Private credit now plays a major role in global finance. A decade ago, most investors had not heard of it. Today, it is a multi-trillion-dollar global asset class, with both the US and Australia building strong but distinct markets. The US market is bigger and more established. Australia’s is newer, smaller, and shaped by a different mix of borrowers. Before investing, it is worth understanding these differences because, on closer reading, the structural features of the Australian market make a genuine case for better risk-adjusted outcomes, not just a smaller version of the US opportunity.
This article covers what private credit is, how the US and Australian markets differ structurally, and why those differences, in light of market maturity, leverage, and the regulatory regime governing enforcement, support the view that Australian private credit deserves a larger allocation in a diversified portfolio than its size alone would suggest.
What Is Private Credit?
Private credit refers to lending outside the regular banking system. Companies and projects obtain loans from private funds, institutional managers, or groups of lenders rather than banks. Terms are negotiated directly between borrower and lender, without a public exchange or the standardised process a bank would apply.
There are several common strategies in private credit, and most funds focus on one or two rather than trying to cover everything:
- Senior secured lending: loans sit at the top of the capital structure with first claim on assets.
- Asset-backed lending: loans secured against specific collateral such as property, equipment, or receivables.
- Mezzanine finance: sits between senior debt and equity, offering higher risk and higher potential return.
- Specialty finance: covers niche lending areas such as trade finance or litigation funding.
Why the US Private Credit Market Is So Large
The US private credit market grew quickly after the Global Financial Crisis. As banks faced stricter capital rules and pulled back from lending to mid-sized companies, private managers stepped in with faster, more flexible deals than banks could offer.
Over the following fifteen years, this gap turned into a full ecosystem. The largest and most established segment is sponsor-backed direct lending: cash-flow-based loans financing private-equity-owned middle-market companies, including buyouts, add-on acquisitions, and refinancings. This is the origin of the US market’s scale, and it remains its biggest single category, though it would be an oversimplification to call the whole market simply “PE deal financing”. Asset-based finance, non-sponsor lending to independent businesses, and newer verticals such as infrastructure and data-centre financing have all become significant, less sponsor-dependent categories in their own right.
Scale has brought real benefits: deeper specialisation, more liquid secondary structures, and a wider range of strategies than a smaller market can support. But scale has also brought intense competition for deals, and, as covered below, a market structure that increasingly depends on leverage to deliver competitive returns to investors.
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The Australian Private Credit Market: A Different Structure
Australia’s private credit market is smaller but has grown quickly, now estimated at around $200 billion in assets under management. It is a meaningfully different market from the US, not just a smaller version of it, and one important nuance is that Australian private credit is not a single, homogeneous category.
Roughly half of the Australian market is estimated to sit in real estate–related lending, spanning property development finance and construction lending, a much larger share than in the US or other comparable markets. The remainder is spread across corporate and SME lending, trade finance, and specialty strategies. This SME/corporate segment itself isn’t uniform: some lending is asset-backed (secured against receivables, equipment, or other collateral), while other SME lending is cash-flow based, underwritten against the trading performance and earnings of the business rather than a specific asset pool.
It is important to make this distinction since property development lending and SME/corporate lending have genuinely different risk factors; the former is subject to construction completion risk, presale conditions, and fluctuations in the property market cycle, while the latter is exposed to trading cash flows, collateral quality, or operating performance depending on the way the loan is structured. To treat ‘Australian private credit’ as a single, undifferentiated category reveals more than it explains, and investors should ask their manager directly about the proportion of the fund invested in property development versus corporate/SME lending, and inquire how each is underwritten and secured.
It is also necessary to address a widely held belief, namely that Australian private credit is only available to wholesale or experienced investors. According to the regulatory surveillance conducted in 2025–26, retail-registered funds are considerably more numerous than wholesale-only funds in Australia, and retail investor involvement has been increasing; this is a major reason the sector has attracted greater regulatory scrutiny.
The Case for Australia: Three Structural Advantages
The size of the market is often seen as an indicator of quality, with larger and more established markets regarded as safer or more efficient. However, on closer examination, three structural characteristics of the Australian market suggest the opposite to disciplined and risk-aware investors.
- A less crowded market supports better risk-adjusted returns
The US direct lending market is intensely competitive: a large and growing pool of capital chasing a finite set of sponsor-backed deals has compressed lending spreads over the past cycle, particularly at the larger end of the middle market. Australia’s smaller, less mature market has fewer lenders relative to borrower demand in several segments, particularly the sub-$20 million SME space, which sits below the deal size most institutional capital is built to service. This is not true across the Australian market, and competition is increasing as more capital enters the market. Still, in the segments where it holds, it supports wider margins and stronger lender terms for disciplined participants, rather than the spread compression evident in the more crowded end of the US market.
- Leverage is doing more of the work in US returns than headline yields suggest
This is the least-understood difference between the two markets, and it matters enormously when comparing “returns” at face value. US Business Development Companies (BDCs), the dominant vehicle for direct lending, are permitted to run leverage of up to 2.0x debt-to-equity. While most operate more conservatively than the regulatory ceiling, fund-level leverage is a structural feature of the US model, not an occasional tool: it exists because an unlevered direct lending portfolio does not generate the double-digit return on equity the market has come to expect, and leverage is what closes that gap. On top of fund-level leverage, the underlying borrowers themselves are often leveraged at higher multiples of earnings than would be typical for an Australian SME borrower. That is two layers of leverage, at the fund and at the portfolio company, standing behind headline US private credit returns.
On the other hand, Australian private credit funds that operate in the SME and asset-backed sectors are generally conservatively leveraged, often with very little or no leverage at the fund level, and lend against lower borrower leverage multiples because the loans are secured by smaller, first-ranking assets. A fund which achieves a return that is at least as good as, or better than, that of others without making use of fund-level leverage is thereby assuming less structural risk in doing so. When investors compare the headline yields in the two markets, they should inquire into the level of leverage at both the fund and borrower levels, since two funds offering similar returns are not necessarily exposing themselves to similar levels of risk to achieve them.
- Australia’s creditor-friendly regime supports better recovery outcomes
The way insolvency and enforcement systems function determines what actually happens when a loan becomes problematic, and in this respect the two markets are very different. Australia’s insolvency system is generally seen as favourable to creditors, since secured creditors usually have strong rights and a high priority in an external administration; receivership remains an available and frequently used method of enforcement, and creditors are actively involved in the process, often with only limited need for court intervention. On the other hand, the US system works on the basis of Chapter 11, a debtor-in-possession approach intended to allow the current management team some time to reorganise, featuring an automatic stay which limits the ability of creditors to take enforcement action and a procedure that can considerably prolong the time it takes to recover debts.
Neither regime is incorrect and has valid policy justifications. However, for a lender, quicker and more certain enforcement of the security is a real credit advantage, and in this respect the Australian system more directly supports the basic idea of asset-backed, senior secured lending than the US system does. This is a significant and frequently neglected factor in explaining why the recovery results from a well-underwritten Australian asset-backed loan can be comparable to those of a similarly rated US cash-flow loan.
Key Structural Differences Between US and Australian Private Credit
Market Size and Maturity
The US market, with a value estimated at the low trillions, is large and deep, covering a wide range of sectors. Australia, with a figure of about $200 billion, is much smaller but growing rapidly, with growth in part due to increasing allocations from superannuation funds to this asset class.
Borrower Profile
US private credit’s largest segment is sponsor-backed lending to private-equity-owned middle-market corporations, though asset-based finance and non-sponsor lending are significant and growing categories alongside it. Australian private credit splits across two quite different borrower bases, property developers and SMEs, each with a distinct risk profile, rather than a single homogeneous category.
Loan Security
In the United States, the main method of lending is based on a borrower’s current earnings, whereas in Australia, property development loans are mostly asset-backed and are secured by the actual real estate. With respect to SME and corporate lending in Australia, the situation is more varied, since some is asset-backed and secured by receivables, equipment, or other collateral, while some is based on cash flow and secured by the trading business itself.
Leverage
The return on direct lending in the United States is usually backed by leverage at the fund level (leverage may be as high as 2.0 times debt-to-equity for BDCs) in addition to the borrowers’ own leverage. In Australia, lending to SMEs and borrowers with assets is generally conservatively geared at the fund level for borrowers with lower leverage.
Regulatory and Enforcement Environment
Both markets are regulated, but differently, and the difference extends to what happens on default. In Australia, most private credit funds operate under an Australian Financial Services Licence (AFSL), and access to many funds depends on the wholesale-versus-retail investor test under the Corporations Act, though a substantial share of the market is, in fact, retail-accessible. ASIC has flagged fee transparency, valuation practices, and conflicts of interest as its key surveillance priorities heading into 2026. Australia’s insolvency and enforcement regime is broadly creditor-friendly. In the US, most private credit vehicles rely on exemptions from the Investment Company Act, with BDCs, many now open to retail investors through non-traded structures, a significant part of how individuals access the asset class, and the US insolvency regime (Chapter 11) is a debtor-in-possession model that favours the borrower’s ability to reorganise over swift creditor enforcement.
Competition Among Lenders
The US market is highly competitive, with substantial capital chasing a large pool of deals, which compresses lending spreads. Australia’s market has fewer lenders relative to borrower demand in several segments, which can support wider margins for disciplined lenders — though this varies significantly by sector and deal size, and competition has been increasing as more capital enters the market.
How Risk Profiles Differ
The level of collateral, the amount of leverage, and the enforcement arrangements all directly affect risk and the recovery outcome. In Australia, asset-backed loans are more common and provide clearer routes for recovery should the borrower experience difficulties, on the condition that the collateral is truly liquid and correctly valued, and because Australia’s enforcement environment, which is friendly to creditors, enables quicker action on that collateral than the US system, which allows debtors to remain in possession. In the United States, by contrast, cash-flow loans are the main type and rely on the borrower’s continued earnings, so recovery becomes less certain if performance declines, a situation worsened by the insolvency system that gives preference to reorganisation. Within Australia too, lending to property developers and lending to small and medium-sized enterprises or corporations has different risk factors; in the case of property development lending the risks are linked to cycles in the construction and property sectors, while in the case of SME and corporate lending the risks depend either on the value and liquidity of the specific collateral or on the borrower’s trading performance, depending on the structure of the loan. Both of these markets are affected by the broader credit cycle, although the ways the impact is transmitted differ.
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Income and Return Expectations
Yields differ across and within markets, shaped by risk appetite, competition, leverage, and the way loans are structured and secured. Both markets predominantly use floating-rate loans, which offer some protection against interest rate movements. The critical point for investors is that headline yield is not a like-for-like comparison between the two markets: a US return built on two layers of leverage is not, risk for risk, equivalent to a similar or lower Australian return built on conservative gearing and first-ranking security. Risk-adjusted, leverage-adjusted returns, not headline yield, should drive manager and market selection.
What Australian Investors Should Consider
- Diversify across market structures, not only across funds; US and Australian private credit carry different underlying risk drivers.
- Within Australia, understand whether a fund’s exposure sits in property development, corporate/SME lending, or a mix, and how much of each.
- Ask what leverage, fund-level and borrower-level, sits behind any quoted return, in either market.
- Factor in currency risk when investing offshore.
- Choose managers on track record and underwriting discipline, not headline yield alone.
- Understand what is actually in the loan portfolio, security type, borrower concentration, and valuation methodology, not just the advertised return.
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Where the Case for Australia Has Limits
In fairness, the Australian market’s advantages come with trade-offs investors shouldn’t ignore. It is smaller and less liquid than the US market, with fewer managers, less standardised reporting, and a shorter track record through a full credit cycle at scale. Real estate–related lending still represents roughly half the market, so sector concentration is a real consideration even for investors seeking pure corporate/SME exposure. And the market is itself under active regulatory review; ASIC’s 2025–26 surveillance work exists precisely because practices across some funds have not kept pace with the market’s growth. None of this changes the structural case above, but it means manager selection and transparency matter at least as much in Australia as market-level structural advantages do.
Future Outlook for Private Credit
Both the US and Australian private credit markets are expected to keep growing, with more global institutional capital entering both. In Australia, growing superannuation allocations are a key driver. The central question for both markets is whether growth remains disciplined as more capital and retail participation flow in; for the US in particular, that question is closely tied to whether leverage levels and underwriting discipline hold up through a full credit cycle.
Conclusion
Market size is not the same as market quality. On a close, structural comparison of competitive intensity, leverage, and the regime governing what happens when a loan goes wrong, Australian private credit, and disciplined asset-backed SME lending in particular, presents a genuinely strong risk-adjusted proposition relative to the US market, not merely a smaller or less mature one. That case rests on real trade-offs too: a smaller, less liquid, still-maturing market under active regulatory scrutiny. The right response to that isn’t to avoid the market; it’s to select managers who underwrite conservatively, are transparent about leverage and concentration, and can demonstrate why their approach earns its return without relying on the leverage that underpins so much of the US market’s headline performance.
Want to explore the Australian private credit market?
Rixon Capital offers private credit strategies focused on Australian small and medium-sized businesses, with an emphasis on capital preservation and careful underwriting. Get in touch with our team to talk about current fund options, target returns, and how our approach compares to others. Visit rixon.capital to learn more.
