“Credit will be key as following COVID-19, Australian borrowers may find it harder to access bank-led financings, the equity capital markets or the debt capital markets,” banking and finance partner David Walter said.

Lending markets in Australia were historically dominated by the big four Australian banks and bank-led financings.

However higher funding costs and increased regulatory scrutiny following the 2008 global financial crisis and more recently in the wake of a banking royal commission have led to a decline in bank lending, according to Mr Walter.

Mr Walter said that this bank lending decline created a financing gap, which is being increasingly filled by private credit providers and it is expected that these providers will play key roles post-COVID-19.

With the Australian private credit market growing, Bakers partner Alastair Gourlay said that corporations are seeing increased activity in the market for the Asia-Pacific region. Local funds are increasing along with insurers and pension funds, especially in Australia, he noted.

“While the Australian secondary loan market remains relatively illiquid, a significant mitigant to that lack of liquidity is Australia’s [creditor-friendly] enforcement regime,” Mr Gourlay said.

Seemingly, the major banks have made moves recently to reduce private wealth operations.

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According to recent reports, National Australia Bank’s JBWere private wealth arm dropped from 245 advisers in December 2018 to 204 in April 2020. 

ANZ axed 230 jobs from its already much-reduced wealth operations in March, including a number of private banking roles.

The largest decline was experienced by industry powerhouse Macquarie, whose once mighty private wealth footprint declined from 282 registered advisers in December 2017 to 137 at April 2020. 

These changing structures in private equity are what Mr Walter and Mr Gourlay see as an opportunity for private credit providers.

In terms of which sectors would be seeing changes to credit financing, Mr Walter said it was hard to measure the mandate across these funds.

However, he noted real demand for this especially in the real estate sector, accommodation hotels, and a good stream of activity around wholesale or financing of residential properties, like large unit developments.

This would form in the mid-market space which will be huge, according to the lawyers, after COVID-19. With banks having pulled out, private credit will step in to create increased demand for credit.

Most importantly, Mr Gourlay and Mr Walter predict two things happening post-COVID-19, where private credit products and providers will step up where the bank stops.

“The more capital constrained banks will focus on core customers and leave a big gap in the credit market for private providers to step in, and likewise, early stage [mid-market] companies are looking for raising equity,” Mr Walter said.

“Where that equity becomes too expensive and difficult to obtain, private credit will be a really attractive short-term source of capital and liquidity for those businesses.

“This will satisfy [short-term] gains and it will be a lot cheaper than equity, and once the stop gap is resolved it will refinance by getting rid of private capital for traditional structures such as the big banks.”