Private credit has gained significant traction among investors seeking enhanced yields, but careful consideration is necessary to fully understand the asset class and the associated risks.
At its core, private credit refers to lending facilitated by non-bank institutions, with its application varying by region. In the United States, private credit primarily serves mid-market companies, whereas in Australia, it is predominantly used for real estate development financing. Retail investors typically gain exposure to this asset class through private credit funds, which are often structured as unlisted vehicles.
The sector has experienced rapid expansion, with numerous new funds emerging. According to estimates from the Reserve Bank of Australia, non-bank lenders now provide more than 10% of business financing. Well-managed private credit funds can offer strong, uncorrelated, and regular returns while enhancing diversification within an investment portfolio. However, as the market grows and more funds target retail investors, the complexity and risks inherent in private credit investments are becoming more pronounced.
For investors considering private credit, selecting a fund manager with a proven track record in managing these funds is crucial. Transparency regarding portfolio composition is essential, allowing investors to make informed decisions. Access to clear and comprehensive details about the portfolio should be readily available through the fund manager’s platform. While regular monitoring may not be necessary, the ability to review underlying assets when needed is an important factor in assessing investment suitability.
Like all asset classes, private credit investments carry a direct correlation between risk and return. More conservatively managed loan portfolios typically yield around 9%, whereas higher-yielding investments offering returns closer to 15% are generally associated with increased risk. Investors should evaluate their risk tolerance and portfolio allocation accordingly.
The rise of private credit has also drawn the attention of regulators. The Australian Securities and Investments Commission (ASIC) has called for a national discussion on the growth of private capital markets, including private credit. Over the past decade, private credit in Australia has expanded five-fold, reaching an estimated $200 billion in funds under management. Increased regulation in this space is expected to enhance transparency and investor protection, fostering a more structured investment environment.
Private credit can be an effective tool for portfolio diversification. Investment strategies within the sector may include lending for property development, corporate financing, or extending credit to self-employed individuals who may not meet traditional bank lending criteria. Some funds employ a diversified approach, combining various forms of private credit exposure within a single portfolio.
Investors must also recognize the fundamental illiquid nature of private credit investments. Given that these assets are structured as loans, they can take months to redeem, making them more suitable for investors with a long-term investment horizon. For retirees seeking income generation, an allocation to private credit can enhance cash flow due to its higher yields relative to traditional fixed-income investments. Likewise, superannuation investors with a longer time horizon may benefit from the higher returns, provided they can accommodate the liquidity constraints.
A thorough assessment of a private credit fund’s lending practices and risk management capabilities is imperative. In cases where loans default, fund managers should have the expertise to manage the underlying business assets effectively. While such instances are relatively rare, they do occur, as seen in recent cases where private credit funds assumed control of distressed assets due to loan defaults.
Unlike investment-grade government bonds, private credit assets generally lack ratings from major agencies. The trade-off for this is the enhanced yield they offer. Given these characteristics, private credit may serve as a valuable complement within a diversified investment portfolio, provided investors are comfortable with the associated risks and liquidity considerations.
If you would like to learn more about Private Credit, or invest into Private Credit, please reach out to Cadre Capital Partners and we will be able to assist in anyway possible.
