The Reserve Bank of Australia (RBA) has stated that the funding conditions for business are favourable as business credit growth in the country has gained momentum and is above average since the financial crisis felt globally. With this notion set, Simon Arraj (pictured), the founder and director of private credit investment manager Vado Private believed that risk adjusted returns from private debt will be supported.
As the recent board meeting of the RBA stated that the increased business insolvencies were still below the pre-pandemic trend, Arraj stated that this was a positive note from the central bank as it signified a healthy and expanding economy because businesses were looking for funds to fuel their operations and capitalise on opportunities for growth.
“Demand for business credit remains strong, reflecting a robust business environment. This demand is driven by factors such as capex, equipment purchases, increased investment in technology and expansion of businesses into new markets. It is this activity that is supporting returns on investments in private debt funds,” said Arraj.
The RBA said that business credit growth was outstripping housing credit growth. Arraj noted that credit quality across the Australian economy continued to be high even with the higher interest rates, leaving non-bank lenders with an important role of funding business operations and growth.
The robust state of business lending also supported returns on private lending as investor returns increased with the official RBA rate rises given that interest rates on private debt were typically floating rates.
“Private credit investments can deliver investors yields of around 10% per annum, which is more very attractive compared to yields on cash investments of less than 5% and investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index, which returned 6.8% over the year to 31 July 2024,” Arraj said.
As the RBA also took into account the challenging conditions in residential construction, Arraj noted that the demand for well-designed and constructed projects in locations that were deemed desirable continued to endure.
“Despite feasibilities being tested, we are starting see more normalised conditions with respect to construction costs. This dynamic combined with the demand and supply mismatch is elevating demand from property developers,” said Arraj.
“This is great for private credit investors who are generating double-digit returns when financing these types of loans.”
