Plans by the banking regulator to scrap the use of Additional Tier 1 (AT1) capital instruments, also known as bank hybrid bonds, will make the private credit asset class more attractive to SMSFs seeking new yield-bearing investments.
Arrowpoint Capital joint managing directors Andrew McDonnell and Michael Kurland said the decision by the Australian Prudential Regulation Authority (APRA) to phase out the $43 million bank hybrid market would leave investors searching for alternatives.
“That [phase down] will leave a big gap in the market for income products for investors as hybrids were very popular for the income they provided. With APRA shutting down that market, this could turn investors’ attention to private credit, which arguably offers superior risk-adjusted returns,” McDonnell and Kurland said.
“The Reserve Bank of Australia (RBA) recently estimated the private credit market is valued at almost the value of the hybrid market at around $40 billion and noted that private credit has grown faster than business debt over the past few years.
“With strong demand for credit and the number of opportunities rising in the private credit market, this could see the market increase 20 per cent to close to $50 billion by the end of 2025.
“The large funding gap that exists between the credit the big banks can provide and the strong and growing demand from corporate borrowers will help drive that growth.”
The RBA data showed the demand for business credit was accelerating more rapidly than other forms of credit in Australia, rising 8.3 per cent for the year ended 31 October 2024, compared to 5.3 per cent for housing lending and just 2.2 per cent for personal credit.
“Should we see an increase in market volatility in 2025, this asset class provides a high yield with regular income payments and a low correlation to other asset classes, providing diversification to investors’ portfolios,” McDonnell and Kurland said.