In recent years, regulatory constraints on traditional banking institutions, a tightening of capital adequacy requirements and a broader shift towards non-bank lending have propelled the global private credit industry toward new heights.

According to Morgan Stanley, at the beginning of 2024, the market reached US$1.5 trillion and is projected to grow to US$2.8 trillion by 2028. How quickly can private credit climb before facing headwinds?

Turbulence ahead?

“Private credit providers are typically not as heavily regulated as banks, which naturally leads one to consider whether there are risks developing, unchecked, in the background," says David Saija, executive director and senior portfolio manager at Revolution Asset Management.

In late 2024, the International Monetary Fund (IMF) and S&P Global Ratings sounded the alarm, advocating for stronger regulatory intervention. “These risks largely revolve around liquidity mismatches, leverage, asset valuations and the interconnectedness of the market, which may have the potential to affect financial stability and become systemic,” Saija explains.

The US private credit market is deeply embedded in corporate lending. “The absolute size and diversity of markets such as the US and Europe mean that, even outside times of economic stress and volatility, there are always pockets of the economy facing distress,” says Josh Manning, founder and portfolio manager of Manning Asset Management. 

The prevalence of Chapter 11 bankruptcy protections in the US allows distressed businesses to restructure their debt, creating a highly dynamic – yet risky – credit environment.

It’s a different story Down Under

“Despite growing at a rapid rate in the last five years, the Australian private credit sector remains significantly less developed compared to the US and European markets,” says Alex Miller CA, director at Longreach Credit Investors. As of late 2024, Australia’s private credit market is estimated at A$205 billion in assets under management. “The dominance of the big four banks reduces the impact of any systemic risks in our market.”

Manning points out that Australia’s economic fundamentals contribute to a lower prevalence of distressed debt. “Over the past 25 years, Australia has been the envy of other economies,” he says, citing consistently low unemployment and stable inflation (acknowledging recent exceptions). He also highlights the dominance of large, well-established businesses, which “naturally results in fewer distressed opportunities”. High-profile collapses, such as Virgin Australia during COVID-19, makes front-page news, deterring aggressive distressed investors.

New Zealand’s financial sector remains heavily concentrated, with the big four banks controlling 80–90% of the market. “New Zealand is a cottage industry at present,” says Paul Carman, founder and managing partner at Private Capital Group. “From an asset perspective, New Zealand funds are still in their initial scaling phase, are typically single-strategy, and demonstrate a relatively wide variety of structures and models.”

Filling the lending gap

“Private credit represents a critical source of financing for borrowers of all sizes in the Australian and New Zealand market, but especially for SMEs,” says Miller.

Unlike traditional bank loans, private credit offers bespoke solutions tailored to specific borrower needs. “An SME borrower can now engage with a diversified lender base, accessing financial products that align with their unique capital requirements and business cycles,” says Manning.

“With Basel requirements tightening bank lending and the Reserve Bank of New Zealand’s 2019 Capital Review reshaping credit markets, private lenders are stepping in to fill the gap,” says Carman.

Many of these SMEs are well established, with strong cash flow and market positioning, yet they lack access to international or bond markets. “Historically, these companies have relied on either bank loans or third-party equity to fund their growth. The former is becoming harder to secure and the latter often leads to unnecessary shareholder dilution,” Carman explains. 

Private credit debt structures offer both flexibility and terms that meet a business's cash flow needs.

Keeping the sector in check

“Much of Australia’s private lending is focused on real estate, so there could be a concentration risk in this sector,” says Miller. But as the market matures, “organisations such as the Australian Prudential Regulation Authority [APRA] and the Australian Securities & Investments Commission [ASIC] have increasingly stepped in to monitor financial risk and governance within the private credit market”.

Another key differentiator of the Australian market is the reliance on asset-based lending (ABL). “Asset-backed lending can significantly de-risk a lender’s ability to recover on the investment,” says Miller. “Given the typical two-to-four-year loan terms provided by private credit, having the additional support of asset collateral enhances stability.”

Warehouse financing has gradually become a staple of New Zealand’s private credit market. “These highly structured vehicles incorporate loss absorption measures and stringent criteria to ensure the inclusion of quality assets,” says Saija.

Unlike banks, non-bank originators rely on warehouse financing to maintain liquidity and continue originating loans. “Warehouses are bankruptcy-remote vehicles, with protections such as loan to value (LVR) buffers and strict asset concentration limits, ensuring investor security,” Saija explains. By securing underlying assets and maintaining contractual cash flow rights, asset-based lending reinforces confidence in the local market.

As the asset class continues its race to the top, the industry must strike a balance between growth and responsible practices. “The real question is not the size of the sector, but whether financing is provided in a prudent, risk-controlled manner or if it veers into speculative or predatory territory,” says Manning. 

Regulatory oversight provides some insulation from systemic risks, but transparency, risk-adjusted returns and investor due diligence will play a defining role in steering its trajectory.