Australians are searching for stable income and lower volatility. Explore the rising investment strategies offering reliable returns and what to consider before diving in.

If regular, reliable income is high on your investment wish list, you’re not alone. Global private credit can tick the box for reliable returns, but it pays to know where your money is going.

As the cost-of-living crunch grinds on, inflation-weary Australians are looking for investments with income-boosting potential.

The most recent investor survey by the Australian Securities Exchange (ASX) found more than one in four (28%) investors says their main aim is to build a sustainable income stream – double the 14% of investors whose top priority is maximising capital growth.

The hunt for income isn’t the only thing shaping investment choices. It seems many of us are losing our appetite for market volatility: the ASX found that almost one in two (48%) investors is looking for stable, reliable returns – a figure that rises to 55% among women.

What’s driving the search for income?

The quest for regular income coupled with low volatility comes as no surprise to Dean Weinbren, managing executive of TermPlus. The Australian fixed-term account platform is powered by Pengana Capital Group and, in association with global investment leader Mercer, offers fixed-term accounts backed by global private credit.

Weinbren explains, “I don’t think there has ever been a time when investors weren’t conscious of sharemarket volatility – it’s part of investing in listed markets.” Despite the potential of shares to deliver high, long-term returns, he adds, “the journey has never been smooth.

“Geopolitical tensions, policy changes or trade measures can move markets sharply, often in ways that have little to do with the underlying health of (ASX-listed) businesses,” says Weinbren. “That disconnect is something many investors are increasingly aware of. For some investors, particularly those focused on income or capital stability, that can be unsettling.”

Investors are embracing alternatives

As investor preferences evolve, the world’s largest fund manager – BlackRock, says “more and more investors” are shifting to alternative investments in a bid to turbocharge returns, generate income and diversify portfolios.

So-called alternative investments are not new. While the term covers a variety of asset classes from infrastructure to hedge funds, some investment markets, such as private credit, have been around for decades.

Historically, global private credit has been the playground for institutional and high net worth investors due, in part, to substantial capital commitments and extended lock-in periods.

What has changed is that global private credit is becoming increasingly open to retail investors, typically through a managed fund structure, often with a minimum investment as low as $2000 (through platforms such as TermPlus).

Vince Scully, founder of financial advice service Life Sherpa, adds that awareness of private credit funds is increasing as more is spent on promotion.

“Our clients are raising the sector more because they are seeing it in the media and being promoted by finfluencers,”
says Scully.

That said, it’s not just individual investors exploring private credit opportunities. Superannuation funds are too. Research by Rainmaker Information, publisher of Money, shows several of the nation’s biggest super funds have invested in this asset class.

Simone Constant, commissioner of the Australian Securities and Investments Commission (ASIC), expects super funds to take an even greater interest in global private credit “as they expand and look for new areas to grow”.

With so much interest in private credit markets, let’s unpack what this asset class involves, and the pros and cons investors should be aware of.

What is global private credit?

The term ‘private credit’ simply refers to non-bank lending.

It’s a market that has been growing rapidly since the global financial crisis of 2008-09, when a number of international banks failed, never to return. Tighter regulations saw a further pullback in bank lending, creating a gap in the market.

This gap has largely been filled by specialist private credit providers who do not fall prey to many of the limitations of the banking structure when it comes to the provision of credit – in particular on the international front, where private credit makes up 84% of lending markets compared to only 10% in Australia.

Along with demand from borrowers, investor demand for high-yield assets has seen a surge in private credit funds, which offer the potential for reliable returns (driven by interest on the underlying loans) without the volatility of listed markets.

Australian versus global private credit

As a guide to the scale of private credit, ASIC estimates the local market is worth about $200 billion. It’s a figure dwarfed by the international market, which the Reserve Bank of Australia (RBA) says has quadrupled in value over the past decade, reaching $US2.1 trillion ($3.1 trillion) in 2023.

That growth isn’t expected to stop any time soon. According to data analyst firm Preqin, the global private credit market is expected to reach $US4.5 trillion ($6.7 trillion) by 2030.

Size isn’t the only factor separating the Australian market from global private credit.

Domestic private credit tends to focus on property-backed lending. The global market typically involves commercial loans to mid-size businesses. We’re not talking corner stores. Target businesses typically earn between $US50 million and $US250 million in annual profit.

More broadly, Dean Weinbren believes global private credit offers several distinct advantages over the local sector. The international market has been around a lot longer, and Weinbren says this has “allowed robust processes, operational frameworks, risk controls and market infrastructure to develop over time”.

For investors, that maturity translates into clearer standards, deeper data and more predictable behaviour through different market cycles.

The global market also provides access to managers with longer track records.

“That experience matters,” says Weinbren. “It influences how loans are structured, how risks are assessed and how portfolios are managed when conditions change.”

As the global private credit market is significantly larger than the Australian market, it can provide a significant diversification advantage, and as Weinbren notes, “a more resilient source of income”.

What sort of returns can you expect?

The RBA acknowledges that private credit has an attractive risk-return trade-off, paying a relatively high interest rate with low volatility compared to publicly traded assets (such as shares) and other fixed income asset classes.

Even so, returns vary between providers, and depend on whether the fund’s underlying focus is local or global private credit.

An ASIC review of 20 private credit funds open to retail investors showed target returns ranging from 4% to 10%.

As a guide, TermPlus, with its focus on global private credit, targets payment of the RBA cash rate plus a fixed 3% on a one-year term, or an additional 4.15% on top of the cash rate for terms of five years1.

Regulator says ‘room for improvement’

The rapid growth of private credit funds has not escaped the regulator’s attention.

Following a review of the sector, ASIC noted “private credit is good for Australia’s economy, borrowers and investors, but only if done well”. And it turns out, several aspects of the private credit market have room for improvement.

As Scully explains, “Disclosure is poor, particular around the rate paid by the ultimate borrower, fees, related party transactions and use of internal credit ratings.”

He adds, “Most of these funds are investing in longer-term debt while advertising daily redemptions. Improved disclosure and better matching of underlying investments with the advertised redemption liquidity would help.”

ASIC’s Constant also doesn’t mince her words.

“It is clear increased oversight of private markets is essential,” she says. “And ASIC will continue its surveillance and enforcement work in private credit to ensure compliance with the law. If we do not see material improvements, we are prepared to pursue stronger regulatory action.”

It remains to be seen if ASIC’s message to ‘lift your game’ will result in change. However, Weinbren regards ASIC’s review as a plus for the market and investors.

“Clearer guidelines [for the local private credit sector] will help level the playing field for product providers and, importantly, make it easier for investors to compare offerings on a like-for-like basis,” he says. “That transparency reduces the risk of poor behaviour and ultimately strengthens confidence in the sector.”

Greater scrutiny by regulators is also likely to clarify the differences between global private credit and the local market.

“There are meaningful differences between domestic private credit strategies and those investing in established global markets,” says Weinbren. “ASIC’s closer scrutiny encourages these distinctions to be clearly communicated, rather than treating private credit as a single, uniform category. That’s a good outcome for investors.”

Ultimately, Weinbren believes it will help ensure people understand what they’re investing in, how risks are managed and where returns are coming from – which is exactly what a growing and evolving market needs.