Building a diversified investment portfolio requires exploring opportunities beyond traditional asset classes like equities, bonds, and real estate. In recent years, private credit has emerged as a compelling alternative for Australian investors seeking reliable income and tailored risk management. Private credit investments generate consistent returns while addressing specific financing gaps in the economy.

In this guide, we’ll delve into private credit investing, its relevance in Australia, and how it can be a powerful addition to your portfolio.

What is Private Credit?

Private credit refers to non-bank lending where private funds provide loans directly to businesses. These loans can be asset-backed and tailored to meet the unique requirements of both borrowers and investors. Unlike publicly traded debt, private credit investments are illiquid and inaccessible on public exchanges.

Private credit includes strategies such as direct lending, mezzanine financing, and distressed debt. These investments serve a wide range of borrowers, including small and medium-sized enterprises (SMEs) that often struggle to secure financing from traditional banking institutions.

Private credit is distinct because it provides flexibility that traditional banks cannot match, often structuring loans to address specific borrower challenges. For investors, this creates opportunities for higher returns due to the tailored and less commoditised nature of the asset class.

The Australian Private Credit Landscape

Australia has experienced a significant shift in its financial landscape, with private credit emerging as a vital financing alternative. The tightening of banking regulations and a growing SME sector have created opportunities for private lenders to fill critical gaps in the market. Private credit funds like the Rixon Income Fund have been instrumental in addressing these needs, delivering tailored, senior-secured lending solutions to high-quality borrowers.

Key drivers of growth in Australia’s private credit market include:

• SME Financing Needs: SMEs are often underserved by banks due to stringent regulatory constraints, creating a demand for non-bank funding options.
• Regulatory Changes: Banking reforms have limited traditional lenders’ capacity to serve mid-market borrowers.
• Institutional Appetite: Superannuation funds and institutional investors are increasingly allocating to private credit for its attractive risk-return profile and consistent cash flow.
• Economic Resilience: The adaptability of private credit makes it a critical component in Australia’s broader economic ecosystem, helping businesses thrive even during periods of economic uncertainty.

Australia’s private credit market has grown materially, with a rise in both the number of funds and total capital deployed. This growth indicates the sector’s importance in supporting businesses and providing lucrative opportunities for investors.

Why Consider Private Credit for Your Portfolio?

Private credit offers several compelling benefits for Australian investors:

1. Attractive Yields: Due to its illiquid nature and bespoke risk structures, private credit investments generally offer higher returns compared to traditional fixed-income assets.
2. Portfolio Diversification: Private credit has a low correlation with public markets, providing stability during periods of volatility.
3. Reliable Income: Structured as income-generating investments, private credit strategies can provide consistent cash flow, making it particularly appealing to income-focused investors.
4. Capital Preservation: Senior secured lending strategies focused on protecting investor principal through asset-backed structures and rigorous underwriting processes.

In addition to these benefits, private credit can help investors hedge against inflation, as interest rates on loans are often priced as a margin to the RBA Cash Rate or a similar benchmark.

Private Credit Strategies: A Tailored Approach

Investors can choose from diverse private credit strategies depending on their financial objectives:

• Direct Lending: Loans provided directly to mid-sized companies, offering tailored solutions often unavailable through traditional banks.
• Venture Debt: Financing for high-growth businesses, enabling them to expand with minor or no dilution ownership.
• Mezzanine Financing: A hybrid of debt and equity, providing flexible capital for growth or acquisitions.
• Distressed Debt: Investments in companies undergoing financial challenges with the potential for significant returns upon recovery.

Each strategy comes with its own risk-reward profile, enabling investors to align their investments with specific goals. For example, direct lending is often preferred for predictable cash flows, while mezzanine financing might appeal to those seeking higher returns through a combination of debt and equity.

The flexibility inherent in private credit allows for bespoke structuring, making it a dynamic tool for achieving a range of financial objectives.

How Private Credit Funds Work

Private credit funds pool capital from multiple investors to finance a portfolio of loans. These funds are managed by experienced investment teams that handle underwriting, capital deployment, and risk management. For example, the Rixon Income Fund specialises in asset-backed, senior-secured loans, delivering consistent monthly income for investors.

Key Functions of Private Credit Funds:

1. Capital Deployment: Financing SMEs and other borrowers who require flexible funding solutions.
2. Risk Mitigation: Comprehensive due diligence and collateral-backed lending help minimise risks.
3. Income Distribution: Regular interest payments from borrowers are distributed to investors, creating predictable cash flow.

By pooling resources, private credit funds allow individual investors to access a diversified portfolio of loans, reducing exposure to any single borrower or industry.

Balancing Risks and Rewards

Like any investment, private credit comes with its own set of risks. These include illiquidity, credit defaults, and sensitivity to economic conditions. However, the risks can be effectively managed through:

• Diversification: Spreading investments across borrowers, industries, and geographies.
• Experienced Management: Collaborating with skilled fund managers ensures robust risk assessment and underwriting.
• Asset-Backed Lending: Securing loans against high-quality collateral provides an additional layer of security.

Investors must also account for external factors like interest rate fluctuations and economic downturns. By aligning private credit investments with a broader strategy, risks can be mitigated effectively.

Why Work with Rixon Capital?

The Rixon Income Fund exemplifies the advantages of investing in private credit. With over $300 million in secured high-yield SME loans executed since 2018, the Rixon Capital team has a proven track record of delivering consistent returns to investors. The Fund focuses on:

• Attractive Monthly Income: Generating monthly net returns of 0.92% to 1.00% monthly for investors.
• Institutional Expertise: Leveraging a decade of experience in private credit and a history of complex public and private market corporate advisory transactions.
• Tailored Solutions: Offering non-dilutive funding for high-quality borrowers, ensuring mutually beneficial outcomes.

Rixon Capital’s commitment to rigorous due diligence and risk management ensures that both investors and borrowers benefit from secure, reliable financial arrangements.

Getting Started with Private Credit Investing

If you’re considering adding private credit to your portfolio, follow these steps:

1. Understand the Asset Class: Familiarise yourself with private credit strategies, risks, and benefits.
2. Evaluate Funds: Look for funds with strong track records and transparent reporting, such as the Rixon Income Fund.
3. Consult Experts: Seek advice from financial professionals to ensure alignment with your investment goals.

Investing in private credit requires a thorough understanding of both the opportunities and risks. Engaging with experienced managers like Rixon Capital ensures that your investments are well-positioned for success.

The Future of Private Credit in Australia

As the private credit market in Australia continues to grow, it offers an increasingly attractive opportunity for investors seeking stable returns and portfolio diversification. With robust regulatory frameworks and rising demand for non-bank financing, the sector is well-positioned for sustained expansion.

Opportunities on the Horizon:

• Expanding SME Sector: As SMEs drive Australia’s economic growth, the demand for private credit is expected to increase.
• Institutional Growth: More superannuation funds are likely to allocate capital to private credit as part of their long-term strategies.
• Technological Advances: Innovations in financial technology are streamlining the lending process, reducing costs, and improving efficiency for private credit managers.

Investing in private credit through a well-credentialed fund like the Rixon Income Fund can unlock significant potential for long-term wealth creation. By understanding the nuances of this asset class and working with experienced managers, you can confidently navigate the private credit landscape.

For more information on how private credit can enhance your portfolio, contact Rixon Capital today.