After years in the shadow of its flashier private cousin, public credit is making a quiet but convincing comeback. For Yarra Capital’s fixed income team, the renewed interest isn’t about chasing yield – it’s about rediscovering balance.
“People aren’t suddenly turning bearish on private credit,” says Roy Keenan, portfolio manager at Yarra Capital Management. “They’re just realising they may have been a little too concentrated. Public credit offers liquidity, diversification and right now, pretty compelling returns.”
One of the more powerful drivers of the recent shift has been the Australian Prudential Regulation Authority’s (APRA’s) ongoing clampdown on Additional Tier 1 (AT1) hybrids, which will see roughly $43 billion worth of securities disappear from the market over the next seven years.
“Some investors are happy to roll their hybrids until the end,” Keenan says. “But others are saying, ‘Get me out of here – where else can I go, that keeps me in the credit quality, keeps me mostly in the banks, and in the public markets? That money has to find a home.”
The discussion around ASIC’s stop orders on some private credit products has also prompted advisers to reassess exposures. “It’s not panic,” says Keenan. “But it has made people ask: ‘Am I over-allocated? Am I concentrated in one part of the market?’ That’s a healthy development.”
As those flows migrate, listed investment companies (LICs) and other quasi-public vehicles have stepped in to capture the capital, further blurring the traditional divide between private and public credit. “Once that capital gets raised, managers have to place it – and that’s feeding liquidity into the public market,” he notes.
For Yarra, this has meant a steady, sustainable lift in flows rather than a flood. The firm’s Enhanced Income Fund, for instance, has enjoyed consistent inflows for two years – driven by advisers and private wealth investors seeking liquidity and alternatives to private credit and hybrids, without giving up on yield.
Part of the rethink, Keenan argues, stems from a lack of understanding of what ‘private credit’ really means in the Australian context. “When you go to conferences here, people often equate private credit with property lending. But globally, it’s much broader – corporate lending, warehouse financing, ABS, RMBS, even leveraged buyouts.”
That lack of nuance can create risk. “Not all private credit is equal,” he says. “Investors should be asking, ‘Am I getting paid for the risk I’m taking?’ In some segments, the illiquidity premium has all but disappeared.”
Yarra itself participates selectively in private markets – in warehousing and leveraged buyouts – but avoids direct property lending. “We’re not anti-private credit. We just want to be paid appropriately for the risk and illiquidity,” Keenan says.
Meanwhile, the public credit market in Australia has quietly come of age. Offshore demand for Australian-dollar assets – particularly from Asia – is fuelling issuance and depth.
“I think partially, there is an aspect of ‘de-dollarisation’ happening. There is a lot of Asian interest in the A$, at present, and that’s going into equities, but also into corporate credit,” says Keenan. “Australian corporate credit, relative to the US, looks pretty cheap; the Aussie dollar looks pretty cheap; and we look a pretty safe country from an economic and political viewpoint, too.”
In fact, Keenan says it is the best environment of his career, in terms of deal flow into the public markets.
“We’ve now got real tenor, real volume, real demand. International banks that left ten years ago are back. Australia is now the third-largest credit market in the world, behind the US dollar and the euro. Think about that – it is ahead of the pound and Canadian dollar markets. I’ve waited 25 years for this.”
Recent deals underscore that point. Yarra participated in nine new transactions in a single week – a mix of corporate bonds and subordinated debt. “That’s unheard of. The pipeline’s never been stronger, and we have real choice from a broad array of issuers.”
Keenan points to Electricite de France (EdF), the French multinational electric utility company owned by the government of France, which in August issued a 10-year Kangaroo bond (that is, issued in A$), its first, with a 20-year tranche. “That was a $1 billion issue, but there was $11 billion of demand. As it happens, we didn’t invest in that, but the point is that that’s an example of an issuer that might have gone to the US market in the past, but it could see that Australia’s a big enough market now for it to issue in Australia.
“Partially, that is a result of the dollars flying in from offshore, but also, it’s the asset allocation into credit from local institutional investors, and the wealth market, which has helped as well,” says Keenan.
This surge has both created opportunities – and challenges – for active managers. “Every credit gets a Yarra rating,” he says. “We won’t invest if we can’t research it. The universe is growing so quickly we’re adding coverage constantly, but that’s where active management really shines. The sheer number of issuers just means more work for us – but that’s a good problem to have.”
Even with credit spreads tightening globally, Keenan sees room for value in Australian investment-grade debt. “In the US, you might get 100 basis points for 10-year BBB exposure. Here, you can still get 130 to 150. So you’re being paid more for less risk – and in a stronger currency.”
Yarra’s Enhanced Income Fund currently runs at around BBB+ average credit quality, with forward-looking returns in the 7 per cent–7.5 per cent range – down slightly from the 8 per cent–9 per cent highs of recent years but still robust.
“I’m not promising 9 per cent again,” he says. “But 7 per cent on investment-grade paper, with daily liquidity? That’s a very good outcome.”
Interest rate cuts – with another expected soon – don’t threaten that view. “If you’ve got the right levers in your fund, you can actually benefit from falling rates,” he says. “You pick up capital gains that offset the lower yield.”
So, is the move back into public credit a referendum on private markets? Not quite.
“It’s not fear – it’s pragmatism,” Keenan concludes. “People still like private credit, but they’re realising liquidity has value. They want a mix. They want flexibility.”
That measured tone may be what defines the next phase of Australia’s fixed income evolution. After years of yield-chasing, investors appear ready to rediscover the virtues of balance – and a public credit market finally mature enough to meet them halfway.