With the share market potentially entering a period of heightened volatility, now is the time to consider rebalancing your portfolio and taking some of the profits you’ve made after the ASX200 delivered annualised total return of 10.63% over the past three years.
Global equities have experienced one of its best bouts of performance in recent years, up 78.7% over the past three years, or over 20% on an annualised basis.
Parking some of your profits in private credit funds — potentially paying attractive monthly returns — should be infinitely more attractive than sitting in cash.
Staying in cash would be expensive exercise as you’ll get precious little on your money in return, while the share market is likely to keep going up.
Alternatively, you could park some of your profits into a private credit fund paying between 7.5% and 9.5% per annum, paying cash monthly.
Your opportunity cost is a lot lower because you’re still be getting the potential for a very attractive return while you’ve reduced your exposure to the share market.
However, given that you’re always going to need growth, exiting the share market completely generally isn’t regarded as a good idea.
Gap in lending market
While banks have traditionally done the bulk of business lending in Australia (and globally) that all changed after the global financial crisis (GFC), when it became less profitable and more capital intensive — courtesy of tighter lending regulations to provide certain types of loans.
This created a glaring gap between what SME corporates in Australia would like to borrow and what banks were willing to lend — which has now blown out to around $400 billion.
To fill that gap, a cadre of new, smart non-bank lenders, run by ex-bankers — aka originators — have entered the market.
What these originators are now doing to making secured loans to businesses that banks used to make.
Where exactly do these originators get the money to finance these loans?
That's where investors like you and me come in who invest in these private credit funds.
However, filling the funding gap left behind by banks only partially explains while the private credit market is currently flourishing.
The private credit market happens to be colliding with a unique period in history when baby boomers are retiring and looking at income solutions.
Things you need to ask
As of 2026, there are over 100 established private credit managers operating in Australia for you to choose from.
However, before jumping into private credit funds with your ears pinned back, you need to know what to look for when running a ruler over the burgeoning slew of funds that have come to market over the last two years.
Just as there are different risks associated with investing in different ASX-listed stocks, there are also different risk profiles for different private credit funds.
As a rule of thumb, founder of Montgomery Investment Management, Roger Montgomery, suggests investors think long and hard before investing in private credit funds that lend to property developers.
He also reminds investors that lending to a property developer, whose building something on spec, is a different proposition to property-backed finance where a director may put their house in return for a loan.
Secondly, Montgomery suggests finding out if there are any lock-up periods — some funds have no lock-up while others have a 12 month lock-up — which might lock you into this fund for any period of time.
Avoid private credit funds that give themselves a pat on the back
It’s equally important to find out of the fund is internally or externally rated.
While some funds are externally rated — using the same tools and software the big banks use — to rate their portfolios, a lot of funds managers in the private credit space internally rate their own funds, which Montgomery says is tantamount to marking your own homework.
Another question to ask is around the average term of the loan — aka the average duration of the portfolio — what that actually means.
“If you look at a portfolio and see the average duration is two years, this means that if a big recession — resulting in everyone wanting to pull their money out of the fund at the same time — in a worst case scenario, the fund would ‘gate’ the fund, which means you only get paid back as the loans are paid off,” Montgomery reminds investors.
“The point is, if you have a two year average term, it could take two years for you to get your money back and anything can happen in that two years.”
If you approach a financial planner they will know these differences, and they should be highlighting them to you.
