Authored by Sunny Xu (Investment Manager, Asset Backed Finance)
Executive Summary
- Five years ago, we argued that credit is not a market share game. Unlike most industries, lenders can always grow by taking more risk or accepting lower returns. The problem is that this growth often looks successful until losses emerge.
- The last five years have tested that thesis. Rising interest rates exposed underwriting standards, forcing many lenders to reassess their loan books, risk appetite and growth strategies.
- The lesson from listed lenders is clear. Businesses such as Plenti, MoneyMe and Prospa have shown that maintaining growth while preserving credit quality is far more difficult than it appeared during the low-rate era.
- Private credit is now facing similar challenges. Capital flowed rapidly into the sector, competition for quality opportunities increased, and regulators have highlighted governance and disclosure concerns across parts of the market. The market is now digesting this.
- Growth is not the problem. The problem is pursuing growth at the expense of underwriting discipline. In lending, growth should be the result of strong credit decisions, not the objective itself. For those that get it wrong, the capital they need to support ongoing lending can disappear.
- At GCI, this belief has shaped our approach since inception. We have prioritised credit quality ahead of growth targets allowing us to maintain committed capital to support our borrowers through changing market conditions.
Bottom line: Credit was not a market share game in 2021. The past five years have reinforced that view.
Five years ago, we wrote that credit is not a market share game.
It was not the conventional view.
Our argument was simple: unlike most businesses, lenders can always grow by taking more risk or accepting lower returns. The problem is that this growth looks successful right up until losses begin to emerge.
The five years since have been an unusually complete stress test of that idea: interest rates went from near zero to their highest level in more than a decade, inflation proved stickier than almost anyone forecast, and an enormous amount of capital poured into private markets and, more recently, into AI.
GCI has traded continuously through all of it. This is a good moment to revisit what we said, update the examples, and explain why we think the argument matters more today than it did in 2021.
Revisiting why lending is different
In many industries, winning market share can create sustainable advantages.
Consider the example of a consumer products business (e.g. food and beverage) seeking to grow market share. Greater scale can deliver better purchasing power, improved asset utilisation, lower unit costs, stronger leverage with channel partners and greater investment in marketing and innovation. As these benefits compound, the flywheel reinforces itself, creating a durable competitive advantage.
Now consider a software business seeking to grow market share. More users provide feedback that improves the product, support greater investment in development and marketing, and attract complementary products that increase customer stickiness. Over time, these benefits strengthen competitive advantage, improve profitability and enhance shareholder returns.
For the types of businesses outlined above, a failed campaign to win market share is typically not terminal. If a business overspends on marketing or other operating and capital expenses without achieving its growth objectives, there is usually time to course correct. Budgets can be tightened, assets sold, and strategic pivot can be made. While not ideal, this allows management and shareholders time to adapt. The product can still be sold.
In contrast, a lending business does not have that luxury. The demand for credit is effectively unlimited – so a lender can always win market share by under-pricing the risk for the borrower. This is different from other businesses, which may try to undercut their competitors by selling at a lower cost to win market share. Unlike consumer products or software businesses, where selling a product at a lower price may mean accepting a lower margin, in lending, you don’t just risk losing the margin; you risk losing the equivalent of your margin plus your cost of goods sold plus your inventory.
What do we mean by this?
For a lending business, the input product into the business is the same as the output product – capital. And “suppliers” of a lending business are completely different to suppliers of other businesses. For instance, a supplier of corn to a food manufacturer will have no problem continuing to supply if the food manufacturer decides to sell its finished product at a reduced margin to win market share. Once the supplier has delivered its product, it is promptly paid and moves on. It has no future exposure to the margins of the business or to the business’s underlying customers.
However, capital suppliers to lending businesses have their capital at risk for the full duration of the end customer relationship. Suppliers of capital are therefore forced to care about the margin the lending business is earning and the risk being taken to produce those margins. In our experience, suppliers of capital do not continue to supply capital, and can be very fickle, once meaningful distress is detected in a lending business’s loan book. The moment a capital supplier to a lending business decides to pull their funding lines, such as when credit losses emerge and start to become material, there is no more input for the business and therefore no more “product”! Not only does the lender lose its margin and the costs of the product it sold, it also risks losing its entire inventory and is therefore unable to make any more product for sale.
Furthermore, with lending businesses that offer long-term finance or products with a less frequent repayment profile, problems can remain hidden in portfolios for extended periods. By the time errors are identified, course correction can be impossible and the business can implode. Strong credit businesses require effective origination strategies, robust credit underwriting models, a differentiated customer value proposition, and finally, a competitive cost of capital, or “supplier”. (We have previously written about the four key elements that non-bank lenders need to succeed: Show me the Equity – the winning formula for Non-Bank Lenders.)
In our experience, for lending businesses, the hard part is never finding borrowers who want money. The hard part is finding borrowers who will pay you back – which requires defining a target market of borrowers that meet your underwriting standards. As any experienced lender knows, it is very easy to hand out money and much harder to get it back!
The world has changed in the past five years
The biggest shift since 2021 has been the end of the zero-interest-rate era. When this tide went out, it revealed underwriting standards. Borrowers who could comfortably service debt at near-zero rates began to struggle when rates rose by four percentage points, while lenders that had grown rapidly during the cheap-money era were forced to reassess both their existing loan books and the quality of new lending.
The response from the industry was telling. Many non-bank lenders moved up the credit curve, targeting stronger borrowers with more stable incomes, proven repayment histories and lower leverage. At the same time, many shifted away from unsecured lending towards secured products, particularly vehicle finance. The transformation of MoneyMe and Plenti is instructive – since 2021, both have materially increased the proportion of their loan books represented by secured lending, while reducing their relative exposure to unsecured personal loans. These businesses recognised that preserving credit quality in a higher-rate environment required more than simply tightening approval criteria; it required changing the underlying risk profile of the loans they originated.
Prospa provides another example of the pressure created by the changing environment. In 1H FY24, the company wrote off 12.9% of its loan book before subsequently tightening its risk settings and shifting strategy. The lesson was not unique to Prospa. Across the sector, lenders were forced to rethink how risk was priced and where they were willing to deploy capital.
The challenge with moving up the credit curve is that these are the same customers the major banks want. As more lenders compete for prime borrowers, acquisition costs rise and margins come under pressure. Success becomes less about growing quickly and more about maintaining underwriting discipline.
The equity market has shown how difficult that balance can be. Even companies that adapted successfully have seen their valuations reset. Plenti listed in September 2020 at $1.66 per share and has since grown its loan book beyond $3 billion, yet its shares trade around $0.76. MoneyMe listed in December 2019 at $1.60 and now trades at eight cents, despite a loan book exceeding $2 billion and a return to normalised profitability. Prospa fared worse. After listing in June 2019 at $3.78 per share, and after years of tightened credit settings and falling origination volumes, it was taken private in 2024 at $0.45 – a decline of almost 90% from its issue price.
The point is not that these are poorly run businesses. Plenti and MoneyMe have executed well, moving up the credit curve, shifting towards secured lending and bringing credit losses back under control. The point is how much harder the new era has made it to compete. Growth that once earned rich revenue multiples now has to be funded more expensively, defended against banks chasing the same borrowers, and delivered while carrying the burden of lofty historic valuations when credit was written in easier times.
Is Private Credit the next lesson?
In 2021 the issues were mostly visible in public markets. That is increasingly no longer the case. Australian private credit has roughly quadrupled over the decade to around $200 billion. While banks previously dominated credit markets, increasingly strict lending policies and legacy problems have left a void that has been filled by private lenders. Where private credit was a term few outside finance used in 2021, it is now dominating headlines – and regulators have taken note.
ASIC’s 2025 review found questionable practices across the sector, including weak fee and portfolio disclosure, poor handling of related-party transactions, questionable investor target market, and poor valuation practices. Its surveillance work has already produced stop orders. Such practices are symptomatic of an environment where inexperienced and unsophisticated private credit managers were able to raise funds easily when capital was abundant. The market is now learning that finding deal flow was easy while capital was plentiful and undiscerning – but finding good deal flow in such an environment was hard. For private credit managers that earn fees on capital under management, there is always the temptation to deploy capital into riskier deals when capital is abundant. But when deals go bad and investors demand their money back, capital flows can reverse quickly. Even worse, when investors wanting their money back can’t get it because funds are gated for redemption, it becomes exceedingly difficult for funds to raise new capital to replace the capital seeking to leave. As we have said before, anyone can lend when the tide is high. The real test is whether you have the capital to keep lending when the tide goes out.
What the cycles have taught us
The lesson from the past cycles is not that growth is bad. Growth is essential for any successful lending business. The lesson is that growth for credit businesses can never be the sole objective, as it is often easiest when standards are loosest, competition is strongest and capital is most abundant. The challenge is maintaining discipline when those conditions exist, because the consequences of getting it wrong may not become apparent until years later.
At GCI Funds, this belief has shaped our approach since inception in 2015. We have supported multiple borrowers through multiple market environments while prioritising credit quality ahead of growth targets. When opportunities have been scarce, we have been willing to hold assets broadly flat rather than “deploy” capital simply for the sake of expansion. We believe that discipline has helped us navigate the recent cycle while continuing to support borrowers and investors alike. With committed capital, including more than $250 million raised in the first half of 2026, we are well placed to support good borrowers when other lenders are pulling back.
Credit was not a market share game in 2021. The past five years has reinforced that view. Please reach out if you are seeking a funding partner that understands your business and has the right experience to support you.