Produced in partnership with La Trobe Financial.
While it is an enormous sector, ensuring selectivity with ‘narrow jaws’ is imperative. A common saying in banking and asset management is that “bad loans are written in good times” but in periods of exuberance it can be easy to forget that truism, highlighting the value and importance of experience, discipline, and robust systems and processes.
Good credit managers “live and die by that mantra”, according to La Trobe Financial chief investment officer Chris Paton.
Since the GFC, the combination of favourable market conditions, banks tightening their lending criteria, borrower demand and strong investor interest in private markets has created both opportunities and challenges for the sector.
“The banks have shifted their approach and they’re focusing more on vanilla, automated credit, which has created a large and growing market of quality borrowers for private credit providers to service and attracted a lot of investor capital to the market,” Paton tells Professional Planner.
“We worked through an easing interest rate cycle and people are now looking for more certainty around where credit spreads will be and servicing capabilities, and there is significant capital to be deployed.
“Private credit managers who are looking to generate additional volumes may be tempted to relax their assessment processes but we’re very diligent in how we manage credit across the cycle. We maintain conservative settings and maintain our disciplines on credit.”
Established in 1952, La Trobe Financial is a pioneer in the Australian alternatives and private credit space. At a time when a plethora of new private credit funds are being launched, the $22 billion asset manager has a proven track record for over 70 years.
Sustainable long-term growth
In 2024, the group entered the US private credit space, leveraging the capabilities of Morgan Stanley.
There are a number of similarities between the Australian and US credit markets, and global credit markets more broadly. The most obvious is that US and Australian banks continue to retreat from mid-market corporate lending. This structural trend underpins the positive long-term outlook for private credit.
“From an economic perspective, private credit facilitates credit availability for a range of high-quality borrowers who otherwise not be able to access credit, which would stymie economic growth and innovation,” Paton says.
“Corporates need to be well-serviced so they can invest, create jobs and contribute to the economy.”
While La Trobe Financial has been an active player in private credit, particularly real estate private credit, Paton says the Australian corporate private credit sector is still in its “relative infancy”.
He is not surprised that the sector has attracted greater regulatory scrutiny and says it’s something the industry should welcome.
La Trobe Financial is highly supportive of reforms that strengthen consumer protections and support investors and advisers to make more informed decisions.
“We’ve seen significant growth in private credit over the last five-to-10 years but that hasn’t been met with the requisite uplift in transparency and governance industry-wide, particularly for strategies now accessible by retail investors,” Paton says.
“From manager to manager, definitions and standards differ. There is no uniform approach to valuation practices, disclosure or how an underperforming loan is defined and reported. Given the importance of a thriving private credit sector for the economy, an uplift in standards is welcome. For all investors, and particularly for retail investors, they need access to all the necessary information to understand what they’re investing in, what the risks are so they can choose the right strategy for them.”
If the market doesn’t rise to the challenge, regulatory intervention such as “principles-based guidance” on reporting standards and minimum disclosure obligations may be on the horizon, according to Paton.
In other parts of the credit market, including mortgage schemes, RG 45 provides a best-practice framework that covers areas like valuation practices, liquidity management and related-party loans.
As corporate private credit attracts more retail investors, the likelihood of regulatory guidance increases, and that’s a good thing, Paton says. Add to that the shifting economic cycle and it’s almost a sure thing.
“Over the last few years there has been a limited amount of credit stress in the financial system and plenty of capital to be deployed. But as we have seen more recently, conditions can change quickly. When the economic cycle shifts, manager choice becomes more important; investors will need resilience in performance through a well-diversified, very granular portfolio,” he says.
“Transparency and a manager’s approach to credit and credit disciplines, including diversification and mandate creep, is critical.”
If additional regulatory requirements are introduced, La Trobe Financial is strongly positioned to meet its obligations because “transparency is in our DNA,” Paton says.
“We publish publicly thousands of data points, which we update every month across our portfolios,” he says.
“We believe that sunlight is the best disinfectant. We embrace transparency and disclosure, and will continue to lead the market in this space.”
