How it works, who it suits and what to know before you invest
Broadly, private credit is non-bank lending, involving loans that are not publicly traded or widely issued publicly.
A fund may use a private credit strategy. The fund manager may make loans directly to borrowers, or the loans might be made by underlying entities. You can earn income from the interest and fees charged, minus costs.
Like all investments, private credit comes with risk. You can lose money if the borrowers fail to repay or the underlying loans are impaired.
How private credit works
Most investors access private credit through investment funds. These can include unlisted managed funds or funds that trade on the ASX like exchange traded funds (ETFs) and listed investment trusts (LITs).
The funds pool money from many investors and lend it, directly or indirectly through another party, to borrowers, who pay fees and interest.
There can be different types of lending strategies:
- Corporate lending: direct loans to businesses
- Real estate lending: loans for buying or developing residential or commercial property
- Asset-backed lending: loans or investments secured by pools of assets like mortgages, car loans and credit card repayments
- Investment in debt instruments, such as bonds or debentures
Private credit has become a larger part of the Australian investment market in recent years as more businesses turn to non-bank lenders.
Some people may have money invested in private credit without being aware of it, via their superannuation fund. Depending on your super fund’s investment options, you may already hold private credit or be able to choose it as part of your investments.
Why invest in private credit?
Investors may use private credit to generate income. Private credit is often promoted as providing regular, steady payments.
But it carries risk.
The underlying borrowers can fall behind on repayments or fail to repay, which can reduce the value of the loans in the fund. Even if assets secure the loans, you can still lose money.
Private credit loans do not trade on public markets like shares or bonds, which can make them harder to value, compare and track.
Is private credit right for you?
Private credit can provide regular income and a way to diversify your investments away from shares – but it carries risks that may not suit everyone. Investing well means choosing investments that fit your financial goals, investing time frame and risk tolerance.
Private credit may suit if you:
- want higher income than term deposits or savings accounts but you can accept higher risk
- can leave your money invested for several years
- understand that valuations may be set by the fund manager, not a public market
- are looking to diversify your portfolio beyond shares and bonds
Private credit may not suit if you:
- need quick or certain access to your money – withdrawals may be restricted or delayed because loans cannot always be quickly sold or repaid
- want investments with government guarantees or capital protection
- are not comfortable with the risk of missed payments or default
- prefer simple, low fee investments – many private credit funds have complex and layered fees
Key risks of private credit
Opacity
Private credit is less transparent than public markets. You may find it hard to get information on what the fund invests in, how loans are valued and how performance is measured.
Conflicts
Fund managers may have incentives that don’t align with your interests. They may keep fees paid by borrowers instead of passing them through to investors, and they may lend to related parties.
Valuation uncertainty
Unlike shares and bonds that are traded on an exchange, private credit loans are valued using models and judgement. That means reported prices may not always reflect true market value.
Illiquidity
Private credit funds may lock up your money for years. Even when withdrawals are allowed, you might face delays if the loans cannot be sold quickly.
Leverage
Some funds borrow money themselves or lend to highly indebted businesses. This can increase returns when conditions are good, but it also magnifies losses in a downturn.
What to weigh up before you invest
If you’ve decided that investing in a private credit fund is right for you, the next step is to compare your options. Not all funds are the same.
Look closely at how each fund is run and where it invests.
Funds that are offered to retail investors must provide a Product Disclosure Statement (PDS) that sets out key features, fees, commissions, benefits, risks and the complaints process.
Make sure you understand:
- How the investment works: what loans the fund invests in and how those loans are secured if something goes wrong
- How the fund generates a return: whether returns come from interest only, or also from fees and capital gains
- Risks and liquidity: where the underlying loans fit in a borrower’s capital structure (the order in which debts must be repaid) and how easily money can be withdrawn
- Fees: all costs for buying, holding and selling the investment. Find out how fees and costs will affect your investment using the Managed funds fee calculator
Get help if you need it
Private credit can be complex. Consider getting help from a licensed financial adviser before you decide whether to invest.
Your super fund can tell you if private credit is part of their investment options and explain the options available. You may also be able to pay for more detailed investment advice from your super account.
Read more about how to get financial advice.
Maria invests in private credit
Maria wanted extra income and was considering investing in a private credit fund that promised high monthly payments. Her financial adviser explained that the fund was new, with limited reporting and no track record. It was also lending money to property developers and could freeze withdrawals if projects were delayed. Maria chose instead to invest with a larger, more established fund. It offered lower expected returns, but it had clearer reporting, independent valuations and a long history of managing investors’ money.
Key actions you can take
- Be clear about your financial goals and strategy and where private credits fits in
- Compare funds carefully and read the PDS
- Check fees and costs
- Research the fund manager’s track record
- Get advice if you need it