Australia’s private credit market is growing fast, now accounting for around 11% of business lending according to recent Reserve Bank of Australia data.
However, this market share is still considerably lower than in the United States and Europe, suggesting there is room for further expansion.
This growth is underpinned by well-known factors, such as stricter regulatory capital requirements on banks which limit their lending appetite in certain sectors, as well as the appeal of private credit’s flexible structuring, and increased demand from investors given the higher yields compared to public markets.
However, as private credit gains traction as a popular source of funding, there’s no shortage of advice on what investors should consider in a private credit fund manager. But what’s often missing is guidance for potential borrowers—the businesses looking for the right capital partner.
Here are six essential tips for selecting the private credit provider that best meets your needs:
Look at the Full Cost of Borrowing, Not Just Interest Rates
While the interest rate is often the first consideration for businesses, it is important to look at the full cost of borrowing. Private credit typically applies higher interest rates than traditional bank loans, a premium that reflects their added flexibility and access to capital, especially when banks aren’t willing to lend.
In addition to the interest rate, factor in origination fees, line fees, ongoing fees, and potential prepayment penalties. Make sure to confirm whether the interest rate is fixed or floating, and if floating, which index it is tied to (e.g., BBSW, LIBOR). Some loans may include payment-in-kind (PIK) interest or step-up rates, both of which can impact overall costs.
Take the time to compare this “all-in” cost not only to traditional bank loans but also to your cost of equity. In some situations, private credit could be a more cost-effective choice than issuing equity.
Seek Flexibility in Loan Structure and Terms
A major advantage of private credit is the flexibility it offers in structuring loans. Unlike standard bank loans, private credit can be tailored to meet your business’s unique needs, whether that means flexible repayment schedules, interest-only periods, bullet repayments, or a combination of amortization and lump-sum payments.
Understanding the loan’s duration is equally important. Short-term loans might offer lower rates but could require refinancing sooner than expected, which might introduce uncertainty into your long-term planning. Some private credit managers may also offer accordion features, allowing borrowers to increase the loan size as their business grows – particularly useful for companies anticipating expansion.
Finally, watch for any equity kickers or warrants tied to the loan that might dilute ownership. While these features can provide additional funding options, they may add complexity to your financing arrangement, so ensure you understand all the potential implications on your business.
Prioritise Speed and Certainty of Execution
In today’s fast-paced business environment, speed and certainty of execution can be as valuable as cost. Many businesses turn to private credit because of the speed with which these managers can lend capital compared to traditional banks. Private credit providers often have more streamlined decision-making processes, which can lead to faster deal closures, a critical advantage if your business needs immediate access to capital.
But not all providers offer the same level of certainty. Review each provider’s track record for following through on commitments and look for a partner with a history of successful exits and reliable capital deployment, particularly in your sector.
Understand the Collateral and Security Requirements
Collateral is usually a key component of private credit, so it’s important to know which assets will be tied up. Private credit managers typically seek security in the form of property, equipment, receivables, or inventory. The loan-to-value (LTV) ratio a provider demands will dictate how much collateral is required relative to the loan amount, which can affect your business’s operational flexibility.
It’s important to evaluate how the level of security might impact your business’ future —an aggressive demand for collateral can restrict your options for other financing down the line. Understanding these terms from the start can help avoid surprises and ensure you retain control over essential business assets.
Choose a Provider with Industry Expertise and Long-Term Partnership
Selecting a provider experienced in your sector can make a world of difference. Sector-specific knowledge means they understand the nuances of your business and may be more comfortable with certain risks, enabling them to structure deals that a generalist lender might shy away from.
Equally important is their approach to the borrower relationship. Some take a hands-on, partnership-driven approach, offering not just capital but strategic advice and guidance. Others may be more passive, focusing strictly on the financial aspects of the deal. Consider which approach aligns better with your business’s needs and management style.
Evaluate the Fund’s Track Record and Integrity
When selecting a private credit provider, the fund’s track record, structure, and the expertise of its investment team are strong indicators of its ability to support your business through both stable and challenging times. A history of successful investments shows they can navigate complex deals and follow through on commitments.
The fund’s structure also matters. Closed-ended funds may require refinancing sooner due to predefined exit strategies, creating potential pressure to meet short-term deadlines; while open-ended funds offer greater flexibility and long-term stability, allowing businesses to focus on growth without the constraints of imminent exits.
Equally important is the experience and approach of the investment team. A team with deep industry knowledge not only structures a deal effectively but also provides valuable strategic insights that can help your business manage risk and capitalise on opportunities.
Finally, assess the character of the people behind the fund. Just as lenders evaluate borrowers based on the three C’s of credit (character, credit, and capacity), borrowers should also evaluate the character of the people they are dealing with.
What is their reputation in the market?
Have they been transparent and direct during negotiations?
Will they maintain integrity when challenges arise?
It’s crucial to ask yourself whether these are people you can trust, especially when the going gets tough. The answers to these questions can significantly impact the long-term success of your partnership.
Finding the Right Fit for Your Business
By thoroughly evaluating these six factors, you can confidently select a private credit provider that best meets your business’s needs and long-term goals. By choosing a partner who understands your industry, offers flexibility, and demonstrates a strong track record, you can create a stable foundation for growth in an evolving market.
By Gary Looi, Investment Director, and Henry Stewart, Managing Director at Global Credit Investments (GCI)
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