Stephen Martin: I'm the Head of Asset-Backed Securities for Challenger Investment Management. I've been with Challenger for 17 years.
Chris Whitcombe: I’m Head of European & US ABS at Challenger Investment Management, and I’ve been with Challenger for four years, based in the London office.
Stephen: Private credit is experiencing significant momentum. In some ways, it feels like we have been engaged with it long before it became a widely recognised trend. What’s driving this surge is a combination of structural shifts in the financial landscape.
Around the world, banks are either shrinking their balance sheets or deleveraging, which creates a gap in the market that alternative credit providers are stepping in to fill. At the same time, traditional borrowers are increasingly looking for faster execution, more flexible terms, and credit partners who truly understand their businesses. These trends are particularly pronounced in the US, where some of the largest private credit lenders have seen remarkable growth in response to these changes.
"Australia’s private credit market is slightly smaller, but still substantial at over
$200 billion, even before counting areas like asset-backed finance (ABF)."
We often talk about the “rise and rise” of private markets, but it’s important to note that the forces behind this aren’t cyclical – they’re structural. The retrenchment of the banking sector and the slow, steady march of regulation aren’t trends that will suddenly reverse. This isn't a temporary window that opens and shuts; it’s a lasting realignment.
In Australia, we’re seeing the same patterns: bank deleveraging, borrowers seeking longer-term and more adaptable capital partners, and a regulatory environment that doesn’t always align with what borrowers need. Private credit is stepping in to meet those needs.
Australia’s private credit market is slightly smaller, but still substantial at over $200 billion, even before counting areas like asset-backed finance (ABF), which we also focus on. The US tends to move first, fastest, and with the most intensity. That same story is unfolding again, but we see meaningful opportunities in Australia that are just as compelling, if not more sustainable, in the long term.
What we appreciate about the Australian market is that while competition has increased as the market has grown, it hasn’t reached the same level of intensity as seen in the US or parts of Europe.
Chris: Our investment approach reflects a fixed income mindset. We’re disciplined, value-driven investors who seek additional premiums for taking on complexity - that’s the core of our framework.
We focus on three key areas: corporate lending, real estate debt and asset-backed finance (ABF). We see the opportunity in private investments as building in an illiquidity or complexity premium over similarly rated public market investments, for example, over public corporates for private corporate lending or over public Asset Backed Securities (ABS) for private Asset Backed Finance (ABF) lending. By accessing opportunities through private markets, we find that we can build an attractive return profile with additional structural protections around the downside.
Across private markets, the key is having the capability to evaluate these opportunities properly. That means committing the time, developing strong relationships, having the experience and expertise within the investment team, and maintaining robust governance and oversight. With the right framework, these investments can be powerful components in building a resilient, high-performing portfolio.
"In the smaller-scale, private space, where many new players are entering,
there’s a risk that investors may be caught unprepared."
Stephen: Taking on the risk aspect of your question, one area is how we manage risk, especially in investments of a smaller scale. While large, granular portfolios are appealing, the real test in private markets is how you manage tail risks within a portfolio and handle a situation when something goes wrong. The ability to step in, manage a portfolio through to exit or realisation, is critical.
In the smaller-scale, private space, where many new players are entering, there’s a risk that investors may be caught unprepared. That’s why we’ve made strategic investments in infrastructure, for example, ensuring that we have the full capability to service these assets.
We're not just passive securitisation investors. We have the capability, willingness, and financial strength to engage directly with private opportunities and manage them through challenges if they arise. That ability to "work things out" is something we see as essential in this market.
Stephen: We’ve been having a lot of conversations with clients, particularly around ABS, because it offers several compelling features. ABS tends to have a short credit spread duration, is highly rated, and serves a defensive role in portfolios. This helps reduce overall volatility.
We're encouraging clients to think about ABS as a replacement for longer-dated corporate bonds. It allows for the separation of interest rate duration risk from credit risk. By isolating those risks, investors can build more stable and resilient portfolios.
In many cases, ABS provides exposure to complexity or structural nuances that deliver additional yield, which some call a complexity premium. Importantly, it allows interest rate sensitivity to be managed elsewhere in the portfolio, making ABS a strategic tool in constructing lower-volatility, more defensive allocations.
This approach is gaining traction, especially among insurance investors. We’ve seen this trend develop over time, and it's continuing to grow as more institutions recognise the benefits.
Chris: We saw the strength of the public ABS market during the LDI crisis, when a significant volume of ABS was traded during that period. Its floating-rate nature and structural characteristics helped attract buyers, even as other fixed income instruments - like government bonds - faced a more challenging trading environment given their interest rate exposure and large, volatile moves in interest rates at the time.
At a time when liquidity was tight and volatility high, especially in government bonds and corporate credit, ABS played a crucial role in raising capital. This was again evident this year, although to a lesser extent, during the period in April after the tariff announcements, when volatility again picked up.
"Despite the market having matured since before the global financial crisis,
ABS continues to carry a lingering perception of outdated risk."
What stood out during both periods were some of ABS’s lower volatility characteristics, compared to longer-dated fixed-rate markets, especially in the US and Europe, where shorter duration and floating-rate structures are more common. These qualities made ABS a useful asset class during a period of significant market stress - a clear demonstration of its defensive value in a well-constructed portfolio.
Stephen: There’s still an education gap when it comes to asset-backed securities (ABS). Despite the market having matured significantly since before the global financial crisis, ABS continues to carry a lingering perception of outdated risk.
This disconnect presents an opportunity. Not everyone fully understands the asset class or is willing to take the time to explore it. But for those who do, there are attractive and often overlooked investment options available.
As the market continues to evolve, closing that knowledge gap will be key to unlocking broader participation and stronger outcomes.
Stephen: One of the factors shaping the Australian market is its relatively smaller size, which makes deep local relationships critical. Building large or granular portfolios requires frequent touchpoints across the market. That’s created a kind of moat for more established players like Challenger, who already have long-standing connections and are active across various segments.
Whether it’s corporate lending, where we engage with private equity sponsors of borrowing businesses, or asset-backed finance, where we’ve partnered with non-bank originators, these long-term relationships, many dating back to the GFC, give us a strong origination advantage. This has naturally limited the ability of new entrants to break into the space.
Another important dynamic is Australia’s success in using securitisation as a core lending and funding tool. Unlike other markets where this has taken longer to develop, Australia moved quickly. The major banks dominate domestic lending, much like their counterparts in Europe and the US. However, over the past five years, they’ve divested a number of large, non-core portfolios, particularly in residential mortgages.
This shift has fuelled rapid growth in the non-bank sector, driving a surge in securitisation. Last year, public issuance hit a record $80 billion AUD - not just a post-GFC high, but an all-time record. For context, that volume is comparable to the €80 billion seen in the European ABS market, which puts Australia’s scale in perspective.
The growing non-bank sector has also driven growth in Australia’s private securitisation market. These non-banks require warehouse facilities and private securitisations to accumulate and finance loan portfolios until they reach a size suitable for public markets. That infrastructure has evolved rapidly.
Over the past five years, this has led to a step change in the breadth, scale, and diversity of the Australian credit market.
Stephen: One insight from managing global portfolios is how different shocks can impact various sectors and regions differently. For example, the impact of tariff proposals has affected markets in different ways and to different degrees.
In Australia, some sectors have been more secondary compared to the US and even Europe. This highlights the importance of granularity and diversification.
Across our client portfolios, having exposure to diverse regions and sectors has been invaluable in navigating turbulent times. Seeing diversification play out in real terms as different economies and industries respond differently has been a key strength.
"We’re also seeing increasing evidence of the different roles ABS can play in
portfolio construction from the perspectives of spread pick up."
Chris: Global policy risk and potential market volatility risks continue to remain elevated. What we are continuing to find compelling in this environment are the defensive volatility-absorbing characteristics of ABS.
In times of increased interest rate volatility, the floating rate profile can be particularly valuable.
We’re also seeing increasing evidence of the different roles ABS can play in portfolio construction from the perspectives of spread pick up, increasing liquidity, diversification and lower volatility.
Stephen: We have continuous conversations with non-bank lenders and their treasurers, who are our counterparties and partners in the private asset-backed finance business. The lending targets they currently have are aspirational, which indicates a strong desire for continued lending growth.
While we may not see record issuance this year compared to last - partly due to factors like Liberation Day - the opportunity set in Australian asset-backed finance, both public and private, is expected to grow and expand over the next few years.
There’s also increased innovation among non-bank lenders. These products vary widely, and interestingly, not all fit neatly within securitisation frameworks. Some offer strong risk-adjusted returns but don’t appeal to public securitisation markets for various reasons.
One area we’re focusing on is alternative financing forms to securitisation, especially whole loan funding - buying entire mortgage loans, leases, or similar assets directly onto the balance sheet. While this approach is well established in the US and Europe, it has been less common in Australia.
We’re excited about the opportunity whole loan funding presents here. When large institutional clients are looking to deploy significant capital in hundreds of millions of dollars in size, whole loan finance makes sense due to its scale and flexibility.
Chris: Despite increasing ABS volumes over recent years, some of the more traditional mortgage and corporate lending markets have seen relatively lower volumes, which we expect to normalise over time.
"As the market normalises, we expect a gradual return to more typical
asset types and volumes in these more traditional lending sectors."
The pandemic and its aftermath have had several lasting effects on lending over the past five years. Combined with the rise in interest rates, markets are now adjusting to a new normal of relatively higher rates compared to previous years.
The impact has been gradual. We’ve seen reduced M&A activity in the US corporate lending market, along with subdued origination and purchase activity across developed economies. These economies are slowly recalibrating to higher interest rate levels.
As the market normalises and new initiatives pick up, we expect a gradual return to more typical asset types and volumes in these more traditional lending sectors.
