It makes sense for regulators to peek under the hood on non-bank lending while seeking to remove obstacles to the free and efficient allocation of risk capital.
Fuelled by the higher cost of money and greater returns on offer, there has been a sudden pick-up in private credit or non-bank lending to businesses.
An alternative to traditional bank lending and debt issued on public markets is a good thing. This provides access to capital for all sorts of businesses for longer than banks are readily able to. Whether this is spreading risk in the financial system and opening up an unregulated market that could blow back into the core banking system is debatable.
It therefore makes sense for prudential and market regulators to take a look under the hood while also seeking to remove any unnecessary regulatory obstacles to the free and efficient allocation of risk capital.
This comes as Australia’s $4 trillion superannuation system is leaning into lending long-term debt capital to big and small businesses as discussed at Tuesday’s Superannuation Lending Roundtable hosted by billionaire Anthony Pratt’s Visy and The Australian Financial Review.
During the superannuation system’s “accumulation phase” across the past 30 years, the cult of equities and the search for the highest yields to build the biggest possible retirement nest eggs have weighted super funds’ capital management strategies and investment portfolios towards higher-risk public sharemarkets and private equity, infrastructure and real estate. In the pre-pandemic world of low interest rates, the inferior returns on lending to businesses did not offer an attractive alternative.
But in the current higher-interest-rate world, close to double-digit returns are spurring some of Australia’s biggest industry super funds to scale up their exposure to private credit by either lending directly or partnering with banks. That is occurring amid a private credit boom in Australia, and globally, which is outpacing the growth of public markets, stalled by an extended listing drought on the ASX.
The growth and scrutiny of private capital should be kept in perspective.
It coincides with union and employer-owned industry funds – which have benefited from the flow of money compulsorily collected from the wages and salaries of “members” defaulted to them through the industrial relations system – now belatedly scrambling to develop financial products and services to help people draw down on their super balances as the system enters the “retirement phase” with the ageing of the Baby Boomers.
That reorientation from taking in contributions towards paying income streams could be underwritten by super funds moving from being overweight in equities to less volatile fixed income that produces steady long-term returns.
A theme of previous superannuation roundtables has been the obstacles to Australian banks facilitating super-fund lending to businesses. Banks typically borrow short through deposits but lend long-term primarily for low-risk housing loans. Capital adequacy requirements that act as a backstop against this maturity transformation – borrowing money on shorter timeframes than lending money out – generally make banks wary of lending to higher-risk businesses.
The theme of this year’s roundtable discussion between super funds, banks, and policymakers on Tuesday was the growing regulatory scrutiny of the opaque private capital markets and the potential implications for the financial system’s stability.
Australian Prudential Regulation Authority chairman John Lonsdale told the event that it was undertaking cross-industry stress tests and working with peer global authorities to better understand any systemic risks posed by private credit’s unchecked rise.
Westpac chief executive Peter King said that with private capital not subject to the same regulations as the big banks, transparency posed a challenge in assessing systemic risks.
A ‘good thing’
National Australia Bank chief executive Andrew Irvine said private capital’s different risk-return profile was a “good thing” that would help the economic growth. But he also cautioned that private capital funds and investors could react differently to a recession and refrain from supporting distressed companies during a downturn the way banks could with their big and prudently regulated capital buffers.
Australian Securities and Investments Commission chairman Joe Longo has now announced that the market regulator is investigating the need for rules to protect investors and the integrity of private capital raisings, along with the red tape and delays deterring public capital raisings.
That follows the revelations in the Financial Review of questionable practices, including the lack of due diligence, failures to write off weakened loans, and fees that outsize distributions.
The growth and scrutiny of private capital should be kept in perspective. Macquarie Group chief executive Shemara Wikramanayake said that although the pendulum was swinging towards the $2 trillion global private credit, of which about $200 billion is in Australia, this is “chicken-shit” compared with the $300 trillion of combined government, corporate and consumer debt.
Nevertheless, a regulatory look at the known unknown of private credit, which the super funds that steward the nation’s retirement savings are pushing into, makes sense.
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