Download the Foresight Analytics Report: A Review of the Australian SME Lending Landscape

Transcript:

Roger:

Hi, I’m Roger Montgomery from Montgomery Investment Management. Well, if you don’t already know, the Australian banks have largely retreated from many types of lending.

They still dominate residential mortgages and, of course, lending to the top 50 companies. But because of Basel III and risk-weighted imposts, they’ve reduced the funds available to small and medium-sized corporates in Australia. Consequently, according to Foresight Analytics, the size of the Australian small and medium enterprise lending market, available to non-bank lenders, has now grown to about $630 billion, and that was at the beginning of 2024, it’s probably bigger than that now. That’s almost ten per cent annual growth, by the way, since 2019.

The retreat by the banks from a growing market has opened the door, as I mentioned a moment ago, for Australian non-bank lenders and their private backers, private investors, to invest in higher-quality borrowers and loans, while also helping Australian businesses to grow. Understandably, Australian private credit is an asset class which is not only growing at double-digit rates, but is becoming a serious, major asset class of some priority, in its own right.

This is because it provides much-needed returns to a growing cohort of baby boomers and Gen Xers who are looking for uncorrelated and attractive returns. Of course, not all private credit is created equal. There’s a plethora of funds out there, each promoting attractive returns.

But what’s the difference in their structure? What’s the difference in the underlying loans?

Investors need to understand precisely what they’re investing in and what a superior investment might look like.

Our partner, Aura Credit Holdings, is committed to transparency and simplifying any complexities associated with the private credit market. To that end, they worked with the independent research house Foresight Analytics to produce and publish a research paper that reviews the Australian small and medium-sized enterprises (SME) lending landscape.

In this video, I’m joined by Brett Craig from Aura Credit Holdings, and together, we’re going to discuss the research report’s three key findings.

So, Brett, let’s talk about the first key finding of the report – that there is a giant gap between what banks are willing to supply to small and medium-sized corporates and what they’re demanding. How has that come about?

Brett:

Well, firstly, there were some significant regulatory changes with the implementation of the Basel III regulations post global financial crisis (GFC). This led the banks to really focus on residential mortgages or loans to large corporates, you know, in ASX’s top 50 – correct. And what that’s done is left a huge void in the market for SMEs and mid-market corporates, where the banks had traditionally funded, but have now stepped back; that’s left a $400 billion gap, now being filled with private credit, non-bank lenders, to enable Australian SMEs and mid-market corporates to grow while using this capital.

Roger:

I mentioned in my introduction that changes to regulation post-GFC have meant that lending to this mid-market tier is less profitable, but precisely how is that the case?

Brett:

There are a couple of reasons. Firstly, if you look at the banks’ internal credit systems, effectively, it’s going to cost them the same amount in human resources to write a $2 million loan as it would a $20 million loan; the credit work is quite similar. So, in effect, for time spent, the banks will focus on the larger loans as opposed to the smaller loans.

Roger:

So, they need more capital, which means their return on capital is lower, but they also need more time, and they get a lower return because it’s a smaller loan. So, it’s more labor-intensive for them as well, and therefore, it costs more.

Brett:

Much more labour-intensive and then, when you see the emergence of non-bank lenders utilising technology to assess borrowers, they have a much lower cost base than some of the banks still using legacy systems.

Roger:

It’s quite extraordinary timing, really, isn’t it? And I mean that genuinely, because at precisely the time that baby boomers, the oldest of whom are approaching their eighties, are looking for reliable income streams, lower volatility, and uncorrelated returns, this gap has formed and is being filled by the kinds of funds they’re looking for.

Brett:

That’s exactly right. And I think that’s the backbone in our Aura Credit business. We are looking at providing strong income. Our objectives are to preserve capital for our investor base and provide strong, regular income, that’s the objective. And one of the great ways we can do that, is by funding what is now a huge gap in the lending market. So, it is fortuitous, and we welcome it.

Roger:

Well, I really appreciate that, Brett. Thanks for your time.

Brett:

Thanks, Rog.

Roger:

That’s all we’ve got time for today. If you’d like to download the Foresight Analytics report or share it with a friend who might benefit from its conclusions and findings, click the link in the video notes below to download your copy. We look forward to answering any questions you might have, so give us a call or send us an email, and we’ll respond as soon as possible. Thanks for your time, and have a great day.