Macroeconomics Advisory chief economist Stephen Anthony has predicted that the good times for private credit will continue for another 12 to 18 months for asset owners but said that the economy is “in a bubble” and the asset class is a byproduct of that.
Private credit has grown explosively in the last few years and the International Monetary Fund (IMF) estimated that the market hit US$2.1 trillion in 2023. It has certainly received a lot of love from Australian super funds due to its attractive returns.
Some global investment executives have been critical, though, with UBS chair Colm Kelleher telling a conference in London last year that the asset class is in a bubble and one trigger away from becoming “a fiduciary crisis”.
But at the Investment Magazine Private Credit Forum on Tuesday, Anthony – the former chief economist of Industry Super Australia and senior director at the Australian Department of Finance – was of a different view.
“This sector [private credit] isn’t the problem… the real bubbles are elsewhere,” he told the forum in Sydney.
“You [investors] are very necessary participants in the supply chain of finance to the broader economy. You’re fundamental. But with that said, the whole apparatus is now a bubble, so just be cognizant of that.”
A snap poll of asset owners and managers at the forum also showed that the majority (96 per cent) think private credit is “definitely not” or “possible, but unlikely” to cause the next big financial crash.
Anthony predicted that interest rates would likely stay higher for longer, which he believed is not a bad thing for private credit.
The labour market is still strong with a high job vacancy rate, pushing rates higher since workers are getting more bargaining power, he said.
“If there’s a deflationary environment here [in Australia], it’s really coming from offshore economies that are facing floating rates and are far more competitive than we are, whereas our non-competing sector is quite inefficient, and our unit labour costs are atrocious,” he said.
“The combination of that means that it’s very hard for the RBA to fight inflation by curbing effective demand in the economy.”
The illiquidity premium remains elevated in private credit and that would help generate alpha, Anthony said, which makes it attractive coupled with the asset class’s diversification benefits.
There are also early signs of growing markets in Asia Pacific including Korea and China, which – coupled with the promising European market – will help investors diversify away from US-centric managers.
However, a high concentration in the healthcare, business services, and technology sectors suggests there is a propensity for systemic credit risk.
“The fact that it [private credit] has less correlation to other asset classes gives you a bit of room in your portfolio to hold this thing as a safety valve, as long as it’s well intermediated, and you are really careful about the detail of what you’re buying and how you’re constructing loans,” he said.
“I like the idea that it’s very bilateral, and you can apply all sorts of different covenants and structures to manage risk. That sounds really, really sensible to me.
“What I don’t like is the situation where, you know, people buy kind of index products, and they don’t really know what’s in them. That seems like a recipe for all sorts of pain and suffering.”
