For the first time since the Global Financial Crisis (GFC), there are finally alternatives to equities for those investors seeking income. One such alternative is private credit, an often overlooked yet compelling option for portfolio diversification with yields currently around 9% net of fees.
On the back of a significant pullback in markets over the last two trading days as a result of softer-than-expected economic data, it’s worth pondering whether the market could be poised for a broader sell-off, especially in the context of markets that are still up significantly from their lows in October and within reach of all-time highs. In today’s higher interest rate environment, traditional investment strategies in equities and fixed income are being challenged, and investors are finally able to make decisions from a position of strength. As Rivkin’s Chief Investment Officer, I believe it’s crucial to explore alternative asset classes that can offer stability and yield.
In the wake of the GFC and amid increased regulation, traditional banks pulled back from lending which required more capital, instead focusing on more profitable areas, which in Australia has focused on residential 30-year mortgages. This created a lack of supply for those willing to lend, while demand from borrowers was unchanged, creating an opportunity for investors. Private credit involves lending to companies or individuals, typically through non-bank financial institutions. Unlike public equities, private credit investments are not traded on stock exchanges, providing insulation from market volatility. This asset class has gained traction due to its attractive risk-adjusted returns and lower correlation to traditional markets.
In the current economic climate where interest rates are elevated and – pending no economic disaster – are likely to settle at more historically normalised levels, fixed income and equity investments are facing increased pressure. Bond prices tend to fall as rates rise, negatively impacting returns. Conversely, private credit can benefit from higher interest rates since loans are often structured with floating rates, adjusting upward in line with the broader market and providing a hedge against rising interest rates.
Moreover, private credit offers predictable income streams through regular interest payments. Many private credit funds provide monthly liquidity and income, which can be particularly appealing for investors seeking both income stability and flexibility. Additionally, most private credit funds have short durations, typically lending over periods between 12-18 months, allowing them to capitalise on higher interest rates without the same volatility that affects long-dated fixed income.
That is not to say that all private credit funds are compelling. As we see more money and new funds opening within the asset class, due diligence is crucial. At Rivkin, our investment team spends significant time assessing various funds, balancing the risk-reward and seeking diversification, and selecting the best-in-class funds that focus on different segments within private credit. Each fund in which we invest has certain qualities that we deem non-negotiable, such as loan-to-value ratios (LVRs) of 65% or below, monthly liquidity, low single asset exposures (10% or below) and liquid underlying security.
Diversifying portfolios with private credit can significantly increase diversification, helping to manage drawdowns and volatility. By spreading risk across various asset classes, investors can reduce the impact of any single market downturn. This strategic approach mitigates risk and optimises returns, positioning portfolios for success regardless of economic or geopolitical conditions.
Private credit presents a compelling alternative to equities and fixed income in a higher interest rate environment. Its potential for stable income, protection against rising rates, and diversification benefits make it a valuable addition to any well-rounded investment portfolio. As we navigate these uncertain times, considering private credit could be a prudent move for investors seeking both income and stability. Historically, the world of private credit has only been available to wholesale investors. As the sector has grown, however, private credit opportunities in the retail space have become more widespread, and we have been working behind the scenes to provide a retail offering that includes all of the qualities we seek from our preferred wholesale partner funds. If you wish to learn more about this product please contact us.
Important Notice:
Rivkin Private Wealth is a business name of Rivkin Securities Pty Ltd, AFSL 332 802. Rivkin Private Wealth’s Wholesale Funds are available to wholesale investors only and are intended for investors who qualify as wholesale clients, as defined by the Corporations Act 2011. Therefore, Rivkin will not issue a financial services guide, product disclosure statement, or any other retail documentation in relation to this service.
Rivkin does not ever provide personal financial advice. Please consider your own circumstances before purchasing any of our products or acting on our general advice, for any Rivkin product or recommendation.
Past performance is not a guarantee of future performance. Investing and trading carry financial risk, when judging performance please consider the different types of investments and levels of risk associated.