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Highlights

  • Private credit offers tailored loans outside traditional bank and bond channels.
  • LICs and LITs on the ASX provide listed access to private credit.
  • LIVs deliver diversification, professional oversight, and potential income.
  • Risks include leverage, liquidity pressures, and opaque valuations.

Private credit, which encompasses loans provided by non-bank entities, has rapidly emerged as a significant alternative asset class. Unlike traditional bank lending or public bond issuance, private credit involves bilaterally negotiated loans tailored to the specific needs of businesses. Private credit funds pool capital from investors, including pension funds, insurance companies, and high-net-worth individuals, and deploy it across a range of lending opportunities, generating income through loan interest, which is then distributed to investors.

Historically, investors primarily relied on stocks, bonds, and real estate for returns, while corporates raised capital through public offerings or bank financing. Today, market dynamics and regulatory shifts have increased the role of private credit. Businesses, particularly those with unique financing requirements or irregular cash flows, are turning to non-bank lenders more frequently, finding flexible solutions that traditional banks may not provide. In Australia, while still smaller than conventional business lending, the private credit market is expanding rapidly, reflecting growing investor interest.

Accessing Private Credit via the ASX

Private credit exposure on the ASX is available through established investment structures, primarily:

  1. Listed Investment Companies (LICs)

LICs are structured as public companies and follow corporate tax rules.

  • Profits from investments are taxed at the company rate before being distributed.
  • Dividend amounts are set by the board and can exceed actual earnings through capital returns or retained profits.
  • Dividends may be franked, offering potential tax benefits to investors.
  1. Listed Investment Trusts (LITs)

LITs operate as trusts and have a different tax treatment.

  • All income and realised gains are passed through to investors before tax.
  • Investors are taxed individually based on their own circumstances.
  • Distributions can include franking credits, depending on the underlying assets.

LICs and LITs are jointly referred to as Listed Investment Vehicles (LIVs) and provide a way to access private credit in a listed format.

Key Benefits of Investing in Listed Investment Vehicles (LIVs)

Listed Investment Vehicles (LIVs), such as LICs and LITs, offer a range of advantages to individuals seeking access to diversified and professionally managed portfolios.

Diversification: LIVs provide exposure to a wide mix of assets, sectors, or regions, such as international shares, bonds, or emerging markets, through a single investment, offering diversification that may be hard to achieve individually.

Professional Management: Portfolios are managed by experienced investment professionals who use strategies and insights not typically available to individual investors.

Growth and Income: Returns can be generated through both capital appreciation and regular income via dividends or distributions.

Stable Structure: With their closed-ended design, many LIVs are insulated from daily fund flows. This allows managers to focus on long-term performance without dilution from new investor inflows.

Key Risks in Private Credit Markets

Private credit’s rapid growth brings opportunities, but leverage, liquidity constraints, interconnected exposures, and opaque valuations raise potential risks to financial stability.

Leverage Risks: Private credit involves leverage at the investor, intermediary, and borrower levels. While fund leverage is lower than public markets, highly leveraged end borrowers increase systemic risk (IMF 2024; IOSCO 2023).

Liquidity Pressures: Illiquid assets and closed-end fund structures limit withdrawals, but large synchronized capital calls could force investors to sell other assets, amplifying market stress (IMF 2024).

Interconnectedness: Links between private credit, private equity, and banks create complex exposures. Conflicts of interest may arise when private equity firms influence borrowers’ management and capital structures.

Transparency & Valuation: Infrequent and subjective valuations may mask risks. Defaults are low but could be severe in downturns, with high loss given default.

To sum up, private credit has grown into a key alternative asset class, offering flexible financing beyond banks and bonds. Investors can access exposure via ASX-listed investment vehicles (LICs and LITs), which provide diversification, professional management, and income, but also carry unique risks.