Marching towards a US$2.8 trillion industry and outperforming fixed income  

Private credit continues its rapid growth, marching towards a US$2.8 trillion global asset class by 2027 up from US$40 billion at the turn of the century.¹  

It continues to gain market share as investors seek a defensive allocation with outstanding risk-adjusted returns in investments that are secured, collateralised or otherwise have strong downside protection features. 

The asset class continues its evolution from a focus on higher risk, opportunistic credit to higher quality, performing credit. The loans themselves are often types banks used to do but can’t anymore, or where banks cannot be efficient lenders for various reasons such as regulation, speed to market, technology or other market forces. In simple terms, private credit has largely gone from the ‘unbanked’ to the ‘banked’ and it provides investors with a genuine alternative to traditional fixed income such as bonds. 

Performance of the asset class has been particularly compelling relative to traditional fixed income. As an example, MA Financial’s private credit funds have outperformed traditional fixed income by ~3.9x since inception, including an approximately +350bps outperformance in 2024.² 

Skin in the game and workouts capabilities matter most in 2025 

In our inaugural 2024 Investment Outlook, we said while private credit had been the “asset class of 2023” the focus for the year ahead would be ‘avoiding the losers, not picking the winners’. 

In 2025, this statement remains as true as ever and that’s why it continues to remain core to our credit investing philosophy.   

One of the best ways to achieve this is to align incentives in the right way. For investors, this means working with an asset manager aligned with investor outcomes – consistent returns with good prospects of capital being safeguarded.  

What matters most is that asset managers have skin in the game. We are always surprised about how little co-investment most managers have with their investors, which has the potential to skew outcomes and create moral hazard risks. Astoundingly, a report by BIS last year indicated ~40% of private credit managers have no material co-investment with their investors.³ 

At MA Financial we are investors in our funds too, with the firm and our staff having over $190 million invested in our private credit strategies.⁴ This sharpens our focus on ‘avoiding losers, not picking winners’ and on delivering consistent performance and long-term returns. 

As always and including in 2025 we are acutely aware low probability events can occur, and the world can change in an unfavourable manner versus the initial investment thesis. Having the right portfolio management, risk management and ‘workouts’ capabilities matter in these instances.  

In 2025 we continue to remain cautious about the proliferation of private credit funds, with many newer players with only ‘fair weather’ experience and limited history dealing with problems that arise. The ability to workout problems and manage portfolios through different conditions will become more important through 2025 and be a determinative factor in the growth of the sector. 

Consistent with our views in 2024, this year we continue to see opportunities to partner with banks as they progress capital optimisation initiatives collaborate rather than compete with private credit funds.  

This year we continue to have strong conviction in asset backed lending being essential and innovative element in Australia’s private credit landscape. 

Real estate credit: the whole is not greater than the sum of its parts 

We believe the narrative for real estate credit in 2025 is likely to be focused on the challenges in the asset class as a whole, rather than the various investible verticals making up the whole. There will be little distinction between traditional real estate credit managers who have pushed into equity positions, so understanding where their portfolio challenges lie will be important for investors. 

We see heightened risk in mezzanine debt and preferred equity. This is due to the very limited ability to truly understand the risk position at any given point of time or have any measurable influence over this risk in these sectors. 

We remain positive about senior credit secured by fundamentally good assets: those with enduring value. Well-designed, high-quality assets that are fit for purpose and appropriate for their location will be less volatile if markets drop and will be quicker to respond as markets recover. When appropriately valued and managed, senior principal positions can withstand significant market volatility and stress. 

The rate of increase in capital supplying the real estate credit market, coupled with reduced demand from borrowers during 2022-2024 when construction and material costs rose substantially, has resulted in significant competition amongst lenders. In many instances, we believe this has led to some mispricing of risk. We believe this is where sound governance, transparency for investors and a desire to protect shareholder value over the long term will pay dividends. 

We expect a substantial increase in demand for capital as borrowers take advantage of changes to government policy supporting an increase in housing supply. We believe 2024 may have represented a cyclical low on the demand side, which has been particularly evident in NSW. Improving construction conditions and a weighting towards the RBA easing the Cash Rate is providing greater confidence in the residential development sector. 

We expect borrowers will continue to carefully consider and select lenders based on their track record of developing long term valued relationships with their business.

Greater regulatory focus to provide greater transparency 

As the private credit market has become larger, we do expect more regulatory focus on the sector this year.  

We think this will ultimately be a good thing, providing greater transparency for investors and ensuring the robust frameworks around governance, valuation and compliance that large institutional-grade asset managers adopt are applied equally throughout the industry.  

We encourage investors to diligence governance, operational and asset management processes with equal weighting to investment and portfolio management capabilities. 

More ways to access private credit 

We continue to expect growth and evolution in the ways investors access the asset class.  In addition to unlisted fund structures, we expect more interest in listed market structures that provide access to diversified private credit portfolios. 

In Australia, the listed investment trust market is re-emerging. This provides a way for investors that want more frequent liquidity than available in unlisted funds to access the fixed income alternative that private credit represents. We anticipate the abolition of AT1 hybrid securities – a more than $40 billion market in Australia – will further support this thematic from investors seeking yield-generating investments in an ASX tradeable form.