are more tailored than mainstream commercial loans, with each deal designed to strike a balance between providing businesses with the capital they need, and ensuring investors achieve an acceptable return.

“Uses of private credit tend to be event driven, such as for succession or the transition of ownership, to fund transactions including M&A, leveraged or management buyouts, or to refinance existing debt or fund growth,” he says. “But you can’t just flip a switch for funding – we work with issuers to present financial information that is clear and well vetted. This doesn’t mean funds can’t be raised quickly: we have helped clients to raise more than A$20 million in a few weeks.”

Speed and flexibility

Alex Miller CA, director at Australian private credit firm Longreach Credit Investors, says that while the private credit market is growing in ANZ, non-bank lending only accounts for only 9% of total business lending in Australia, compared with 91% and 65% (according to S&P Capital IQ) in the US and Europe respectively.

“Regulatory constraints, reputational considerations and decades of preferring to lend against real estate has resulted in banks limiting cash flow lending to smaller, middle-market corporate borrowers. As a result, private credit is stepping in to fill that gap and provide alternative capital solutions to this borrower segment.”

Since 2018, Longreach Credit Investors has provided funding of more than A$1.1 billion to more than 70 ANZ business borrowers. The firm focuses on the lower-middle market, targeting businesses generating revenues up to A$100 million and EBITDA of up to A$25 million. It invests primarily through senior secured or structured debt.

“We are focused on providing bespoke capital solutions that are tailored to meet the unique needs of each business. We work closely with our borrowers to gain a deep understanding of the needs of each business,” says Miller.

He adds, “We offer solutions to businesses looking to grow organically or by acquisition, as well as those which have liquidity or capital structure rebalancing requirements.

“Our team prides itself on its ability to navigate complex financing situations, deliver creative, non-equity dilutive solutions and act quickly so borrowers can take advantage of time-sensitive market opportunities.”

Morrison adds that while the cost of private credit borrowing is typically higher than traditional banks, the flexible amortisation profile associated with private credit loan facilities allows more cash to be left in the business to fund growth: “A middle-market private company will often be asked for directors to give personal guarantees by a bank and that means their personal property is typically available to be sold to repay the loan. This leads to a much more conservative business strategy.”

Funding growth

Morrison explains that private credit is also well suited to funding growth.

“Traditional lending metrics tend to be historical focused,” he says. “They look at asset coverage or historic earnings and cash flow. For a fast-growing company that might be growing at 20–50% a year, that growth may create a very large funding requirement purely for working capital.

“In the private credit market, you are dealing with the likes of Longreach that will work to understand your business and its financial profile, and they are able to make decisions very quickly. They can also react to new information to change terms and arrangements.”

Morrison adds that private loans are often used to fund complex event-driven business events.

“A company might require a large investment in geographic expansion with an overseas partner, or they might be acquiring another business or buying out one of their shareholders. Whenever there’s a counterparty like that, you’re susceptible to the terms and profile of the deal changing. The cost base and resources normally available at a bank means they can’t facilitate the level of due diligence and analysis required to keep up with that borrower and their needs.”

Raising capital

McGrathNicol, which will celebrate its 20th anniversary this year, has a long history of assisting corporate and institutional clients resolve complex strategic and financial issues, and capitalise on opportunities to grow. It has advised on more than 50 middle- and lower-market sale transactions involving private equity, and its senior team has also raised more than US$5 billion of capital for clients to primarily fund acquisitions, growth, shareholder distributions and buybacks, and leveraged and management buyout/ins.

Morrison says its corporate advisory services include raising private debt and equity capital, as well as M&A advice and strategic reviews.

“We also provide transaction services such as pre-lend and financial due diligence,” he says. “We work with clients who may be preparing for succession or an acquisition, or perhaps they’ve got an investment opportunity or a new contract that’s ramping up, and they need more working capital and need funds from outside the organisation. We look at the sources of capital that are available and advise clients on how much and on what terms they might be able to raise that capital. If it’s attractive to them, we help them take the next step.”

Longreach Credit Investors has an investment team with deep finance and accounting expertise.

“Our team is comprised of diverse personal and professional backgrounds including chartered accountants, and backgrounds in restructuring and turnaround,” says Miller.

“As a capital partner to our borrowers, we can apply these capabilities to assist them in identifying potential business risks and can work with them to advise them how to best protect against downside scenarios, to protect their businesses and the capital of our investors. As a long-term capital partner, there is strong alignment in the success of a borrower’s business.”

Miller adds that Longreach has strong, established relationships with borrowers and accounting firms like McGrathNicol, as well as with corporate and professional advisers, private equity and other investment funds.

“One of our preferred borrower sourcing pathways is via accounting firms, because it generally means that we’re presented with high-quality information that has been vetted,” he says. “Ultimately, that links back to speed and providing prospective borrowers with visibility and confidence in our ability to execute.”

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What are private loans typically used for?

• Refinancing

• Acquisitions

• Capex, business expansion and working capital

• Management buyouts and buy-ins

• Dividends and shareholder distributions.

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Advantages of private loans

• Speed to close

• Certainty of terms

• Flexibility in structuring

• Bilateral process

• Multiple uses

• Strategic partnership

• Non-dilutive; alternative to equity.

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If you have clients who could benefit from access to private credit, visit longreachcredit.com or mcgrathnicol.com to find out more.