This material is for general information purposes only. It has been prepared by Towers Watson Australia Pty Ltd (AFSL 229921) without taking into account your objectives, financial situation or needs. It is not personal advice and you should consider its appropriateness, and obtain professional advice, before acting.
Private credit has become one of the fastest-growing areas of Australia's investment market. Attractive income, differentiated credit exposure and the potential for returns above traditional fixed income have driven increasing investor interest.
However, attractive returns alone rarely tell the full story. Differences in lending standards, valuations, liquidity and governance can have a significant impact on long-term outcomes, making manager selection and due diligence increasingly important.
Where private credit fits
Private credit sits within the broader credit market alongside government bonds, investment-grade corporate bonds and other alternative credit strategies. Unlike publicly traded bonds, private credit investments are typically privately negotiated loans to corporate, real estate or infrastructure borrowers.
These investments can provide access to opportunities not readily available in public markets, but they are generally:
- Less liquid
- Less transparent
- More dependent on manager expertise
Within Australia's private credit market, strategies can range from relatively conservative corporate lending through to higher-risk real estate and specialist lending. As a result, private credit should not be viewed as a single investment opportunity with a single risk profile.
Why headline returns are only part of the story
Strong historical returns are often the first thing investors compare. However, performance alone rarely provides a complete picture.
Private credit managers can pursue different lending strategies, operate under different valuation policies and offer different liquidity terms. Two funds may deliver similarly attractive returns while taking very different levels of risk to achieve those outcomes.
Recent regulatory scrutiny of the Australian private credit market has also reinforced the importance of:
- Governance
- Valuation practices
- Liquidity management
- Fee transparency
Understanding these differences requires more than comparing performance. It requires a disciplined approach to evaluating managers.
Comparing two private credit strategies
To illustrate why performance should not be assessed in isolation, our guide compares two anonymised Australian private credit strategies. These examples are illustrative and anonymised and are composites based on our observation of the market.
Both have delivered attractive reported returns over the past five years. Based on performance alone, one appears to have delivered stronger outcomes.
- One strategy delivered higher reported returns and no negative months over its track record.
- Another experienced occasional drawdowns during periods of market stress before recovering.
Many investors may naturally favour the stronger-performing manager. However, in private credit, the manager reporting the highest returns is not necessarily the manager taking the least risk.
Returns alone cannot explain:
- How risks are recognised
- How valuations are determined
- Whether liquidity terms are appropriate
- How governance influences outcomes
These factors can materially influence long-term investment outcomes.
Our guide includes the full comparison of these two illustrative strategies and outlines practical questions investors can use when assessing private credit managers, including considerations around risk management, valuations, liquidity, fees and transparency.
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Private credit: Opportunities, risks and manager selection
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