Activity in Australia’s private debt market slowed markedly in 2023, with growth of 7 per cent in assets – down from 32 per cent in the previous year. EY has released its annual Australian private debt market update, based on disclosures from debt fund managers. It estimates the size of the market at A$188 billion, spread across leveraged and sponsor lending, direct lending, middle market and SME, real estate, infrastructure, special situations, distressed and venture debt. EY estimates that $76 billion of that is in commercial real estate-related loans, representing about 16 per cent of total lending to that segment, and $112 billion is in all other business-related segments, representing about 12 per cent of total corporate and business lending. Slower growth in 2023 was the result of reduced mergers and acquisitions activity, projects finance and real estate development. Another factor contributing to the slowdown was deals not getting done because of disagreements over valuations. EY said lenders’ portfolios held up well, despite higher interest rates and inflation, and lenders are ready to deploy capital. “Loan defaults and insolvencies appear to be in line with the traditional bank lending markets,” the report said. A positive indicator for the sector is that corporate bond spreads are 20 to 90 basis points tighter now compared with where they were 12 months ago, reflecting an easier pricing trend for credit. Some of the bigger deals last year were TPG borrowing $800 million from a syndicate of private debt lenders for its acquisition of funeral services provider InvoCare; private lender participation in a $4.7 billion loan to data centre operator AirTrunk; and private lender participation in an $850 million loan to insurance broker AUB Ltd. EY said there is a significant opportunity for private lenders in net zero energy transition investment. “The shift in corporate reporting that will be introduced with the Australian Sustainability Reporting Standards will accelerate climate-related investment targets being set by equity investors and banks,” it said. As a result, private debt lenders will have an opportunity to fill the gap in the coming energy transition by assisting with new investment capital, refinancing and to acquire loan books and lending businesses as banks accelerate their reduction in climate risks.