Mid-market credit opportunities to accelerate

Christian Brehm, CEO of FC Capital, shares the latest trends in Australia's private debt market and how his firm manages risks

What are some key trends in Australia’s private debt market today?
Tighter lending guidelines imposed by the Australian Prudential Regulation Authority (APRA) on the major banks have caused them to retreat from the small and mid-market segment in Australia, opening new markets for credit investments. Although there was a temporary pause in deal flow from March 2020 to January 2021 due to COVID-19, Australia’s private debt market has grown quickly since January 2021 in terms of capital inflows and deployment opportunities.

This shift is expected to accelerate in Australia and New Zealand this year, especially in direct lending. Specifically, we foresee more deals averaging between $10mn to $15mn with double-digit returns, adding up to $2bn to $3bn worth of market opportunities across the board. There will also be a few larger ticket deals in the mid-market segment with single-digit returns. To cope with asset class growth and underwriting needs, FC Capital aims to expand its team this year and in 2023.  

Where can we see the most opportunities?  
We believe that focusing on the small and mid-market space for opportunities valued up to $40mn provides us with risk arbitrage returns in Australia, compared to credit markets like the US or Europe, where pricing starts in double digits. We see the most growth in the mid-market direct lending space in 2022, especially for directly originated transactions. FC Capital will further expand into this space with a new fund proposed to launch in 2022.

How can private debt firms manage risks?  
Due diligence and credit underwriting are key to managing risks. Depending on the opportunity, FC Capital reviews credit investments like equity-style investments. We produce long-form due diligence reports in-house which are available to investors and proposed borrowers. We also review management teams, sponsors, their market references, and conduct physical site visits in addition to the traditional credit work. Post-COVID-19, we have refined our approach to exclude industries such as hospitality and retail from our borrowing universe. We continue to identify risk and arbitrage opportunities in our target market. 

About Christian Brehm
Christian Brehm is the Chief Executive Officer at FC Capital, a leading Australian alternative asset manager with over $600mn in FUM across equity and private credit strategies. The business is presently actively deploying funds in the Australian and New Zealand private credit space, targeting SME and mid-market corporate as well as special situation lends. Since FC’s inception in 2012, the firm has underwritten more than $1.5bn in credit investments in  Australia and New Zealand. The firm combines deep investment banking and commercial banking experience and a substantial balance sheet to offer suitable borrowers innovative funding structures and expedited financing timelines.