Interest in private credit fuelled by desire for predictability

Self-managed super fund (SMSF) trustees are increasingly considering private credit as alternatives to term deposits and direct residential property have become less attractive, according to comments reported by SMSF Adviser from Prasad, an adviser in the sector. Prasad said that over the past 12 to 18 months trustees had assessed alternative investment options and found many wanting. He noted that term deposit rates have come off their peak, with better rates generally tied to long terms and conditions, and that fixed income's losses when rates rose in 2022 have left many trustees wary. He also described direct residential property, long the default SMSF asset, as low-yield, high-maintenance and illiquid, with land tax and compliance costs attached.

Prasad said the demand is driven by predictability, capital preservation, visibility of the underlying security and regular income. With borrowing rules for SMSFs and residential property changed, he said property-backed private credit resonates because trustees can understand the security. He also pointed to tighter bank lending, which has pushed a growing share of enquiries to non-bank lenders from borrowers that banks would previously have funded, including established developers and business owners with strong assets but uneven income. He said non-bank pricing has not fallen to match improved borrower quality because non-bank capital remains scarce relative to demand, and cautioned against managers still promising yields from three years earlier.

Prasad identified development and construction exposure presented as property-backed lending, fund concentration in related or single-developer loans, and liquidity mismatches as key risks. Warning signs include unusually smooth returns, valuations from a single valuer that consistently support the manager's needs, reluctance to disclose arrears or loan-level data, origination-based fees, and marketing that outweighs the credit team. He advised advisers to ask about the security position, whether LVRs are based on as-is or on-completion valuations, who performs credit assessment, how recent defaults were handled, whether redemption terms match loan terms, and who holds the AFSL and custody arrangements.

Looking ahead, Prasad said private credit is moving from a satellite to a core defensive allocation, with caveats. He argued senior first-mortgage funds at conservative LVRs belong with fixed income, while mezzanine or construction funds belong in the growth allocation, and that private credit should never make up the whole defensive allocation given its illiquidity. The article does not provide fund-level performance data or market size figures.