With the share market close to record highs, and wariness about property valuations and bond markets, many investors are looking at private credit as an alternative investment.
Private credit is a private capital strategy in which investment managers and institutions invest by making private, non-bank loans to companies that need financing. These loans are not available via publicly traded markets, and they generate returns for investment managers and their private debt fund investors via interest payments.
The asset emerged as a prominent investment strategy in the aftermath of the Global Financial Crisis in 2008. This period marked a significant shift in the lending landscape, with traditional banks tightening their lending standards and reducing exposure to riskier loans. This gap in the market paved the way for private credit funds to become key players in providing alternative sources of lending.
Since 2008, private credit has matured rapidly and is enjoying “a moment” as an attractive high-income product. From less than $50 billion in funds under management (FUM) in 2015, Australian private credit has achieved a compound annual growth rate of around 23% since to reach almost $200 billion in 2023.
It has been one of the most resilient asset classes through the current cycle of rising interest rates. Portfolios have performed well, and returns have been highly competitive, with private credit funds typically setting their return objective around 8% to 12% p.a while promoting their relative “low risk”. Investor appetite for private credit strategies is strong and managers in the space have continued to grow market share.
But we remind readers that risk and return are flip sides of the same coin, and to achieve high single digit or better returns, these funds by their nature are taking on more risk than their big bank counterparts. Furthermore, a lack of regulation in private credit, and what is, in some instances, a lack of transparency about how money is invested, presents risk. Some managers offering high returns from private credit funds might have only a few years’ experience, or might have taken some short cuts in their due diligence of creditor firms. Some borrowers might not have a track record of coping with a recessionary environment.
As always, is therefore important to conduct the necessary due diligence and consider the risks associated before investing in any asset.

Source: AFR