Private credit—once the preserve of high-net-worth investors with a strong appetite for risk—has entered the mainstream investment conversation. Globally, the sector has grown to around US$1.7 trillion (A$2.6 trillion) in lending, and in Australia it now represents approximately $40 billion, or 2.5% of total business debt. This rapid expansion is reshaping the credit markets and creating new opportunities for both institutional and retail investors.

In recent years, the market has opened up beyond traditional wholesale channels. Investors can now access private credit via exchange-traded funds, direct products, or listed investment companies. While this has improved accessibility, the increasing flow of capital into the sector has started to put downward pressure on yields. This is partly due to a lower global interest rate environment, but also a natural result of higher demand for the asset class.

What is Private Credit?
Private credit refers to lending provided by non-bank entities, with the debt not traded on public markets. The lenders are typically asset managers who source funds from investors and allocate them to businesses in need of financing. Returns are generated primarily through interest payments.

The spectrum of private credit is wide, ranging from bilateral deals between a single lender and borrower to large syndicated loans involving multiple lenders. Historically, private credit targeted riskier borrowers—those who could not access traditional bank finance—offering significantly higher yields as compensation for the increased risk and illiquidity.

Why Yields Have Been Attractive
Over the past decade, the average yield on U.S. direct lending has been significantly higher than government bonds or even high-yield corporate debt. This yield premium has made private credit appealing to investors willing to accept lower liquidity and higher default risk.

In Australia, however, the sector is evolving. A growing portion of private credit now resembles traditional bank lending, such as residential mortgage-backed securities, which can offer more predictable returns and lower default risk. This shift has brought the average risk profile of the sector down, broadening its appeal.

The New Risk-Return Balance
As the private credit market matures, the yield premium over public credit has narrowed. While this can make the sector less compelling for those purely seeking higher returns, it also signals a lower overall risk profile and the potential for more sustainable growth. Increased accessibility—particularly through listed investment vehicles—may eventually see private and public credit markets operate more similarly in terms of liquidity and pricing.

Points for Investors to Consider
For investors evaluating private credit, the key consideration remains the quality of the underlying loans. This involves understanding the creditworthiness of borrowers, the level of diversification within the portfolio, and the degree of liquidity offered by the investment structure. While higher yields may be available in riskier segments of the market, these must be weighed carefully against the increased potential for default.

Private credit as a valuable diversifier within a well-constructed portfolio, offering the potential for attractive income and relatively low correlation to traditional asset classes. However, with the sector evolving rapidly, due diligence is essential. Understanding where a particular fund or product sits on the risk spectrum—and whether its yield is justified—is critical to achieving the right balance between return and capital preservation.

If you would like to explore Private Credit further, please reach out to Cadre Capital Partners.