Private credit a ‘sharp double-edged blade’ for Australian investors

Local private credit funds will soon be managing upwards of $200 billion in capital. The banks have now noticed.

The sector is largely unregulated and for those who are new to the game, it may seem like the wild west.

The truth is that the industry is providing a unique set of opportunities for investors both domestically and internationally to explore new streams of revenue.

Private credit, in simple terms, is a type of non-bank lending where loans are issued elsewhere other than the public market.

This can include loans to corporates, loans secured by commercial real estate, or loans backed by assets.

The sector has already become firmly established in other parts of the world, especially Europe and the US.

Australia is relatively new to this idea, which is why the sector has seen a meteoric rise in such a short period of time.

Attractive returns creating a ‘private credit frenzy’

I’m a director of Australian non-bank lender Archer Wealth and the manager of a wholesale investment fund that invests exclusively in real estate deals.

Investors are drawn to predictable cash flows that private credit can provide, especially in real estate, where underlying assets are generally secure.

The conservative returns private credit can offer provide a refreshing alternative for investors who care about protecting their principal investment as well as generating returns.

Reflecting on my own experience, those who are looking at real estate-backed private credit are searching for a less risky, conservative approach to investment.

I’m seeing many investors pursuing this space to diversify their portfolios away from volatile equity markets, particularly as central banks around the world, and the RBA here at home, continue adjusting interest rates.

This new industry of private credit offers a balance between risk and reward, allowing investors to target high single-digit or low double-digit returns without exposing themselves to the full volatility of public markets.

Private credit less volatile than public may think

Private credit may sometimes be confused with payday lending or ‘loan sharking’, but they are not the same thing.

With the majority of private credit deals negotiated on bespoke terms, lenders and borrowers have greater flexibility in structuring loans to mitigate risk, which is what has made it so attractive to investors who understand the deals that are reached.

In my view, the sector’s appeal lies in its ability to avoid the knee-jerk reactions seen in public markets.

Investors appreciate that private credit deals are backed by tangible assets, whether it’s real estate or business cash flows.

While every investment carries risk, private credit tends to offer more control, giving investors confidence during market downturns.

Private credit a ‘sharp double-edged blade’ if approached carelessly

Private credit is not all sunshine and roses. The sector can expose investors to unnecessary risk if they fail to properly assess the creditworthiness of borrowers or the strength of the underlying collateral.

Private credit can be a double-edged sword and the most experienced investors are very aware of this.

If an investor is going to place their money on a private credit deal, they need to make sure they go in with an understanding of the market and borrower.

My view is that, when due diligence is rushed or risks are miscalculated, investors may find themselves with non-performing loans or significantly devalued assets. This is why they have to be careful when investing in private credit.

Australia’s relatively new private credit market means that many investors may still be unfamiliar with how to navigate this sector.

It’s crucial for investors to partner with experienced managers who have a proven track record in private credit.

The sector holds immense potential, but, as with any investment, proper risk management is key.

Gee Taggar is the managing director of Archer Wealth.