Private credit is emerging as a popular asset for investors seeking stability, security and attractive returns, according to Capstone Funds director Frances MacDonald.
Private credit, also known as private debt or private loaning is an alternative form of finance that is not publicly traded and includes credit held by or extended to privately held companies taking the form of loans, bonds, notes or private securitisation issues.
While Australia is lagging behind the U.S. and Europe, with private credit still in its infancy, representing only 10% of the total debt market, MacDonald argues this creates the perfect opportunity to get in on the ground floor.
“Locally, we’re seeing a large funding gap, particularly for SMEs and property developers, where traditional banks have either stepped back or can’t meet borrowers’ need for speed and flexibility,” she tells Azzet.
“It’s a structural shift, investors are now actively seeking private assets for yield, stability, and security underpinning the shift away from public markets.”
Recently, at the InvestmentMarkets webinar, MacDonald said 40% of sophisticated investors said private credit is their top allocation priority.
This is because private credit has outperformed other asset classes through a combination of high yields, low volatility and downside protection underpinned by real asset security.
“It offers the potential for double-digit returns - especially compelling in an environment of persistent inflation, equities volatility, and underwhelming yields from traditional fixed income,” she says.
“It offers stable, consistent returns with low correlation to public markets, which adds real diversification and resilience during periods of volatility.
“Unlike equities, private credit is often backed by tangible security, giving investors added comfort through asset-backed protection.”
MacDonald said private credit’s reliability has made it an especially attractive asset in today’s volatile economic climate.
“Private credit has become incredibly attractive to investors in a high inflation, high interest environment marked by volatility,” she says.
“Investors have turned to private credit as it offers a stable, high-yield diversifier to public markets.”
She also said that diversification and capital preservation are the top reasons investors are leaning towards private credit.
“We’re seeing investors actively seeking diversification away from public markets, with evidence that portfolios with a greater proportion of private assets and private credit faring better,” she said.
While their are many attractive features to private credit as an asset, MacDonald warns that investors should practice due diligence before investing.
“A key barrier that investors should be aware of in private credit compared to public markets is that private credit has an illiquidity premium, meaning your investment is committed in a loan and isn’t immediately accessible,” she says.
“Investors need to be comfortable with longer investment horizons, which varies according to the type of lending.”
