After an extended period of low interest rates, the Reserve Bank of Australia has moved decisively into a tightening cycle. This has shifted conversations towards when and how rate cuts might occur. For many investors, this back-and-forth creates uncertainty. Portfolios built for one environment may not perform as well in changed market conditions.
Investors often worry about income stability and capital preservation during these periods of ups and downs. This is why many investors start looking beyond listed markets. Private credit, while not new, is increasingly being considered as an alternative that responds differently to changing interest rate conditions.
This article explores how private credit typically performs during both interest rate cuts and tightening cycles, and why some Australian investors see it as a stabilising allocation.
What Is Private Credit?
Private credit refers to lending that takes place outside the traditional banking system. Instead of purchasing publicly traded bonds or shares, investors provide capital directly to businesses or projects, usually through a managed fund structure. These loans can be secured against cash flows (“cashflow lending”) or tangible assets such as property, equipment, or receivables (“asset-backed lending”), which can significantly change the risk profile.
At its core, private credit is about income. The appeal lies in its structure: loans are designed to provide a predictable stream of income from regular interest payments, while the secured nature of the lending offers a layer of capital protection. It fills a crucial gap in the market, especially for solid businesses that might find bank lending criteria too restrictive or slow. While not completely risk-free, private credit deliberately prioritises income and downside protection over growth.
How Interest Rate Changes Impact Traditional Investments
When rates shift, the ripple effects are widespread. During a cutting cycle, the immediate pain is felt in the income. Yields on term deposits and newly issued government bonds fall, squeezing retirees and income-focused portfolios. Equities might rally on cheaper borrowing costs, but that’s never a guarantee, and valuations can become stretched.
Conversely, during a tightening cycle, the script flips. Borrowing costs rise for everyone. Existing bond prices typically fall, and the property and share markets can stumble under the weight of higher financing expenses and dampened consumer sentiment.
It’s this pendulum swing that leaves many investors feeling they’re always on the back foot, reacting to forces entirely outside their control. This is when alternatives come back into focus.
Performance of Private Credit During Rate Cuts
One of the more distinctive traits of private credit investments is that returns are primarily driven by loan agreements rather than daily market movements. So when interest rates are cut, the impact depends less on sentiment and more on the structure of each loan.
For unsecured loans, where there’s no specific collateral, returns continue to come from agreed interest payments, provided the borrower remains financially healthy. Rate cuts can actually ease pressure on these borrowers, improving their ability to service debt and maintain consistent repayments.
With cashflow lending, the focus is on the borrower’s ability to generate steady income. When rates fall, financing costs across the business may reduce, which can strengthen cash flow coverage. That, in turn, supports ongoing interest payments and can even reduce default risk in some cases.
For asset-backed loans, where lending is secured against tangible assets, the underlying collateral remains a key source of protection. Even if yields compress elsewhere in the market, the security’s value and the contractual nature of repayments continue to anchor returns.
Because private credit isn’t directly priced by the market, it can continue generating relatively stable income even as traditional instruments like term deposits begin offering lower yields. That consistency can be reassuring, especially during periods when income from other sources starts to decline.
Performance of Private Credit During Rate Tightening
When interest rates rise, the dynamic shifts. Borrowers face higher costs, and the resilience of each loan structure becomes more important.
The absence of collateral in unsecured loans means the lender relies heavily on the borrower’s credit quality and financial discipline. As rates increase, weaker borrowers may come under strain, which is why rigorous upfront credit assessment and ongoing monitoring are critical.
In cashflow lending, rising rates can put pressure on interest coverage ratios. If a borrower’s income doesn’t grow in line with their debt costs, repayment capacity can tighten. This is where conservative structuring, such as lower leverage and strong covenants, plays a key role in protecting investors.
And for asset-backed lending, the presence of collateral provides an additional layer of security. Even if a borrower experiences stress, there is a tangible asset underpinning the loan. That said, asset values themselves can be influenced by broader economic conditions, so careful valuation and prudent loan-to-value ratios remain essential.
Across all three approaches, strong lending discipline becomes the differentiator. Conservative underwriting, detailed due diligence, and active portfolio management help ensure that loans are structured to withstand periods of higher rates.
Advantages of Private Credit in Changing Rate Environments
There are a few reasons private credit is often described as resilient across rate cycles. Predictable cash flow from interest payments is a major one. Another is its lower correlation to listed markets and daily interest rate movements, which can help smooth portfolio performance.
Capital protection also plays a role. Asset-backed lending provides an additional layer of security that many traditional income assets do not offer. Add diversification benefits on top of that, and private credit can function as a counterbalance rather than a replacement within a broader portfolio.
It is not about avoiding risk entirely. It is about choosing which risks you are prepared to live with.
Risks and Considerations
Private credit does carry risks. Borrowers can default, assets can lose value, and economic conditions can deteriorate faster than expected. Liquidity is another consideration, as private credit investments are not typically traded daily like shares or bonds.
This makes fund management experience particularly important. The ability to assess credit risk, structure loans conservatively, and actively manage exposures can materially influence outcomes. Investors should be comfortable with these dynamics before allocating capital.
How Investors Can Access Private Credit
Most investors access private credit through managed funds, such as income-focused private lending funds. Vehicles like the Rixon Income Fund are designed to provide exposure to diversified private credit opportunities while applying professional oversight and risk controls.
Minimum investment requirements often mean these funds are suitable for wholesale or sophisticated investors. Professional advice is usually recommended to ensure private credit fits appropriately within an overall portfolio and aligns with individual objectives.
Conclusion
Amid periods of interest rate cuts and tightening cycles, private credit has demonstrated the ability to deliver relatively stable income with a different risk profile from traditional assets. Its focus on direct lending, secured income, and capital preservation allows it to perform a distinct role whether rates are rising or falling.
For Australian investors seeking predictable income and portfolio balance, private credit is a sophisticated and increasingly essential component of their portfolios.
Speak to Rixon Capital
If you are exploring options to see how private credit can strengthen your portfolio, Rixon Capital can help. Contact our team to discuss investment strategies for a diversified approach.
Get in touch with Rixon Capital today.
