2024 – A Mixed Report Card but with Positive Momentum Building

The recent Federal Budget and accompanying changes to Australia’s capital gains tax regime have generated plenty of
commentary, much of it focused on who wins, who loses and what it all means for entrepreneurship, housing and economic
growth. Those debates will continue. But for investors, a more practical question emerges. When the rules of the game
change, where does capital go?

The answer may not be where most people are looking. For years, the Australian investment landscape has gently nudged
investors toward assets where a significant portion of returns arrive in the form of capital gains. Listed equities, private equity
and venture capital have all benefited from a system that rewarded patient holders of appreciating assets. Private debt,
meanwhile, has always been something of a different beast. It is less interested in dreams and more interested in cash flow.
Less concerned with what an asset might be worth in five years and more focused on what it can pay today. It is, in many
respects, the tortoise in a market that often celebrates hares. And as the old Aesop fable reminds us, the tortoise occasionally
has his day.

Warren Buffett once observed that “only when the tide goes out do you discover who’s been swimming naked.”
For much of the past decade, abundant liquidity and favourable tax treatment allowed investors to focus overwhelmingly on
growth. Future valuations mattered more than current income. The promise of tomorrow often outweighed the cash flow of
today. The Budget changes subtly alter that balance. Not dramatically. Not overnight. But enough to matter.

When the after-tax value of capital appreciation declines, the relative attractiveness of contractual income inevitably rises.
Investors do not need to change their return objectives; they simply need to look at them through a different lens. A dollar is
still a dollar. The path it takes to reach an investor’s pocket, however, has become more important. This is where private debt
begins to look particularly interesting.

Unlike private equity or venture capital, private debt does not require a favourable exit market. It does not need valuation
multiples to expand. It does not depend on the next funding round occurring at twice the previous valuation. Its returns are
largely earned along the way. Interest payments arrive monthly or quarterly. Fees are contractual. Security packages are
negotiated upfront. The investment thesis is often built around cash generation rather than future optimism. There is
something reassuringly old-fashioned about the model.

For much of the post-GFC era, income was scarce. Investors searching for yield were pushed further and further out along the
risk spectrum. Today, however, higher interest rates have restored the value of contractual cash flows. The tax changes simply
reinforce a trend that was already underway. As a result, we believe private debt now finds itself benefiting from two powerful
currents at once. The first is economic. Higher base rates have increased income generation across many lending strategies.
The second is behavioural. Investors increasingly recognise that a return earned today is often more certain than a gain hoped
for tomorrow.

That does not mean private debt replaces equities, private equity or venture capital. Far from it. The world still needs
entrepreneurs. Businesses still need growth capital. Equities will remain one of the most effective long-term wealth creation
tools. But investing has always been a game of relative attractiveness rather than absolutes. One of the oldest ideas in
modern investing has been that capital appreciation should sit at the centre of every portfolio discussion. The Budget changes
encourage investors to revisit that assumption. Not abandon it. Simply question it.

In doing so, many investors may rediscover an asset class that has spent years quietly compounding returns in the
background. Private debt has never been the loudest voice in the room. It does not produce the spectacular success stories of
venture capital. It rarely generates the headlines of listed equities. It seldom captures the imagination in quite the same way.
Yet in a world where tax policy increasingly favours certainty over speculation, income over appreciation, and cash flow over
promises, its virtues are becoming harder to ignore.

Over the past six months, the divergence between the US Business Development Company (BDC) sector and the Australianprivate credit market has become increasingly pronounced. While both markets operate within the broader private lendingecosystem, structural differences, regulatory settings, and recent market dynamics have highlighted why we believe Australianprivate credit remains an attractive asset class.

In the United States, BDCs have faced a more challenging environment. Rising interest rates initially supported the sector through higher floating-rate loan yields, however this tailwind is now moderating as credit stress begins to emerge across borrower cohorts. A number of BDCs have reported an uptick in non-accrual loans, particularly in sectors exposed to consumer weakness or cyclical demand and this has been further compounded by narrowing net interest margins as funding costs rise and competitive pressures increase.

Additionally, valuation volatility has become a key concern. Many BDCs are publicly listed and therefore subject to daily market pricing, which can deviate materially from underlying net asset values (NAVs). Over recent months, several BDCs have traded at persistent discounts to NAV, reflecting investor concerns about asset quality, future earnings sustainability, and broader credit cycle risks. This mark-to-market dynamic has introduced an additional layer of volatility that is often disconnected from the actual performance of underlying loan portfolios.

Leverage is another structural consideration with BDCs typically employing higher levels of leverage compared to Australian private credit vehicles. While this can enhance returns in benign environments, it also amplifies downside risk during periods of credit deterioration. Combined with exposure to more aggressive lending segments—such as covenant-lite loans and sponsor-backed transactions at higher leverage multiples—the US BDC sector is arguably more vulnerable late in the credit cycle.

A further issue has emerged within non-listed US BDCs around liquidity alignment. Many of these vehicles offer periodic or semi-liquid redemption features while investing in inherently illiquid private loans. Over the past six months, some funds have introduced redemption gates or limited investor withdrawals in response to elevated demand for liquidity. This mismatch between investor expectations and underlying asset liquidity has drawn increased scrutiny, highlighting the importance of structural alignment between fund terms and portfolio characteristics.

In contrast, the Australian private credit market presents a more defensive and stable proposition. The market is characterised by lower leverage, more conservative underwriting standards, and a focus on asset-backed or cash flow-secured lending. Australian lenders have generally avoided the more aggressive end of the capital structure, instead prioritising senior secured positions with strong covenant protections.

With most Australian private credit investments unlisted, and with valuations based on underlying loan performance rather than market sentiment, volatility is reduced. This results in smoother return profiles and minimises the behavioural risks associated with short-term market movements.

Furthermore, supply-demand dynamics in Australia are highly favourable. Traditional bank lending has retrenched significantly due to regulatory capital constraints, creating a structural funding gap for mid-market borrowers. Private credit providers have stepped in to fill this gap, often with strong pricing power and the ability to negotiate lender-friendly terms. Our observation of this dynamic supports the attractive risk-adjusted returns, typically in the high single-digit to low double-digit range.

Importantly, credit performance in Australia has also remained relatively resilient. While there are pockets of stress, particularly in construction and discretionary retail, overall default rates have remained contained. Lenders have benefited from proactive portfolio management, strong borrower engagement, and conservative loan-to-value ratios.

So while the US BDC market continues to offer opportunities, it is currently navigating a more complex and volatile phase of the credit cycle. By contrast, Australian private credit continues to stand out for its structural defensiveness, attractive supply-demand imbalance, and more stable return profile. For investors seeking income with lower volatility and stronger downside protections, the Australian market remains a compelling alternative at this stage of the cycle.

A lot has been written of late on the state of the Australian Private Credit market. From regulators releasing their long-awaited findings into the sector, to market commentators and participants alike, each espousing their views as to what the future holds, what challenges the sector must overcome and who will emerge as the dominant players.

The question that must be asked is why the increase in attention on the sector in the first place. The answer is relatively simple – the Australian Private Credit market is no longer in its infancy but is growing up and like any maturing sector this naturally attracts increased media and regulatory attention.

Private credit has now moved from the periphery of Australia’s lending landscape to become a meaningful and fast-growing source of capital for businesses. Once viewed as a specialised alternative sitting outside the realms of traditional bank financing, the asset class is now gaining institutional traction as companies look for funding options that offer reliability, customisation and speed of execution.

Australia remains a market where banks dominate corporate lending, yet several forces are reshaping the status quo. Regulatory settings, a concentrated banking sector and evolving borrower needs have created space for non-bank lenders to step in with solutions that the major banks are often less able to provide. As a result, private credit is moving from a complementary role to an increasingly central one.

The domestic market, estimated at roughly A$225 billion, is drawing significant attention from both local superannuation funds and offshore investors seeking stable income streams and exposure to Australia’s resilient economy. With more capital entering the space, activity is broadening—from standard mid-market loans to more complex structures that require specialist underwriting and deep engagement with management teams.

In this expanding environment, the lenders most likely to shape the next phase of growth will be those able to pair meaningful scale with strong local insight. The ability to source transactions early, navigate sector-specific nuances and deliver tailored structures has become a key competitive advantage as borrowers seek more sophisticated funding partners.

Importantly, the market is at a stage where flexibility matters. Companies increasingly value lenders that can support them through different phases of their development—whether that involves senior secured loans, hybrid structures, or loans that facilitate the transitioning into syndicated markets when conditions allow. Australia’s still-maturing private credit ecosystem makes this adaptability especially valuable, as businesses often prefer to stay with a single, trusted provider over multiple financing cycles.

Australian deals typically benefit from the market’s relationship-driven nature and relatively limited syndication channels, often resulting in attractive documentation terms and lender protections. These characteristics, combined with the country’s strong legal framework, continue to draw interest from global credit managers and investors alike.

Looking ahead, disciplined underwriting and thoughtful portfolio construction will be essential. The industry has already seen a handful of challenged credits attract media attention, underscoring the importance of rigorous due diligence as the market expands. Growth is likely to remain strong, but avoiding complacency and maintaining a fundamentals-driven approach will be critical as more capital flows into the asset class.

And this is where amicaa is particularly well positioned.

Backed by an international institutional partner, being The Carlyle Group’s US$208bn Global Credit platform¹, amicaa benefits from access to global expertise, sophisticated risk-management practices and established governance frameworks that have been tested across multiple markets and cycles. When applied locally, these capabilities strengthen amicaa’s ability to execute diligently, structure thoughtfully and maintain a disciplined approach as the Australian private credit market scales.

For borrowers and investors, this combination of local presence and global institutional backing offers a compelling proposition: a partner with deep Australian insight, supported by the experience and oversight of a global credit platform¹.

¹Source: Carlyle Credit Income Fund (“CCIF”), Q4 2025 Quarterly Earnings Presentation.

Investors will recall in our March 2025 quarterly report, we highlighted the recent issuance of a questionnaire by ASIC to a number of Private Credit funds aimed at assisting the regulator to delve deeper into the growing Australian Private Credit market. At the time, ASIC announced that their intention was to better understand valuation and conflict of interest practices and more broadly the governance frameworks of mangers operating in this burgeoning private credit market.

ASIC subsequently commissioned a review of Australia’s private credit sector by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams. In this report, titled “Private Credit in Australia”, one of the key premises was to reinforce how private credit complements the banking system and that the enhancement of governance standard will ensure the promotion of confidence and credibility within the sector.

The report did, however, highlight a number of concerning practices, and it was interesting to note the segment of the Private Credit market that was singled out:

“The concentration of Australia’s private credit market in higher-risk real estate construction and development is where we see the greatest area for improvement for investor protection and market integrity. This market segment has . . . less transparency on conflicts of interest, manager remuneration disclosure, and valuations and portfolio monitoring”

For amicaa, what remains clear from this statement is that private credit should not be viewed through one lens. The risk appetite of managers and the returns available for investors can vary significantly depending on the nature of the underlying investments, the experience of individual managers and the governance frameworks under which they hold themselves accountable.

For amicaa, the report was viewed as a vote of confidence in our governance structure and our international relationship with Carlyle Global Credit. Specifically, the report noted the following key observations:

1. The institutional end of the Australian private credit market has imported established market best practices for the benefit of investors
2. Larger, global managers are generally more forthcoming with supplying investors with useful and important information on their investment exposures
3. Overseas headquartered managers exhibited more professional operations with appropriate resourcing and staff skilled in managing investments and experienced in workouts
4. International managers undertake independent quarterly valuations, are transparent in both their valuation methodologies and their disclosures
5. Best practice internationally is for all borrower fees and all interest to be passed directly to investors, as ultimately it is their capital at risk and only transparent management fees should be charged

There is always room to refine and improve governance practices and the frameworks employed should not be viewed as static, but instead should be organic in nature, adapting constantly to what is an evolving private credit market. As the metaphor goes, “a rising tide lifts all boats” and ASIC’s focus on this part of the sector should be viewed as highly beneficial to all participants in private credit markets by supporting sustainable growth, transparency and crucially, investor protections.

While this may cause near term pain and, potentially, consolidation among smaller less sophisticated private credit managers, institutional-grade managers with existing robust governance frameworks based on international best practices are well placed to meet both ASIC’s and investor’s expectations and to instil the requisite confidence that investor deserve when investing in private credit markets.