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Following is an article published in PEI Private Debt Investor, April 2025.
Private Debt Investor recently spoke with Phil Miall, QIC Head of Private Debt Australia, about what the asset class in Australia has to offer investors.
In the search for returns and diversification, private debt investors are increasingly casting a wider net to unearth the best opportunities. This is leading more LPs to consider the benefits of investing in Australian private debt, a market that has undergone significant change in recent years with banks stepping back to make room for a rapidly expanding private lender universe. To find out more, Private Debt Investor sat down with Phil Miall, Head of Private Debt Australia for QIC.
How can investors achieve scale and diversification in their Australian private debt allocation?
It’s important to step back and register just how sizeable this market is now, simply because Australia’s private debt market has been growing at a strong clip for the past decade. The compound annual growth rate since 2015 has been close to 22 percent, with the total market size growing from around ($35 billion ($22 billion; €20 billion) to over A$200 billion. This strong market growth enables investors to scale, which also lends itself to diversification, with a lot of variety contained within this A$200 billion figure.
What have been the drivers of the domestic market’s strong growth, and to what extent will this continue?
There are a few factors driving this growth. On the supply side – and this is probably a trend being seen in a few markets – we have bank disintermediation in Australia. Tightening bank regulations are making this into a significant structural factor, which is creating tailwinds for deal activity in the private debt market.
Australian banks have traditionally had the dominant market share in the country and we don’t have a high yield bond market of note. Our banks have long dominated the region’s corporate and real estate loan activity. Things started to change when bank regulation in Australia began to bite in 2015, which led to greater capital requirements being placed on banks.
As a result, it has become less or even uneconomic for banks to lend to certain sectors. The banks have not fully retreated from these market segments, but a funding gap has been created that needs to be filled.
At the same time, asset owners and borrowers are becoming increasingly comfortable with private lenders and recognise them as a reliable and stable source of funding.
On the demand side, higher base rates have been a factor, providing increased yields for private lenders. Alongside the relatively stable returns of the asset class, private debt is a compelling investment from an asset allocation
perspective.
"The relative value of Australia’s private debt market versus other markets is very attractive, with an elevated illiquidity premium”
Phil Miall - Head of Private Debt Australia, QIC
Why is Australian private debt a compelling investment for domestic and international investors?
The relative value of Australia’s private debt market versus other markets is very attractive, with an elevated illiquidity premium. For example, Australian private debt in the sub-investment-grade space offers around 150 basis point to 200bps pickup over US leveraged loans of a similar rating.
Australia is also a relatively stable and resilient economy, with a generally creditor-friendly insolvency regime. These are all attractive features for international and domestic investors, while the market’s size and strong growth allows for scale and diversification.
With regard to private debt, what is the current economic outlook for the Australian market? What risks should investors be wary of?
If we look at the economic outlook and what it means for deal activity, we think this is going to be quite a favourable deployment environment going forward due to the combination of several factors. The first is the record levels of private equity dry powder that can be put to work, which should support sponsor-led M&A activity. Secondly, the economic backdrop has been fairly resilient. We see signs of a moderate cyclical
recovery for the Australian economy over the next few years. We are also past the point of peak interest rates and the Reserve Bank of Australia’s recent interest rate cut should be positive for investor sentiment.
There are of course risks to keep an eye on. Of particular focus at the moment is the implementation of US tariffs, the responses globally and what it will mean for economic growth. Though the direct linkage between the US and Australia is relatively small, we may see further impact from our proximity to China. Our base case is that should be fairly manageable and that any slowing down in China shouldn’t be overly material for us. While the risks on tariffs are building, offsetting that is the fiscal support coming out of China and Europe.
A higher-for-longer rate environment is also something we are watching closely from a downside perspective and the ongoing pressure on household expenditure. That said, in 2023 there was market concern in Australia about the roll-off of fixed-rated home loans into much higher floating rate loans, and how abruptly this might impact household consumption. The economy held up well through that period and has been resilient since then.
Which sectors present the most compelling investment opportunities? And what factors may see this evolve?
We see fertile hunting grounds right now in corporate leveraged loans and real estate debt. Real estate transaction activity should increase nicely over 2025 and result in a steady flow of attractive opportunities for private debt investors. Transaction volumes were somewhat patchy in real estate while the last interest rate tightening cycle and its market dynamics played out, but sentiment is generally improving in the sector, with the expectation that asset prices have seen a floor, so the outlook is strengthening.
In corporate leveraged loans, we’ve had strong deployment outcomes over the past 12 months, committing to investments totalling approximately A$300 million, and we see this attractive origination environment continuing in 2025. Deals we’ve committed during this period include senior secured acquisition financing for Pacific Equity Partners’ acquisition of ATOM Group and also Adamantem Capital’s take private of QANTM Intellectual Property.
Despite the attractive investment environment, we’re watchful of downside risks at both a macro-level and in certain sectors. However, our experienced team of credit experts employs a patient, discerning approach to investment selection and a focus on direct origination of club and bilateral opportunities, enabling us to build portfolios with what we see as the best risk-adjusted returns from selective, high-quality private debt investments.
