Private credit has become one of the most sought-after investments over the last couple of years. Once the domain of institutional heavyweights such as endowments, sovereign wealth funds, and billionaire family offices, private credit is now being pitched to everyday investors, offering the allure of double-digit yields and "exclusive" access to what has traditionally been a hard-to-obtain investment.
But with rising popularity comes rising responsibility by investors to understand both the opportunity and the risks involved, and how investors can approach investing in this new world. We believe a barbell approach, pairing high-quality liquid fixed income alongside high-quality private credit managers, can help provide stability and selective exposure to enhanced risk-adjusted income opportunities.
Key Takeaways
- Private credit has rapidly grown from a niche asset class to a multi trillion-dollar global market, with a wave of new funds targeting everyday investors.
- While the asset class offers attractive yields, it comes with trade-offs like limited liquidity, transparency, and untested performance in a credit crisis.
- A diversified approach that pairs private credit with liquid, high-quality liquid fixed income could help manage risk and smooth portfolio outcomes.
What is Private Credit?
Private credit refers to non-bank lending where investors lend directly to borrowers without going through public markets. This is common for borrowers who cannot get traditional financing from banks, such as real estate developers, infrastructure projects or small-to-middle market companies looking for growth capital.
Unlike traditional bonds, private credit investments are not traded on public exchanges like the share market. They’re negotiated privately and come with limited transparency. The attraction lies in the ability to earn a premium, often referred to as the "illiquidity premium" over comparable public credit for taking on the additional risks.
Why has Private Credit Risen in Popularity?
Private credit has become a buzzword in investing circles, featured in investment conference panels, podcasts, and financial headlines almost daily. Google search trends show a surge in interest, reflecting how this once-niche asset class is now firmly in the spotlight.
Globally, the private credit market has exploded since the Global Financial Crisis (GFC). Back in 2008, the asset class was relatively niche, with the industry worth US$200 billion. Today, it has grown into an estimated US$2.5 trillion global market.1
The post-GFC regulatory crackdown on bank lending created a void in the lending market, as most banks cut their commercial real estate exposures. Private credit managers stepped in to fill that gap. More recently, interest rate volatility and a growing appetite for yield have all helped fuel demand for the asset class.
In Australia, while smaller in scale, the private credit industry currently only accounts for around 2.5% of total business lending, but the industry is growing quickly.2 Fund managers have been quick to capitalise on this, with a flurry of new vehicles launched targeting private credit, with around 50 investment funds being launched since 2023. Funds in this category have catapulted to managing over AU$40 billion of Australian investor capital. While still trailing the AU$280 billion allocated to fixed income funds in Australia, they are closing the gap.3
The ETF industry has taken notice too. Some ETFs in Australia provide access to listed private credit strategies, typically via Business Development Companies (BDCs), which are US-based publicly traded investment companies (such as Blackstone, KKR, and Ares) that lend to small and mid-sized private businesses. Some overseas ETF providers have tried packaging illiquid, unlisted private credit strategies into ETFs, but adoption has been limited. This highlights the challenge of liquidity mismatch - how a liquid ETF can hold and fairly value a portfolio of inherently illiquid private credit assets.
What are the Risks of Investing in Private Credit?
Regulators are paying closer attention to private credit, with the International Monetary Fund (IMF) warning of vulnerabilities stemming from its lack of banking-style oversight and calling for proactive regulation.4 Locally, ASIC is conducting surveillance and industry engagement to assess potential risks to market integrity and investor outcomes.5
Investors may want to consider the following risks before investing in private credit:
- Liquidity Risk - Private credit is, by design, illiquid. In a downturn, when you might want to exit, there may be no buyers or even an option to sell. This lack of liquidity can compound losses if markets seize up or underlying borrowers face stress.
- Limited Transparency - Unlike index-based ETFs that disclose their underlying holdings regularly and trade in real-time, private credit investments are valued infrequently, often quarterly, and rely heavily on manager judgment. It’s almost the equivalent of someone marking their own homework. This can lead to a disconnect between reported Net Asset Value (NAV) and true market value, especially during times of stress. Some private credit funds don’t provide crucial information loan arrears, default rates, or detailed portfolio breakdowns, making it difficult for investors to assess underlying risks and the true health of the loan book. There has also been evidence where private credit funds have been reluctant to write off badly performing loans.6
- Track Record in a Crisis - Much of the recent growth in private credit has occurred during a period of benign default rates, positive economic growth, low interest rates and an abundance of capital flowing through the financial system. Many private credit funds haven’t yet been tested in a full-blown credit downturn. It's unclear how they’ll perform when borrowers begin to default.
- Embedded Costs and Incentives - Some new private credit products come with “stamping fees” or selling fees paid to underwriters or platforms promoting the product. While stamping fees were banned for listed investment companies (LICs) and listed investment trusts (LITs), they can still apply to other financial products like wholesale funds. These fees can dilute investor returns and also raise questions about conflicts of interest.
During the April share market volatility, some private credit funds reported little to no decline in value, even as publicly listed markets fell as much as 20%. While private credit managers often frame this as a feature of the asset class, not a bug, it should still prompt caution around whether valuations reflect true market conditions or simply the limitations of infrequent, manager-assessed pricing.
How to Balance out Private Credit?
Private credit can have legitimate role to play in a diversified portfolio, particularly for investors seeking income or looking to access return sources less correlated with traditional equities or bonds. There are well-established managers with robust underwriting, risk management, and experience across cycles. But not all players are equal, and as Warren Buffett famously said, “Only when the tide goes out do you discover who's been swimming naked.”
One way to balance the risk is through a barbell approach: pairing private credit exposure with high-quality, liquid fixed income assets. These could include investment grade corporate bonds, Australian banking credit, or even looking at liquid high-yield bonds.
While many private credit funds are concentrated in the real estate sector, other fixed income options might help add layers of sector diversification. Often-labelled “boring” or “unsexy”, corporate bonds can provide exposure to a broader range of industries such as financials, healthcare, and energy while offering greater liquidity and transparency. These types of bonds only have a low single-digit exposure to the real estate industry.
Even if concentrated in a single sector like Australian banking credit, this exposure is to some of the most well-capitalised and tightly regulated financial institutions in the world. Overseen by the Australian Prudential Regulation Authority (APRA) and rated by independent credit agencies, these banks offer a level of transparency, oversight, and resilience that can serve as a reliable counterbalance to the risks inherent in private credit. Over half of the senior and subordinated bonds in Australia are rated A+ or higher. In contrast, many private credit loans, while sometimes unrated by independent rating agencies, would have loans in their portfolio that would fall below investment grade. Investors should pay close attention to the underlying loan quality and borrower profile.
While banking credit or high-quality corporate bonds may not offer the eye-catching returns of private credit, they offer something just as valuable: daily liquidity, clear pricing, and transparency. They also act as a ballast in times of volatility, allowing investors to rebalance or access capital without being locked into multi-year terms with redemption locks.
Conclusion
Private credit brings the allure of institutional-style returns to everyday investors. But with complexity, illiquidity, and opacity comes a need for greater due diligence and portfolio construction discipline. The temptation of high yields shouldn't overshadow the importance of understanding what you own, how it’s priced, and how it fits within your broader financial objectives. Any investment offering the illusion of safety with outsized returns should give any investor to exercise caution. Whether it’s marketing alchemy or not, investors should not brush past the inconvenient truths and risks of illiquidity, leverage and opacity.
By balancing private credit with liquid, high-quality instruments, investors can enjoy some of the upside without taking on more risk than they realise. In a world of growing access and innovation, prudence still pays dividends.
