‘Equity like’ returns on private credit, with investors drawn by stable income
With returns in the range of 8% to 10% in the private credit market, private credit is offering ‘equity-like’ returns which is drawing investors into this growing asset class, according to Tim Keith, Managing Director at Capspace.
According to Mr Keith, a relatively high demand for capital from Australian businesses will also support returns from private credit. He sees private credit playing an important role in investors’ portfolios, delivering regular income to investors and strong returns after inflation.
“Depending on how the private credit fund is structured, investors are seeing returns in the 8% to 10% range across private credit. We see those returns being maintained and even potentially going a little higher if Reserve Bank does raise interest rates in coming months,” said Mr Keith.
“Australia is still in a reasonably high inflation rate environment. The June quarter CPI data this week shows headline inflation edged up to 3.8% from 3.6%. That consideration will be critical to the next RBA decision. We think that it is going to be a pretty close call. Even if the RBA does not rise, interest rates are likely to stay at current levels for the foreseeable future,” Mr Keith said.
That is likely to maintain the attraction of private credit, with the demand for capital high from businesses given the lending support from banks doesn’t meet the needs for credit of the economy.
Business credit (lending to non-financial businesses) grew by a healthy 7.8% over the year to June 30, 2024, compared to seasonally adjusted growth housing credit growth of 4.7%, data from the Reserve Bank of Australia (RBA) released this week reveal. Personal credit, which includes credit card lending, grew by just 2.8%. “We see the demand for private credit remaining high. And as the returns in private credit are driven by that demand as well as the premium to the RBA cash rate, we don’t see either of those two things changing in the near future. For income seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors yields almost double the return and well above the yields on rental properties which often fall below 5%,” Mr Keith said.
However, investors in private credit need to fully consider fund their liquidity needs and capital protection before investing in any fund. A key factor for investors is to ensure their fund manager invests their capital well and protects it through security, whether that comes through mortgages or general security over the businesses in which the fund invests.
“Liquidity varies among private credit investments, so investors need to consider how much liquidity they need. They also need to consider how their capital protected; that a critical factor.”
According to Mr Keith, despite the high level of business credit, higher interest rates are having an impact on the business community along with meeting their tax obligations.
“We are seeing insolvencies rise to the highest levels we’ve seen for quite a period of time. A lot of this is driven by the ATO, and the ATO is making sure that all businesses pay the debts owing to them and following through with recovery action.
“Certainly, in the market that we operate in the SME business market, getting funding from banks is continuing to be difficult. And so we see the demand for credit quite strong from SMEs,” Mr Keith said.
“But for our business, the demand for business credit is primarily driven through how difficult it is to deal with the big banks. We deal with successful businesses that have great prospects going forward. They they’ve been in existence for quite a long period of time, being quite successful in what they do, yet they still find it challenging to get credit from the banks. That is the market that we play in, private credit, which is as strong as ever.”
