The four Australian major banks have a tight grip on market share for commercial lending in New Zealand through their local offshoots. In fact, the lending market is arguably more concentrated than in Australia as fewer international banks have established a significant balance-sheet presence in the smaller jurisdiction.

However, Reserve Bank of New Zealand (RBNZ) capital requirements for domestic banks published in December 2019 could be a game changer. These increased the minimum required total capital ratio for domestic systemically important banks to 18 per cent of risk-weighted assets, from 10.5 per cent. Some market participants expect one of the consequences of the new rules is that the major banks will be forced to retreat from lending that becomes less capital-efficient – specifically in the subinvestment-grade space.

Effectively, subinvestment-grade companies will have to generate implausible returns for banks to justify the extra capital impost, Paul Carman, founder at Private Capital Group New Zealand (PCG) in Queenstown, tells KangaNews.

“The direction of travel is clear,” he says. “Capital changes will create a regulatory arbitrage disadvantage for banks in lending to subinvestment-grade companies and will reinforce capital allocation to investment-grade credit.”

There is significant opportunity for specialist lenders to fill the gap. Set up in late 2019, PCG plans to launch its first fund in September with roughly NZ$400 million (US$280.4 million) in assets under management. It expects to launch its domestic-portfolio investment entity a few months later, having been in extensive discussions with domestic investors over the past year, Carman says.

However, the New Zealand institutional market’s unfamiliarity with the private-debt asset class – specifically the lack of visibility about liquidity and valuation – is a significant hurdle to attracting investment.

While the New Zealand private-debt market is in its infancy – Carman estimates it is more than five years behind where the Australian market has developed to – there are green shoots and change is happening faster than this timeline suggests. “Comfort with the asset class will come to investors once they make the first allocation with a preferred asset manager. We are in an embryonic stage with domestic investors, but it is all happening now. I think it will accelerate in the next 12-18 months rather than 3-5 years.”