What is private credit?
Private credit refers to loans and other forms of debt financing provided by non-bank lenders rather than traditional banks. In Australia, the private credit market has grown significantly over the past decade, driven by regulatory changes that have led banks to reduce their exposure to certain types of property lending, and by increasing demand from wholesale investors seeking income-generating alternatives to traditional fixed income investments.
Private credit encompasses a range of lending activities, including property-backed mortgage lending, construction finance, bridging loans, and mezzanine debt. Funds that invest in private credit are commonly structured as managed investment schemes and may be available to wholesale investors only.
Why is private credit growing in Australia?
Several structural factors have contributed to the growth of private credit in Australia. Stricter capital adequacy requirements imposed on banks by APRA have led to a reduction in bank appetite for certain types of property lending, particularly construction and development finance. This has created a gap in the market that non-bank lenders have moved to fill.
At the same time, wholesale investors have been drawn to private credit because of its potential to provide regular income, typically through monthly distributions, and its low correlation with traditional equity and bond markets. Property-backed private credit offers the additional benefit of tangible security in the form of registered mortgages over Australian real property.
How do private credit funds generate returns?
Returns in private credit funds are primarily derived from the interest charged to borrowers on the fund’s loan portfolio. The interest rate reflects the risk profile of each loan, including factors such as the loan-to-value ratio, the quality of the security, the borrower’s track record, and the term of the loan. Management fees and fund operating costs are deducted before distributions are paid to investors.
What should investors consider?
Investors considering an allocation to private credit should evaluate the fund manager’s track record, the quality of the underlying loan book, the fund’s maximum LVR policy, the proportion of first versus second mortgage lending, the liquidity profile of the fund, and the alignment of the fund’s risk appetite with their own investment objectives. All investments carry risk, including the potential loss of capital.
Related resources from Granor Capital
Explore how pooled mortgage funds provide diversified exposure to private credit, and check whether you qualify as a wholesale investor. Read about how monthly distributions work. View Granor Capital’s wholesale investment funds.
This article is provided for general information purposes only and does not constitute financial advice. Investors should seek independent professional advice before making any investment decisions.
