What is Private Credit Investing?

A Guide for Australian Investors

Private credit investing is gaining significant attention in Australia as investors look for alternative opportunities beyond traditional shares and property investments. With superannuation funds, family offices and high-net-worth individuals seeking stable returns in an increasingly uncertain global economy, private lending investment has become a key alternative for those seeking steady income and portfolio diversification.

This article explores what private credit investing is, its relevance to the Australian market, and how it compares to traditional asset classes.

Understanding Private Credit Investing

Private credit refers to non-bank lending. In essence, it is a form of private mortgage investment when the loans are secured by real estate.

With these strategies, loans are made directly to companies or projects outside the scope of traditional lenders like banks.

Therefore, private credit investing involves an investor or a pool of investors providing loans to companies, SMEs, or property developers that can’t rely on traditional banking systems for capital. 

These loans can take many forms, including:

Direct Lending: Where one investor or a few individual investors provide funds to a specific borrower under agreed loan terms (also sometimes called peer-to-peer lending). In this scenario, the investor may be engaging in a private lending investment approach.

Pooled Fund Lending: Where a pool of investors’ funds is lent out to a portfolio of borrowers and regular returns are generated from the interest paid by those borrowers, often structured as a private mortgage investment vehicle when property is used as security.

Private credit is generally seen as a higher-yielding asset class due to its illiquid nature and higher risk profile compared to public bonds. However, the returns can be compelling for investors willing to take on these risks.

Why is Private Credit Gaining Popularity in Australia?

Potential for higher returns: Compared with traditional fixed-income products such as government bonds, investors in a private mortgage investment structure can access higher potential yields, making it an attractive source of passive income.

Lower barrier to entry: Aside from the return upside, a private lending investment structure can provide a more accessible entry-point than traditional investment types like buying an investment property outright. For example, pooled mortgage funds can have minimum investments from as little as $10,000.

Banking Regulations: Stricter lending criteria by Australian banks, especially following the banking royal commission, means many SMEs struggle to secure traditional bank loans. This has opened a gap in the market that private mortgage investment providers are increasingly filling.

Superannuation Growth: As Australia’s superannuation industry has matured, funds are looking for strategies beyond equities and property. Private lending investment offers a way to diversify portfolios, manage risk and generate consistent returns.

Passive Returns: A major benefit of investing in a pooled fund is the potential to earn regular passive income via a private mortgage investment structure while leaving the day-to-day management to the fund manager.  

Risks of Private Credit Investing

While the potential for higher returns, increased diversification, and passive income make private credit investing an attractive alternative investment, like any form of investment, it does have its risks, particularly the following: 

Illiquidity: Private credit investments are less liquid than publicly traded debt or equities. Investors typically need to hold their positions for longer periods, which may be a drawback in times of market stress or when capital is needed quickly. In a private mortgage investment scenario, values may not be as easily converted.

Default Risks: In any loan portfolio there is the possibility of a borrower defaulting. While many funds focus on secured lending (e.g., in private lending investment vehicles with real-estate collateral), liquidation of that collateral can take time. Diversified pooled funds spread this risk, but it remains an important consideration.

Keep in mind that a borrower going into default doesn’t automatically mean that investors lose money. There are times when a borrower defaulting could actually lead to a more favourable outcome for the investors as featured in one of our previous case studies.

Structuring and transparency: Because these investments are outside of public markets, investor due-diligence becomes more important. Understanding the loan-to-value ratios (LVRs), exit strategies, borrower quality, security property and fund manager’s track record is key when considering a private lending investment.

Why should Australian investors consider investing in private credit?

In Australia, the private credit market is still developing, with much of the opportunity lying in SME lending, property development and business refinancing. A private mortgage investment or private lending investment approach can therefore be particularly appealing for investors seeking an alternative source of passive income with attractive risk-adjusted returns.

For instance, retirees drawing on superannuation funds may find consistent income streams and increased diversification beneficial. Younger or newer investors may appreciate that smaller capital amounts can participate through pooled funds.

How to Get Started in Private Credit Investments via APG’s Pooled Mortgage Fund

APG’s Pooled Mortgage Fund is a private mortgage investment vehicle, used to finance multiple business and property development loans. At any given time, APG’s loan portfolio has an average of 30 loans, all of which are secured by Australian real estate.

The fund is open to both wholesale and retail investors. Minimum investment for a retail investor is $10,000; for wholesale investors $25,000.

Investors receive regular distributions each quarter. Those with longer-term goals have the option to reinvest distributions via a Distribution Re-investment Plan (DRP). The fund management team handles sourcing borrowers, due diligence and servicing the loans, so investors can enjoy a largely passive experience through this private lending investment platform.

APG’s fund management team is responsible for overseeing the loan portfolio, sourcing borrowers and conducting due diligence. Therefore, investors don’t have to worry about anything pertaining to the management of the fund, making APG’s pooled mortgage fund a truly passive investment.

APG’s Direct Private Credit Investing Opportunities

Occasionally, APG offers direct investment opportunities (i.e., direct loans) for seasoned investors who may want more control. It’s another form of private lending investment suited to those with greater involvement and capital. Minimum investment starts at $25,000 (although this can be reduced for first time investors) and is popular with investors who want to be more involved in the lending decision and conduct their own due diligence.

Whether you choose a private mortgage investment or a private lending investment structure, private credit has become a viable way for Australian investors to diversify away from traditional asset classes and earn strong income from alternative lending markets. To learn more about the fund you may contact our Investor Relations team and they will gladly answer any question you may have. 

This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances. The returns mentioned are not guaranteed.

If you have any questions about investing in private mortgages then please send us a message via our Contact Page.