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Australia Private Credit Guide

the private credit investing in Australia. The guide covers: the private credit funds (the "non-bank lending vehicles") — the "private credit" is the "lending provided by the non-bank institutions" (the "private credit funds, the wholesale lenders, the mortgage funds") to the "borrowers who may not qualify for the traditional bank loans"; the Australian private credit market has grown to $50+ billion (the "doubled since 2020") as the major banks have reduced the "commercial and the development lending"; the private credit funds include: (a) the "direct lending funds" (the "loans to the small and the medium enterprises — the SMEs"), (b) the "real estate debt funds" (the "loans for the property development, the construction, the bridging finance"), (c) the "private credit ETFs" (the "ASX-listed private credit ETFs" — the "QPON, the BOND, the MORT"); the mortgage funds (the "first mortgage and the second mortgage lending") — the "mortgage funds" are the "pooled investment vehicles" that lend the "investor funds" to the "property borrowers" secured by the "first or the second mortgage over the Australian property"; the mortgage funds typically offer the "target return of 5% to 9% per annum" (the "higher than the term deposit rates" — the "trade-off for the lower liquidity and the higher risk"); the mortgage fund features: (a) the "secured lending" (the "mortgage registered on the property title"), (b) the "LVR limits" (the "70% to 80% maximum loan-to-value ratio for the first mortgage funds"), (c) the "liquidity provisions" (the "quarterly or the annual withdrawal rights" — the "may be suspended in the market stress"); the peer-to-peer lending (the "P2P marketplace lending") — the "P2P lending platforms" (the "RateSetter, the Plenti, the SocietyOne") connect the "investors (the lenders)" with the "borrowers" (the "personal loans, the car loans, the small business loans"); the investor receives the "interest payments" (the "net of the platform fee and the loan defaults") — the "target return of 5% to 12% per annum" depending on the "credit grade of the borrower".

Private Credit Investment Features

  • Risk and the return: The private credit offers the "higher yield" than the "public fixed income" (the "term deposits, the government bonds") for the "higher risk". The risks include: (a) the "credit risk" (the "borrower default"), (b) the "liquidity risk" (the "cannot withdraw the funds at the short notice"), (c) the "interest rate risk" (the "floating rate loans may decline in the value when the rates fall").
  • Investment structures: The private credit is accessed through: (a) the "unlisted registered managed investment schemes (the ASIC-registered MIS)" — the "regulated by the ASIC" — the "Product Disclosure Statement (the PDS) required", (b) the "ASX-listed private credit ETFs" — the "QPON" (the "BetaShares Australian Bank Senior Floating Rate Bond ETF") — the "ASX-traded, the daily liquidity", (c) the "wholesale funds" — the "minimum investment $50,000 to $500,000" — the "sophisticated investor requirement".
  • Tax treatment: The "interest income" from the private credit investments is the "assessable income" at the "marginal tax rate". The "capital gain" or the "capital loss" on the sale of the fund units is subject to the "CGT". The "tax-deferred distributions" (the "return of the capital") may arise from the "mortgage funds" and reduce the "cost base".

For the mortgage fund tax treatment and the property investment, see our Property Tax Guide →.

Private Credit vs Bank Term Deposits

  • Yield comparison: The "private credit funds" offer the "target return of 5% to 9%" vs the "term deposits at 4% to 5%" — the "yield premium of 2% to 4% for the private credit risk". The "mortgage funds" offer the "6% to 8%" and the "P2P lending" offers the "5% to 12%" depending on the "borrower credit grade".
  • Liquidity comparison: The "term deposits" have the "fixed maturity date" — the "access at the maturity". The "private credit funds" may offer the "quarterly or the annual withdrawal rights" — the "may be suspended in the market stress". The "P2P lending" has the "monthly repayment and the early withdrawal options" (the "sale of the loan on the secondary marketplace").
  • FCS protection: The "term deposits" are guaranteed under the "Financial Claims Scheme" for the "up to $250,000 per the account holder". The "private credit funds" are "not covered by the FCS" — the capital is at the risk in the default scenario.

For the term deposits and the fixed-income alternatives, see our Term Deposits Guide →.