SME Private Credit Funds in Australia offer access to unique lending opportunities, promising attractive risk-adjusted returns, reasonably consistent and predictable income streams, and portfolio diversification. But is it the right investment for you?
This blog outlines seven signs that will help you decide if an SME private credit fund is the right investment choice for your financial goals. First, let’s understand:
What Are SME Private Credit Funds?
Private credit funds are investment vehicles that provide loans directly to emerging corporates, and SMEs, ranging from unsecured and subordinated lending all the way to senior-secured, asset-backed loans. These loans are often made to small and medium-sized enterprises (SMEs) that need capital but may not have access to traditional bank financing. As an investor, you will have the ability to earn interest income from an underlying loan portfolio, which can be structured to deliver a steady income stream, often at levels that are compelling relative to traditional fixed-income investments on a risk-adjusted basis.
You’re Seeking Higher Risk-Adjusted Yields Than Traditional Fixed-Income Investments
One of the primary reasons investors are drawn to SME private credit funds is the potential for significantly higher risk-adjusted yields relative to traditional fixed-income investments such as bonds and term deposits. In today’s relatively inflationary environment, these conventional options often offer yields close to the perceived inflation rate, meaning your investment may not keep pace with the rising cost of living.
Some of the most compelling SME private credit funds strategies can offer the opportunity to access attractive risk-adjusted returns. . For example, the Rixon Income Fund seeks to provide its investors regular monthly income with a net Target Return of 10–12% p.a.. The Rixon Income Fund offers these returns through a strategy focused on writing first ranking, senior secured, asset-backed loans..
You’re Comfortable with Moderate to High Risk
Understanding the risk profile of SME private credit is essential before making an investment decision. Private credit, even asset-backed lending, is riskier than government bonds or a term deposit. However on a risk-adjusted basis, these higher returns can be attractive as they are delviered without a necessarily exponential increase in underlying risk.
Identified lending risks may be mitigated through senior secured positions, tangible asset cover, and careful loan underwriting.
If you’re prepared to accept some risk in exchange for relatively, proportionately higher potential returns, an allocation to SME private credit could be the right choice for you.
You’re Are Looking for an Investment – not a Short-term Trade
Unlike listed equities or debt, SME private credit funds are materially less liquid. A redemption of an investment can take 30-90 days. Notably, investors are compensated for the absence of a daily traded market via an illiquidity premium which is one of the drivers of higher relative returns in SME private credit.
An allocation to SME private credit best suits investors who are looking to hold and build portfolios over the long-term.
You’re Seeking Diversification
Diversification is one of the cornerstones of sound investing, and private credit funds offer an excellent way to enhance your portfolio. By including private credit in your portfolio mix, you diversify away from listed equities, listed debt, and property (debt or equity). In addition, investors in a private credit fund benefit from exposure to a pool of loans rather than a single exposure.
You Want a Predictable Income Stream
One of the main attractions of some SME private credit fund strategies is their ability to target a consistent income stream. SME private credit loans are typically structured to pay interest regularly, often monthly if not quarterly. This predictable cash flow is aimed to translated into a regular income stream for investors.
Private credit funds in Australia can be an excellent option for those looking to supplement employment or dividend income. With SME private credit yields available from 10% p.a., these returns can generate meaningful cash flows without market volatility..
Your Fund Manager is an Expert in Their Lending Niche
Finally, when investing in a private credit fund, it’s crucial to have confidence in the fund manager’s expertise. Private credit lending requires a deep understanding of the SME credit market and the ability to assess, diligence, and and manage risk properly. When evaluating a potential private credit fund, it’s essential to look at the fund manager’s experience and track record.
For instance, the Rixon Capital investment team has over 20 years’ combined experience in the Australian credit market, and to-date, an impressive track record of originating, underwriting, and managing a portfolio of senior-secured, asset-backed loans. This experience ensures that your investment is being handled by professionals with a proven ability to deliver consistent, meaningful, risk-adjusted returns
SME private credit funds in Australia offer a compelling investment opportunity for those seeking higher risk-adjusted yields, portfolio diversification, and a predictable income stream. If you’re comfortable with moderate to high risk and seek to invest-and-hold, private credit could be the right investment choice for you.
Want to know how to invest in an asset-backed private credit strategy? Contact Rixon Capital today to understand how their senior secured, asset-backed strategy delivers its investors regular monthly income and a net Target Return of 10-12% p.a..
