What’s driving the explosive growth in private credit investing?
The surge in private credit investment has been fueled by both macroeconomic and structural factors. Abundant liquidity and a prolonged low-yield environment made traditional fixed income less attractive, prompting investors to seek better risk-adjusted returns in private markets. Private credit offers unique advantages — such as floating-rate structures, seniority, and enhanced governance — that provide inflation protection, lower volatility, and more stable returns than many public assets.
“Return on thematics like climate can run hot and cold at different parts of the capital structure. We found excess return on the debt side when the equity side wasn’t getting us interested.”
John Woods, Deputy CIO and Head of Multi-Asset, Australian Ethical
Additionally, with more companies staying private longer, accessing certain themes and sectors often requires private market exposure. Investors have increasingly appreciated the diversification benefits and the opportunity to earn attractive yields — ranging from 400 to over 800 basis points above cash, depending on risk and capital structure position. Infrastructure and thematic debt strategies, like climate-focused funds, have also emerged as appealing, offering excess returns when equity markets lag. Overall, the ability to capture yield without extending duration or significantly increasing credit risk has made private credit a compelling allocation.
Where does private credit fit within a growth-defensive asset allocation?
Financial advisers face challenges categorising private credit within growth or defensive allocations due to its hybrid nature. Typically, alternative assets, including private credit, are conservatively placed in the growth bucket. However, private credit’s position in the capital structure can offer downside protection, blurring clear classification. Investor approaches vary widely based on risk tolerance and portfolio context, with some viewing private credit as defensive and others as growth. This lack of a neat bucket complicates performance assessment and requires advisers to look beyond simple growth/defensive splits to understand how private credit fits within overall portfolio construction.
How do private credit managers source deals and loans?
Private credit managers primarily source deals through private equity (PE) transactions, particularly leveraged buyouts, which make up most of their lending activity. For every dollar of equity invested by PE sponsors, there is typically a roughly equal amount of debt in the capital structure — usually around 40-50% senior secured debt secured by the company’s assets, supported by junior debt and an equity buffer. These managers maintain strong relationships with both internal and external PE funds, which are critical sources of deal flow. However, private credit teams conduct their own independent analysis, focusing primarily on downside risk and capital preservation, contrasting with PE’s emphasis on growth and upside potential. This distinct viewpoint allows private credit lenders to structure financing with a clear understanding of risk, ensuring security and protection within the capital stack. Beyond PE partnerships, private credit managers also leverage extensive networks, including intermediaries and corporate borrowers, to identify proprietary opportunities outside competitive auctions. Their ability to offer flexible, bespoke financing solutions, often faster and more confidential than public markets and banks, makes them valuable partners for PE firms and private companies alike. This symbiotic relationship provides a steady pipeline of quality loans, aligning private credit strategies closely with the investment goals of private equity sponsors.
What kind of due diligence is required for private credit investments?
Due diligence in private credit investment is an intensive, multi-layered process, driven by the long-term and illiquid nature of these investments. Unlike public markets, where investors can quickly adjust positions, private credit typically involves capital commitments locked up for several years, often five to ten or more. This requires investors to adopt a deep, patient approach focused on understanding risks comprehensively before committing capital.
A foundational element is rigorous manager selection. Investors evaluate a manager’s track record, strategic focus, expertise, and, critically, transparency. Investors seek managers who provide clear insight into the quality and health of underlying loans, their portfolio construction, and risk controls.
“Understanding what lies ‘under the hood’ of a manager’s strategy is vital because funds targeting similar return profiles may carry very different risks in the underlying loans.”
Lucie Bishop, Portfolio Manager, Revolution Asset Management
The credit assessment itself is highly detailed. Investors perform bottom-up financial and operational analyses, often modeling borrower performance across different economic scenarios to ensure resilience through downturns. They place strong emphasis on downside protection — ensuring borrowers can meet interest payments and repay the principal even in recessionary conditions. This involves extensive review of financial statements, industry dynamics, and business models. Physical site visits are also common, enabling investors to see first-hand operations, assess management teams, and understand the company’s culture and competitive positioning.
Legal and structural diligence are equally important. Private credit transactions involve complex loan documentation, often negotiated and drafted by top-tier law firms to ensure robust protections such as senior secured status, covenants, and clear enforcement mechanisms. Syndicated loans generally provide stronger protection and greater market transparency compared to bilateral loans, where fee structures and potential conflicts of interest can be more opaque. Investors carefully scrutinize these elements to avoid hidden fees and ensure alignment of interests.
“Make sure you're getting what's on the tin label. A private debt book should be a private debt book, not a private equity private debt book.”
John Woods, Deputy CIO and Head of Multi-Asset, Australian Ethical
Because private credit markets are less transparent and less standardized than public markets, investors frequently engage external specialists for operational due diligence, legal review, and validation of key assumptions. They recognize the importance of independent verification and do not rely solely on third-party or peer due diligence. Overall, the due diligence process demands substantial time, resources, and expertise to thoroughly assess risks, ensure transparency, and secure long-term, resilient investments aligned with investor objectives.
Competition for assets?
Competition in private credit varies significantly across subsectors, shaped by risk-return profiles and market participants. Leveraged buyout (LBO) loans are a key area but form only part of a broader strategy that includes stabilised commercial real estate (CRE) senior secured assets. CRE lending, especially in Australia, is highly competitive, dominated by large banks, limiting opportunities for private credit funds in this space.
In contrast, the asset-backed securities (ABS) private warehouse market offers less competition and attractive returns due to its complexity and niche nature. This space involves private capital funding special purpose vehicles (SPVs) that accumulate loans from non-bank originators before those loans are securitized and sold publicly. Private investors typically fund mezzanine tranches, earning premiums for illiquidity and complexity, making this a compelling but underappreciated segment.
“The ABS private warehouse space is a less understood market, and it offers very attractive risk-return characteristics.”
Lucie Bishop, Portfolio Manager, Revolution Asset Management
For leveraged loans and corporate lending, competition has intensified with offshore private credit managers targeting higher-risk, higher-return deals globally. However, in the mid-yield range — approximately 400-500 basis points over cash — where more bank-like, senior secured loans reside, competition is less fierce. This space offers opportunities to selectively choose structures such as club loans with fewer players involved.
Overall, while certain segments like commercial real estate are crowded due to bank dominance, private credit managers find attractive niches in complex ABS warehouse funding and mid-risk corporate loans, balancing competitive pressures with risk-return optimisation.
Can private credit meet the liquidity needs of superannuation members?
On the other side of the spectrum, smaller or mid-sized funds — often still building out their private markets’ programs — take a more hands-on approach. For these funds, access is not automatic. Building relationships takes time, and many rely on specialist consultants or global advisers to expand their reach and provide due diligence support. Some funds supplement this by sending internal teams on global research trips to meet with dozens of managers face-to-face, ensuring that sourcing efforts remain deliberate, informed, and globally competitive.
“The haircut you will take to liquidate assets in a short amount of time will wipe out any illiquidity premium earnt over the last three to four years.”
John Woods, Deputy CIO and Head of Multi-Asset, Australian Ethical
Transparency and clear communication about redemption processes are essential to protect both redeeming and remaining investors. While private credit generally offers stable returns, recessionary periods create higher-risk, higher-return opportunities in distressed debt funds. Recent market stresses highlight the importance of thorough due diligence on managers and underlying loans to ensure the investment matches its stated risk profile. Private debt should deliver what it promises, distinct from riskier private equity strategies.
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Related: Super funds and private assets: a perfect marriage?
