Australian Private Credit Market Trends & Legal Implications | GRM LAW

Australian Private Credit: Market Trends and Legal Implications

Introduction

The Australian private credit market has undergone a period of rapid expansion, mirroring global trends and establishing itself as a significant alternative source of finance for businesses. Once a niche segment, it now plays an increasingly important role in the broader debt landscape, offering tailored solutions where traditional banking may fall short. However, this growth is not without its complexities, attracting increased attention from regulators and market participants alike. This article explores the key trends shaping the Australian private credit market and examines the evolving legal and regulatory implications for lenders and borrowers.

Key Market Trends

Several distinct trends characterize the current state and future trajectory of private credit in Australia:

• Exponential Growth: Both globally and locally, private credit has seen remarkable growth. Global assets under management (AUM) quadrupled over the past decade, reaching US$2.1 trillion in 2023, with projections suggesting a further surge to US$2.8 trillion by 2028. In Australia, estimates of market size vary depending on methodology, ranging from the RBA's figure of approximately A$40 billion in outstanding credit facilitated by asset managers (around 2.5% of total business debt) to EY's broader AUM estimate of A$188 billion. Regardless of the precise figure, the trend is clear: private credit is expanding its footprint rapidly, growing faster than overall business debt.
• Filling the Funding Gap: A primary driver of this growth is private credit's ability to cater to borrowers and sectors underserved by traditional banks. This includes medium-sized businesses, often private equity-backed, with unique financing needs, irregular cash flows, or risk profiles deemed too high for banks. 64% of market participants surveyed by Herbert Smith Freehills (HSF) agreed that private credit fills an important lending gap.
• Increased Competition and Diversification: The influx of capital and new fund managers has significantly increased competition for deals. In response, funds are diversifying their strategies and deal types to secure a steady pipeline of opportunities.
• Attractive Sectors: While opportunities exist across various industries, the real estate and consumer sectors are viewed as particularly attractive areas for private credit investment over the coming decade, according to the HSF survey.
• Role in Energy Transition: Private credit is also poised to play a substantial role in financing the energy transition, with a significant portion of market participants anticipating it will have an equal or greater role than traditional finance in funding renewable energy projects.
• Investor and Lender Landscape: The market involves sophisticated end investors like superannuation funds, insurance companies, and family offices, primarily investing through intermediary asset managers. While closed-end funds dominate globally, open-ended structures are notably more common in Australia.

Advantages Over Traditional Lending

Private credit offers distinct advantages that appeal to borrowers and sponsors, including:

• Flexibility: Tailored structures and covenants.
• Speed: Quicker and easier execution processes.
• Risk Appetite: Greater willingness to accept complexity and risk.
• Sector Focus: Ability to lend to sectors less favoured by banks.

These benefits often outweigh the primary perceived drawback – potentially higher lending costs compared to traditional bank loans, which remains a key barrier to further growth.

Legal and Regulatory Implications

The rapid expansion of the market has inevitably drawn greater regulatory scrutiny:

• Increased Oversight: Globally, regulators are concerned about the lack of transparency regarding leverage and interconnectedness within the private credit sector. Australian regulators, including the RBA and ASIC, are actively monitoring the market, although current risks to financial stability are deemed contained.
• Regulatory Framework Debate: There is ongoing discussion about the adequacy of the current regulatory framework. The HSF survey indicated an even split, with 50% believing the current framework is fit for purpose and 50% suggesting some reform is needed, though none called for significant overhaul.
• Potential Reform Areas: Key areas identified for potential regulatory adjustment include licensing obligations for private credit providers, specific conduct requirements, and the potential imposition of capital requirements against lending activities.
• ASIC Focus: ASIC is expected to focus on issues such as misleading conduct, governance, conflicts of interest, and valuation practices within the sector.

Conclusion

The Australian private credit market is a dynamic and rapidly evolving landscape. Its continued growth seems assured, driven by its ability to offer flexible, bespoke financing solutions. However, participants must navigate increasing competition and prepare for a potentially evolving regulatory environment. While the advantages of speed and flexibility are clear, addressing perceptions around cost and ensuring robust governance and transparency will be crucial for sustainable growth. As the market matures, understanding both the commercial trends and the shifting legal and regulatory sands will be paramount for success for lenders, borrowers, and advisors operating within this vital segment of the Australian financial system.

References

• Herbert Smith Freehills. (2025, April). A Pulse on Private Credit Investment in Australia 2025. Retrieved from https://www.herbertsmithfreehills.com/insights/2025-04/a-pulse-on-private-credit-investment-in-australia-2025
• Reserve Bank of Australia. (2024, October). Growth in Global Private Credit. RBA Bulletin. Retrieved from https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html
• Norton Rose Fulbright. (2024). Private credit: An emerging market. Retrieved from https://www.nortonrosefulbright.com/en-au/knowledge/publications/94071699/private-credit-an-emerging-market
• A&O Shearman. (2024, October). Regulatory shifts in Australia's private capital market. Retrieved from https://www.aoshearman.com/en/insights/regulatory-shifts-in-australias-private-capital-market-navigating-the-private-credit-landscape
• Mills Oakley. (2024, December). Spotlight on private credit markets. Retrieved from https://www.millsoakley.com.au/insights/spotlight-on-private-credit-markets/