The Rise of Private Credit in Australia

Business valuation is no longer just about profits—it’s about access to capital. Since 2015, Australia’s private credit market has grown by 14% annually, reaching $120B in 2023 (RBA). Banks, constrained by BASEL III capital rules, now avoid riskier loans .

Example:
A Sydney construction firm secured $5M via private credit after banks rejected its loan. The deal closed in 3 weeks—not 6 months.

But how does Australia compare to Europe and the US?

Global Comparison: Australia vs. Europe vs. the US

1. Australia:
   • Growth Driver: Superannuation funds ($3.5T pool) and private equity.
   • Deals: Mid-market firms (5M–5M–50M loans).
   • Regulation: APRA’s stricter capital rules push banks to safer loans.
2. Europe:
   • Growth: $400B market (ECB, 2023).
   • Focus: Green energy and infrastructure.
   • Challenge: Fragmented regulations across EU states.
3. US:
   • Dominance: $1.2T market (Federal Reserve, 2023).
   • Players: Pension funds, hedge funds.
   • Risk: Overheating with 20% YoY growth.

Australian private credit yields average 9–12%, vs. 7–10% in the US and 6–9% in Europe (RBA, 2023).

Why Australian Private Credit Yields Outperform the US and Europe

Australian private credit offers higher returns (9–12%) than the US (7–10%) and Europe (6–9%) due to three key factors:

1. Market Maturity:
   • Australia’s private credit market is younger and less saturated, creating higher risk premiums to attract investors.
   • The US and Europe have deeper, competitive markets, compressing yields.
2. Risk Profile:
   • Australian lenders often finance mid-market SMEs and sectors like mining/construction, which banks avoid post-BASEL III. These loans carry higher default risks but justify premium returns.
   • In the US/Europe, private credit targets safer, large corporates or real estate.
3. Regulatory & Economic Drivers:
   • Australia’s superannuation funds ($3.5T) demand high-yield alternatives, pushing private credit rates up.
   • Europe’s stricter regulations (e.g., EU leverage limits) and lower growth expectations suppress yields.

Data Source: RBA Bulletin – October 2024  Global Economy – Growth in Global Private Credit

Why BASEL III Killed Bank Profitability

BASEL III, a global banking regulation framework introduced after the 2008 crisis, forces banks to hold more capital against loans deemed risky. For small businesses, this means:

1. Risk-Weighted Assets (RWAs):
   Banks must assign a “risk weight” to loans. Riskier loans (e.g., small businesses, start-ups) require banks to hold more capital as a buffer against defaults. Safer loans (e.g., mortgages) need less.
   Example:
   A 1M loan to a start-up might require 150K in capital (15% risk weight).
   A 1M mortgage might need just 35K (3.5% risk weight).
2. Profitability Impact:
   Holding more capital reduces banks’ returns on risky loans. For instance, if a bank earns 8% interest on a startup loan but ties up 15% capital, the effective return drops. Safer loans offer better returns per dollar of capital. This is called Return on Risk Weighted Capital or RORC and is a key measure of bank profitability and risk.
3. Regulatory Pressure:
   Banks face penalties if they fall short of BASEL III capital ratios. To comply, they prioritise low-risk lending.

Result:
Banks now avoid SMEs, startups, and sectors like construction or hospitality. Private lenders fill this gap, charging higher rates but offering flexibility. Here’s what it might mean for your business:

• Higher interest rates.
• Longer approval times.
• Frequent rejections.

Result: Banks now focus on low-risk clients (e.g., ASX-listed firms). Private lenders fill the gap.

Data Source:
Reserve Bank of Australia (RBA) Bulletin – June 2017  Financial Stability – How Have Australian Banks Responded to Tighter Capital and Liquidity Requirements?

But private credit isn’t a free-for-all. Risks abound without expert guidance.

The Role of Skilled Finance Brokers

Business valuation hinges on securing the right funding. Private credit offers options like:

• Unitranche Loans: Single debt instrument (blend of senior/junior debt).
• Mezzanine Financing: Hybrid debt/equity for high-growth firms.
• Asset-Backed Lending: Loans secured against equipment or inventory.

Case Study:
A Melbourne tech startup used mezzanine financing to scale without diluting equity. A broker secured terms 30% better than the founder’s DIY search.

Why Go Pro:

• Time Saved: Brokers access 100+ lenders in days.
• Costs Cut: Negotiated rates and terms.
• Risk Managed: Pre-vetted lenders with proven track records.

Why Expert Brokers Are Essential in Private Credit’s Complex Landscape

Private credit providers operate in hyper-specialised niches—from mining equipment financing to SaaS revenue-based loans. Each lender has strict criteria:

• Industry focus (e.g., areas within healthcare, renewables, manufacturing, logistics).
• Loan size brackets (e.g., 2M–10M, 5M-25M, or 10M to 50M).
• Risk tolerance (e.g., startups vs. mature firms, acquisition v expansion).

Without a broker who understands these nuances, businesses face:

1. Mismatched Applications: Wasting months on lenders outside their niche.
2. Costly Terms: Accepting higher rates or restrictive covenants from suboptimal deals.
3. Hidden Risks: Overlooking complex structures (e.g., mezzanine debt with equity kickers).

Example:
A Brisbane logistics firm sought 8M but approached an agri lender specialising in sub−5M retail deals. The broker rerouted them to a transport-sector specialist in their niche, securing a 2% lower rate and better terms.

How we help:
Convergent Capital Corp’s pre-vetted brokers:

• Map lenders to your industry, size, and risk profile.
• Decode jargon (e.g., “bullet payments,” “covenant-lite”, “negative pledge”).
• Negotiate terms that align with business & industry cash flow cycles.

Don’t Navigate Private Credit Alone

Convergent Capital Corp connects you to pre-vetted finance experts who:

• Match you to tailored lenders.
• Negotiate optimal terms.
• Ensure compliance and transparency.

🔗 Click here to request a callback for a confidential discussion

Relevant Articles from our Catalogue

• How to Value Your Business for Private Credit Deals
• The Verdigris of Valuation: Pricing Secrets Revealed
• The Grand Design: Mastering Corporate Strategy for Growth
• Navigating the Growth Curve: Identifying & Aligning Clients with Finance Broker Expertise

External Links to Consider

• RBA Bulletin – October 2024  Global Economy – Growth in Global Private Credit
• European Central Bank (ECB): Private markets, public risk? Financial stability implications of alternative funding sources
• US Federal Reserve: Private Credit Risks and Rewards