Private credit: Dispelling the myths, defining the opportunity

As the once ‘alternative’ asset that is private credit becomes a portfolio staple, distinguishing risk from opportunity – and fact from fiction – remains a key challenge.

Separating facts from fiction when it comes to private credit could be well worth your time. Pic via Getty Images

Special Report: As the once ‘alternative’ asset that is private credit becomes a portfolio staple, dispelling certain preconceptions surrounding it and defining its opportunities remain key challenges. 

Words by Tom Cranfield, Executive Director, Risk & Execution, Zagga

Private credit may feel like a new frontier for Australian investors, emerging as a safe haven amid record high global market volatility, uncertainty, and geopolitical risks. Yet, globally, it has long played a proven role in delivering uncorrelated portfolio diversification and stable income. As this once ‘alternative’ asset becomes a portfolio staple, distinguishing risk from opportunity – and fact from fiction – remains a key challenge.

Private credit is a well-established asset class and, globally, is set to double to USD $2.8 trillion by 2028, according to the Preqin 2024 Global Report: Private Debt.

Locally, our market is in its nascent phase but is quickly maturing, especially in commercial real estate. Today, private credit accounts for 17% of Australia’s commercial real estate debt market  attracting the attentions of both local and offshore investors, with market share accelerating.

The growth of real estate private credit has been driven by certain key factors. Firstly, traditional lenders, like the major banks, have pulled back from construction projects due to capital and regulatory constraints.

At the same time, Australia faces a worsening nationwide housing shortage. These drivers have opened up institutional-grade lending opportunities to experienced private credit managers at a time when investors are bolstering their defensive, income-generating allocations.

While private credit offers a wide range of benefits, it is important to also understand the risks. Not all credit is created equal and thorough due diligence is essential. If a private credit manager claims they’ve never had a default, it should prompt serious scrutiny – it may suggest a very short track record, a lack of portfolio maturity, or selective disclosure.

Importantly, a default does not mean a loss. In private credit, defaults are a known and manageable part of the risk landscape. What matters most is selecting a specialist manager who can anticipate, mitigate, and respond to these risks – one who employs a disciplined, multi-layered investment process that includes robust credit assessment, conservative structuring, active loan monitoring, and access to underlying security.

These robust fundamentals ensure the manager is well placed to preserve investor capital even when a borrower defaults. The right manager doesn’t aim to avoid risk – they manage it with foresight and precision.

Busting myths

While prudent risk assessment is essential, investors must also separate fact from fiction. In private credit, persistent myths often cloud judgement and hold investors back from otherwise sound opportunities.

Here are four common myths that unduly keep investors up at night.

Myth 1: Illiquidity is the trade-off for private credit returns

Liquidity varies widely in private credit and the trade-off is not always binary. Direct investments are typically tied to a single loan and repaid at maturity – often after 6, 12, or 24 months. Fund structures, by contrast, offer pooled exposure across multiple loans with clearly defined liquidity provisions.

Zagga's model includes a 12-month initial lock-up followed by 90-day rolling liquidity – designed to balance portfolio stability with investor access.

As always, understanding the liquidity profile, exit mechanics, and underlying loan terms is key to aligning capital with investment objectives.

Myth 2: The Australian housing bubble is set to burst

There is constant fearmongering that the Australian housing market is on the precipice. To bust that myth, investors need only look at the facts and figures – the fundamentals of the Australian housing market remain strong.

As at end-March, mortgage arrears sit at a historically low 1.6% . Simultaneously, chronic undersupply, record migration, and resilient buyer demand – particularly in Sydney – continue to support market stability. Sydney continues to perform strongly, with solid clearance rates and tight rental conditions relative to long-term averages.

We place our focus on the Eastern Seaboard, with a preference for Sydney – a market defined by robust fundamentals, long-term demand dynamics, and sustained development activity. Its depth and resilience continue to generate a strong pipeline of quality investment opportunities, supporting capital preservation and income stability for our investors.

Myth 3: Lower interest rates = lower returns

Private credit returns are typically linked to interest rates, not market sentiment – offering stability amid shifting government policies and macroeconomic uncertainty. Introducing a defensive layer, like property, provides further uncorrelated diversification.

In real estate private credit, loans are commonly structured with floating interest rates, meaning returns move in line with the prevailing cash rate. While total returns may fluctuate with rate movements, when rates fall, as we are seeing in Australia, the margin above the cash rate remains.

For example, Zagga targets a return of 400 to 500 basis points above the RBA cash rate, regardless of where we are in the interest rate cycle.

This alignment offers a natural hedge against rate changes, unlike traditional fixed income securities, which can experience mark-to-market volatility as interest rates shift. While fixed-rate bonds may see capital value erosion when rates rise, private credit maintains its income margin – helping smooth returns across cycles and offering a defensive buffer in uncertain markets.

Myth 4: Construction collapse will destroy my investment   

While the Australian construction sector has faced headwinds, including a number of insolvencies, experienced managers know how to mitigate these risks. Success lies in identifying well-structured loans, backed by capable counterparties, and actively managing them through the life of the investment.

Track record, sector insight, and deep credit expertise matter. Investors should choose managers who have successfully navigated multiple investment cycles and who understand how to preserve capital and achieve successful exits, even in more challenging market conditions.

For our part, Zagga has returned over $1 billion in principal and interest with monthly returns averaging 9.47% (as at March 2025). Since inception eight years ago, we've invested in more than 300 commercial loan transactions in excess of $2.5 billion and completed 150 successful exits.

Private credit is firmly embedded in Australia’s lending landscape, and its relevance is only accelerating. In a market defined by constant volatility and growing uncertainty, disciplined credit investing offers a powerful combination of downside protection and reliable income. But as the asset class matures, distinguishing risk from opportunity — and fact from fiction — remains critical.

For investors, success depends on selecting the right manager, with the right risk lens – one who bring discipline, insight, and an investor-first mindset to every decision. In private credit, selectivity is everything.

The views, information, or opinions expressed in this article are solely those of the author and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial advice contained in this article.

This article was developed in collaboration with Zagga, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Originally published as Private credit: Dispelling the myths, defining the opportunity