Arrowpoint joint managing directors Andrew McDonnell and Michael Kurland said the phasing out of these bank hybrids aims to improve the effectiveness of bank capital in a crisis.

The $43 billion bank hybrid market will be phased out between now and 2032, APRA said.

“That will leave a big gap in the market for income products for investors as hybrids were very popular for the income they provided. But with APRA shutting down that market, this could turn investors’ attention to private credit, which arguably offers superior risk-adjusted returns,” McDonnell and Kurland said.

The Reserve Bank of Australia recently estimated that the private credit market is valued at almost the value of the hybrid market, around $40 billion, and that private credit has grown faster than business debt over the past few years.

“With strong demand for credit and the number of opportunities rising in the private credit market, this could see the market increase 20% close to $50 billion by the end of 2025,” McDonnell and Kurland said.

“The large funding gap that exists between the credit the big banks can provide and the strong and growing demand from corporate borrowers will help drive that growth.”

New data from the Reserve Bank of Australia revealed that demand for business credit is growing more rapidly than other forms of credit in Australia, including home lending and personal credit. Business credit rose 8.3 per cent for the year ended 31 October 2024, compared to 6.5 per cent for the year-earlier period and compared to 5.3 per cent for housing lending and just 2.2 per cent for personal credit.

“Business lending growth is accelerating despite the rise in interest rates in recent years and this is helping to drive the growth of corporate lending. The supply of capital to good businesses is very low versus demand. That represents a compelling opportunity for investors who can harvest an attractive premium from corporate lending,” McDonnell and Kurland said.

Private corporate debt provides strong risk-adjusted returns with low volatility and a focus on capital preservation.

“Should we see an increase in market volatility in 2025, this asset class provides a high yield with regular income payments and a low correlation to other asset classes, providing diversification to investors’ portfolios.”