Private credit can offer several advantages over traditional fixed-income securities such as Australian and U.S. government bonds, primarily due to a better yield and flexibility of terms. In private credit, investors are equivalent to depositors are banks, while the private credit fund is equivalent to the bank. The availability of Private Credit has created a boon for investors, particularly when compared to traditional government bonds or equities. While private credit remains the hottest asset class on investors’ minds, it’s paramount for investors to discern how the systems and processes of a private credit provider add value and security to an investment.
The reason why government bonds play a role in protecting assets is that it is a traditional safe harbour asset in an economic downturn. The benefits of bonds are that they provide a consistent income at a premium compared to the cash rates; investors are compensated for the time for a government bond to mature. However, the risks of fixed-income securities are also often overlooked and misunderstood. Bonds are dynamic and their value is a function of the time to maturity, interest rate sensitivity (particularly in a rising interest rate environment) and its yield. This was particularly evident from 2020 until now where bonds have provided negative returns (so much for capital stability!). Long story short, the longer the time horizon of a government bond the more probability of random events could occur which could affect investor returns.
There is also consideration as to how private credit providers compare returns to equities. In recent times market returns have been compelling and reached new heights on the major indexes. The financial reality is that all asset classes revert to the mean. The U.S. yield curve has just come out of its inversion while the spread between US Treasuries and Corporates has been narrowing in 2024; Moody’s AAA Bond yield was reported at 4.68%: a 1% difference between US Treasuries. Now while these signals are ‘priced-in’ and don’t guarantee impending collapse of markets; they are leading indicators. Is it a prudent opportunity for investors to take some gains off the table?
The systems and processes behind private credit providers are the most important thing when considering an investment. Private credit isn’t a ‘carte-blanche’ one-size-fits-all approach to investing as there is a spectrum of private credit providers which specialise in a range of different loans. The underlying securities of the loans will also differ in risk profile from the unsecured, structure of a loan, mezzanine, vetting processes of loanee and how highly leveraged the book is. More importantly, when selecting a manager, it is important consider the qualitative aspects of their style; the key questions investors should be asking are:
- Do they have skin in the game?
- What is their experience and expertise within their niche?
- Are they disciplined and rigorous in vetting their loans?
- Liquidity, are the funds locked up for a period or how long until they can be liquidated?
- What is the loan collateralised against?
Case Study
Barry is a retiree with a traditional 60/40 equity to fixed income split in his superannuation account. He also had a spare $400,000 cash sitting on the sidelines while also an equity portfolio of $250,000 in his name. Given the heightened geo-political risk Barry questioned whether the risk versus the reward of an equity portfolio warranted a review all the while not wishing for the cash reserves to be eroded by inflation.
His objective was to take $50,000 gains off the share portfolio so that it did not affect any capital gains and maintain a cash buffer of $150,000 for a medical emergency or the ability to buy the dip in a market downturn.
His discussion with a financial adviser centred on the allocation of a portion of his funds agreed to an even split of five reputable private credit providers and diversifying across differing loans. The investor’s objective was to generate a return of 4% above the cash rate while reducing the volatility of his portfolio for 12 months.
| Before | After | ||
| Share Portfolio | $250,000 | Share Portfolio | $200,000 |
| Cash | $400,000 | Cash | $150,000 |
| Private Credit | $0 | Private Credit | $300,000 |
| Spi | 10% | Spi | 10% |
| Ci | 4.50% | Ci | 4.50% |
| Pci | 9% | Pci | 9% |
| Total 12-month Return | $39,000 | Total 12-month Return | $52,250 |
| 6.00% | 8.00% | ||
Want to Learn More? Click here to see our Private Credit offerings from Rivkin Private Wealth.*
*Rivkin Private Wealth Private Credit products are intended for wholesale investors only.
Conclusion
Private credit remains a sub-asset class that can generate consistent and generous returns particularly when compared to the yield of a traditional fixed-income bond and on a risk-adjusted basis of an equity portfolio. While it is ‘in vogue’ amongst investors, diligence and prudent consideration should be top of mind as there are a range of providers who will vary in expertise, quality, and discipline.
Important Notice:
Credit products are considered complex financial products. Investing in these products involves risk, and you should fully understand those risks before committing your capital.
Rivkin Wealth Advisors Pty Ltd, ABN 56 612 316 202, AFSL 551201 makes no representation and takes no responsibility as to the soundness of any opinion or the accuracy or completeness of any information contained within this document. The information contained within this document is general advice only and does not consider your personal circumstances. There may be a product disclosure statement or other offer document for the securities and financial products written about in this. You should obtain a copy of the product disclosure statement or offer document before deciding whether to acquire the security or product. For all of our relevant disclosure documents by calling +61 2 8302 3620 or visiting our website at https://about.rivkin.com.au/legal-documents/. Directors and employees of Rivkin Wealth Advisors may, from time to time, hold securities in companies mentioned in this email. Directors and employees may also earn fees, commissions, rebates and/or interest from products and services offered to clients of Rivkin Wealth Advisors.
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