As interest in private credit investments grows, Pengana Credit CEO Nehemiah Richardson has called for a clearer distinction between Australian and global private credit due to their different risk and return profiles. That clarity will help investors avoid comparing “apples to oranges” when evaluating allocations to this asset class, he said in a recent market note.

By 2023 the private credit market in Australia is valued at $188 billion according to EY, while BlackRock estimates the global market at $1.6 trillion. Richardson emphasized that despite this huge disparity in size, local and global private credit often “merge” even though their differences go beyond mere scale.

“In reality, the asset class is much more nuanced and this is most evident when you consider the banking sector in Australia compared to the US and Europe,” he said.

In Australia, the big banks handle 90 percent of corporate lending, with private credit providers accounting for about 10 percent. In contrast, other major markets often see the opposite trend.

"In the US and Europe, it's almost the opposite. Approximately 84 percent of corporate lending is done by private credit providers, with about 16 percent done by banks,” he said.

These differences lead to different risk profiles between local and global private credit markets, with global markets typically characterized by greater acceptance by borrowers and investors, managers with longer tenures, structural dynamics that encourage innovation, and more great diversification.

In contrast, Australian private credit is focused primarily on commercial property and subordinated positions in asset-backed structured finance facilities that have not yet been tested by economic cycles and where banks have limited risk appetite, Richardson explained.

"In the US and Europe, private credit plays a major role in their economies," he said.

"There is a huge loan market, including relatively lower risk positions in bilateral loans for quality companies."

Richardson noted that since 2005, including the global financial crisis, the historical annual loss rate for global private credit direct lending strategies has been around 1.03 per cent, while average loss rates for the Australian private credit sector are less documented. , which emphasizes the need for investors to be well informed before investing.

Earlier this month, the opaque nature of Australia's private credit landscape was compared to the "Wild West", with a professional noting that investors lacked access to essential information such as arrears, arrears, loan-to-value ratios and restructurings.

For Richardson, the rapid growth of private credit, which is expected to reach about US$2.8 trillion by 2028, again shows how managers and investors must remain disciplined.

"We will likely see more variability in complexity and risk profile as more products enter the market," he said.