Private credit has become one of the most talked-about asset classes in recent years. With super funds, investment platforms, and advisers all getting on board, many investors are asking:
Should I be investing in private credit too?
The short answer: maybe, but only if you truly understand the risks involved and how it fits into your broader investment strategy.
What is private credit?
Private credit is a form of lending where investors provide loans directly to borrowers, typically property developers, businesses, or other non-bank borrowers, without going through traditional banks or intermediaries.
These loans are often packaged into managed funds or structured investment products. Investors receive regular income in return for the risk they’re taking on.
This space gained momentum after the 2008 Global Financial Crisis, when banks significantly pulled back from commercial lending. That left a gap in the market, and private lenders moved in to fill it.
Why is private credit so popular?
For years, private credit offered a compelling combination of high returns and perceived stability. Early investors earned strong yields, sometimes above 10%, with relatively low visible risk.
With interest rates low, private credit looked like a perfect solution for income-seeking investors.
Fast forward to the current day, private credit is being offered on major investment platforms, promoted by advisers, and included in large institutional portfolios. More popularity often means more capital chasing the same deals, and that can impact returns and increase competition for quality lending opportunities.
The risks of private credit
Despite the attractive yields, private credit is not a low-risk asset class. Here are the core risks to consider:
1. Illiquidity
Private credit investments are usually locked in for a fixed term. That means you might not be able to withdraw your money quickly if you need it. There are some recently examples of private credit funds limiting withdrawals including the Merricks Capital Partners Fund.
2. Lack of transparency
Most private credit funds don’t disclose the underlying borrowers. As an investor, you often have little visibility into who you’re actually lending to.
3. Default risk
Borrowers in private credit deals are often those who can’t get traditional bank loans. That implies higher credit risk.
4. No government guarantee
Unlike term deposits or savings accounts, private credit investments aren’t covered by government deposit guarantees. If a loan defaults, you bear the loss.
5. Hidden volatility
Private credit can appear stable, with months (or years) of steady returns. But this “stability” can mask deeper structural risks. When economic conditions deteriorate, these funds can suffer sharp and sudden losses.
As the saying goes: It’s like picking up pennies in front of a steamroller. You collect consistent returns… until the market turns.
Private credit vs shares & bonds
One common argument for private credit is that it offers attractive returns with less volatility than the share market. But appearances can be deceiving.
| Bond ETFs | Private Credit |
| More day-to-day volatility since listed on the share market | Stable on the surface as not typically market-to-market daily but prone to rare but severe drawdowns |
| Transparent pricing | Opaque pricing structures |
| Wide exposure across sectors | Can be highly concentrated |
| Liquid markets | Illiquid and often difficult to exit |
While private credit may look like a safer alternative to equities, it can be riskier in downturns and could be an unnecessary risk in your portfolio.
Should I invest in private credit?
Private credit may suit some investors, but in moderation.
It can be a complementary part of a diversified portfolio, not a core holding. If you’re investing in it for the returns, be sure you’re equally aware of the risks.
Avoid putting too much weight on past performance. Many funds have track records of uninterrupted monthly returns, but that doesn’t mean they’re low risk. In fact, it may mean the risk is simply hiding beneath the surface, waiting for a market event to expose it.
Private credit is an interesting and evolving part of the investment landscape. But as with any “hot” asset class, it’s important not to be swept up in the hype.
Ask yourself:
- Do I understand how this fund makes money?
- Am I being properly compensated for the risk?
- How does this fit into my broader portfolio strategy?
If you’re unsure, it might be time to revisit your asset allocation with a focus on diversification, liquidity, and transparency, and consider how private credit fits into that bigger picture.
If you’re looking for a simple diversified ETF investing strategy, find out more about Stockspots ETF only investing strategy.
