Australian private debt liquidity is in its early stage

The level of liquidity in the Australian private debt market will match overseas markets in 10 to 15 years, according to Schroders Capital’s head of private debt.

Speaking at the Australian Superannuation Investment conference, held by the Australian Institute of Superannuation Trustees (AIST) in the Gold Coast, Nicole Kidd, Schroders Capital head of private debt, said the private debt market in Australia was still in its early stages.

Her remark followed the mention of the Australian Prudential Regulation Authority’s (APRA) recent consultation into its proposal to change Prudential Standard 530 to enhance liquidity management by superannuation funds.

“Private debt in Australia… is [illiquid], you get paid a liquidity premium, arguably to compensate for that risk,” Kidd said.

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“But offshore in the US, there's a very, very deep and liquid secondary market for private debt, and Europe, slightly less solid, but it still exists.”

However, there were still opportunities to buy within secondary markets in Australia when the asset was well priced and despite strong credit risk.

“The motivations for lenders to be in a syndicate or not aren’t necessarily to do with the credit risks, and so you can find opportunities in the market to participate in secondary buying and selling to take advantage of those reasons.”

She said liquidity from private debt would grow as more funds invested in the space.

“As more and more funds are investing in the space, there'll be more chances to recycle capital and I think the other thing that is likely to change is the structure,” Kidd said.

“We might see some amortisation come back in so that’s going to create liquidity within funds or within separately managed accounts.

“Obviously, interest coupons are a small amount of liquidity, but general buying and selling… it will be 10 to 15 years before we have anything even close to what we're seeing in the offshore markets.”