Credit Assets
Credit investing is like putting money in a bank account — but instead of the bank lending your money out, you lend it directly to a borrower. In return, you earn interest for providing the loan.
Most credit investments are private loans made outside public markets (e.g. stock exchanges), which is why it is called private credit. You can access this through private credit funds — some are listed, meaning they trade openly on public markets (e.g. the ASX), while others are unlisted, available only through private platforms or investment managers.
Returns from credit come from interest (yield) — this is a typically a variable rate consisting of a mix of a base rate (which moves with market conditions and the RBA cash rate) and a risk margin (credit margin) paid by the borrower. Credit usually offers higher yields than cash or bonds, but with more risk. Many loans are secured by assets, offering some protection if the borrower defaults, though repayment is never guaranteed.
Credit Return ≈ Base Rate + Credit Margin – Fees
Understanding different credit investments and structures helps you determine which options are appropriate for your risk tolerance, return expectations, and liquidity needs.
BANK
PRIVATE CREDIT
No return guarantee
Key Differences: Banks pool your deposits and lend to unknown borrowers, offering low guaranteed returns. Private credit funds let you choose specific funds that lend to known types of borrowers, offering higher returns that match the risk but with no guarantee of repayment.
Why Credit is Less Risky Than Shares
Capital structure shows how a company finances itself — mainly through debt (credit) and equity (shares). Credit (debt) holders are repaid first, before any profits reach shareholders. Credit investors earn fixed interest, while shareholders get residual profits (dividends only if there's money left). Because of this repayment priority and secured claims on assets, credit is less risky than owning shares.
Payment Priority
Key Takeaways:
- Repayment Priority: Credit investors are repaid first, before any profits reach shareholders.
- Fixed vs Variable Returns: Credit investors earn fixed interest payments, while shareholders get residual profits (dividends only if there's money left).
- Asset Security: Credit investors often have secured claims on company assets, providing additional protection.
- Risk Level: Because of repayment priority and secured claims, credit is inherently less risky than owning shares in the same company.
Interest Rate Environment
Key Takeaway: In rising interest rate environments, credit investments typically benefit from higher yields due to variable interest rates, while shares typically lose value due to increased borrowing costs and lower valuations.
Capital Structure Overview
The capital structure shows who gets paid back first when a company or borrower has debt. Each layer represents a different level of security, risk, and potential return.
Senior Debt
The safest layer. First in line to be repaid and usually backed by assets such as property or business income. Lower risk, generally lower returns.
Junior Debt
Sits below senior debt and is repaid later. Often has no asset security, so risk is higher and interest paid is higher.
Equity & Equity‑Linked
Represents ownership or profit participation rather than a loan. Returns depend on business performance, not fixed repayments — higher upside and higher risk.
Distressed / Default
Borrowers already in financial difficulty or default. Repayment is uncertain; recovery often depends on restructuring or selling assets.
Base Rate — the market benchmark for borrowing costs (e.g. BBSW). When this rises, variable loan interest generally rises too.
Credit Margin — the additional return for the risk a borrower may not repay. Higher‑risk borrowers pay higher margins. Independent agencies (e.g., S&P Global) assign credit ratings (e.g. AAA) that indicate default likelihood.
How to Invest in Private Credit
Listed & unlisted private credit funds invest in the same underlying assets — loans to businesses or property borrowers. The key difference is how you invest and how easily you can exit.
| Aspect | Unlisted Fund | Listed Fund |
|---|---|---|
| Access | You invest directly through the fund manager or private platform, often by completing application forms and meeting minimum investment amounts. | You invest through the ASX, buying units like shares via your broker or trading account. |
| Liquidity | Limited — withdrawals are allowed only at specific times (e.g. quarterly) or at the end of the fund's term. | High — units can be bought or sold daily on the stock exchange, depending on market demand. |
| Pricing | Based on the fund's net asset value (NAV), typically updated monthly or quarterly. | Determined by the daily market trading price, which moves with supply and demand. |
| Examples |
MA Secured Real Estate Income Fund — Australia; first-mortgage real estate loans Remara Private Credit Fund — Australia; diversified private credit and real estate Aura Core Income Fund — Australia; core income and private credit |
LF1 – La Trobe Private Credit Fund (LIT) — Australia + U.S.; real estate and corporate credit PCX – Pengana Global Private Credit Trust (LIT) — Global; diversified direct lending and asset-backed credit QRI – Qualitas Real Estate Income Fund (LIT) — Australia; commercial real estate credit |
Credit Investment Risk vs Return
This chart shows that higher-risk loan types demand higher credit margins (interest spreads) to compensate investors for taking on more risk.
Note: The figures, credit ratings, and positioning shown above are approximate and illustrative only. Actual credit margins, risk levels, and ratings will vary significantly based on specific borrower circumstances, market conditions, security arrangements, and other factors. All investments should be assessed on a case-by-case basis with appropriate due diligence.
Legend
| Term | Description |
|---|---|
| Senior Direct Lending | Loans to established, income-generating companies. Usually secured by assets and senior in repayment priority. +3% to +5% |
| Real Estate Debt | Loans backed by property (first mortgages, construction, or bridging). Margin varies by LVR and project risk. +3% to +6% |
| Mezzanine Financing | Subordinated or second-ranking loans; higher return for higher risk. May include profit-sharing or equity kicker. +6% to +9% |
| Venture Debt | Loans to growth-stage start-ups with limited cashflow; may include warrants or options. +8% to +12% (+ equity upside) |
| Distressed Debt | Purchase of defaulted or near-defaulted loans at deep discounts. Returns depend on recovery outcomes. +10% to +15% (highly variable) |
| Special Situations | Event-driven or opportunistic financing (e.g. restructures, M&A). Often short-term and bespoke. +5% to +8% |
| Credit Ratings Overview | Credit ratings describe how likely a borrower is to repay their debt. Issued by agencies such as S&P or Moody's, ranging from strong to defaulted. |
| Investment Grade | AAA to BBB– — Strong finances, low chance of default. AAA: extremely strong. BBB–: reliable but can weaken in downturns. Lower risk, more stability. |
| Sub-Investment Grade / High Yield | BB+ to C — Weaker balance sheets or higher leverage; pay more interest to attract investors. BB+: some speculative traits. C: highly vulnerable. Higher risk, higher yield. |
| Default | D — Missed payments or in default. Recovery may come from restructuring or selling assets; repayment is uncertain. |
What to Consider
Understand the Trade-Off – Private credit offers higher income than cash or bonds because you're taking more risk — mainly that borrowers may not repay. Higher yield = higher risk.
Loan Security – Safer loans are secured against real assets (like property or equipment). "First-ranking" or "asset-backed" loans have stronger protection; unsecured or mezzanine loans are riskier.
Diversification – Choose funds that spread loans across different borrowers, industries, and loan types. A well-diversified loan book reduces the impact if one borrower defaults.
Default Rates – Review the fund's Product Disclosure Statement (PDS) or reports for loan arrears or default data. Lower defaults and clear recovery processes suggest stronger risk management.
Manager Quality – Prefer AFSL-licensed managers with transparent reporting, a solid track record, and experience through different market cycles.
Liquidity and Income – Understand how often income is paid (monthly or quarterly) and whether you can withdraw early. Private credit is not capital-guaranteed, and returns can fluctuate.
Personal Fit – Check the fund's Target Market Determination (TMD) to see if it aligns with your risk tolerance, investment timeframe, and cash-flow needs.
Risks and Limitations
Liquidity – funds may be locked up for the full loan term.
Valuation – unlisted funds use internal valuations; listed fund prices can move above or below fair value.
Manager – outcomes rely on the fund's ability to assess borrowers and manage defaults.
Collateral – recovery depends on the strength and value of loan security.
Economic – rising interest rates or weak growth increase default risk.
Concentration – too few borrowers or sectors amplifies losses.
Regulation – private credit isn't covered by government guarantees like bank deposits.
FAQ — After you've read the Credit summary
A share gives you ownership in a company. A unit gives you ownership in a managed fund that holds investments like loans or bonds. Shares receive dividends from company profits, while units receive distributions from a fund's investment income.
NAV (Net Asset Value) is the fund's total assets minus liabilities, divided by units on issue — it shows the underlying value per unit. Listed funds trade on the ASX, where market prices move daily with supply and demand. Units may trade above (premium) or below (discount) NAV.
The BBSW (Bank Bill Swap Rate) is the rate Australian banks charge each other for short-term lending. It moves closely with the RBA cash rate, which is the rate the Reserve Bank sets for overnight lending.
Credit investments often pay a variable rate made up of the base rate (BBSW or cash rate) plus a risk margin to compensate for default risk.
Loan-to-Value Ratio (LVR) = loan ÷ value of security. A lower LVR means a bigger safety buffer if asset values fall — for example, a 60% LVR means the borrower's asset can drop 40% before the loan is underwater.
Yes. Returns are paid in nominal dollars. If inflation is high, your real (inflation-adjusted) return is lower, even if the interest rate stays the same.
If a borrower misses payments, the fund manager will enforce any loan security (like selling a property) to recover funds. You could lose part — or all — of your capital if recoveries fall short or the loan is unsecured. Recovery outcomes vary with the loan type, LVR, and market conditions.
No. Default means a borrower has failed to make payments. Distressed debt refers to loans or bonds that are already trading at a discount due to financial stress but may not yet be in default.
Retail investors have less than $2.5 million in assets or under $250,000 annual income and receive stronger consumer protections. Wholesale investors exceed these thresholds and can access higher-risk, less regulated products.
Typical costs include management or administration fees and sometimes performance fees. Always compare net yield after fees, not just headline returns.
Income is usually distributed monthly or quarterly and taxed as interest income at your marginal rate. If you sell units for more or less than you paid, you may have a capital gain or loss.
Review the fund's Product Disclosure Statement (PDS) and Target Market Determination (TMD) for details on investor type, risk level, liquidity, and term. Consider whether you're comfortable with limited withdrawal access and the possibility of loan defaults.
This information is factual only and not financial advice. You should consult a licensed financial adviser before making any investment decisions.
P2P platforms connect investors directly with borrowers online. You earn interest from the loans you fund but take on full borrower default risk. Returns can be higher, but protection and diversification are typically lower than in managed funds.