The Attraction of Private Credit Versus Stocks

How does investing in private credit stack up against stocks?

Private credit has become one of the fastest-growing areas of global investing, emerging as a serious alternative to equities for investors seeking steady returns and diversification. While equity markets have long dominated the wealth-building narrative, private credit is quietly reshaping portfolio construction by offering attractive yields, lower volatility, and income-focused strategies.

Understanding the Two Asset Classes

At its core, equity investing means buying a stake in a company. Your returns depend on the company’s ability to grow and generate profits. The upside can be significant, but equity investors also shoulder the full volatility of the stock market, as prices can swing sharply based on earnings, sentiment, or macroeconomic conditions.

Private credit, by contrast, is about lending. Investors provide loans directly to businesses and, in return, receive regular interest payments. Unlike equities, where success depends on growth and valuation multiples, private credit returns are primarily contractual - tied to the borrower’s obligation to pay back principal plus interest.

Key Attractions of Private Credit

1. Predictable Income

   Many private credit funds distribute income monthly or quarterly, providing a steady cash flow that equities rarely match. For income-focused investors, this reliability is a central attraction.

   
   

2. Attractive Yields

   Private credit often delivers higher yields than traditional fixed-income assets such as government bonds or term deposits. In a low-yield world, this has helped the sector attract institutional and increasingly retail investors.

   
   

3. Diversification Benefits

   Because private credit returns are not directly tied to stock market performance, adding it to a portfolio can reduce reliance on equity market cycles. For Australian investors heavily concentrated in property and shares, this diversification is increasingly appealing.

   
   

4. Lower Volatility

   Equities are inherently volatile, particularly in times of market stress. Private credit, while not risk-free, tends to offer a smoother return profile because it is based on contractual cash flows rather than fluctuating market valuations.

   
   

5. Market Gap Opportunity

   With banks retreating from certain types of corporate lending, especially in mid-market business finance, private credit managers have stepped in to fill the gap. This has created opportunities for investors to earn returns by providing genuinely needed capital.

   
   

Comparing Risks: Private Credit vs Equity

Every investment carries risk, and private credit is no exception. While equities are exposed to valuation swings, growth shortfalls, and market sentiment, private credit faces risks such as borrower defaults, illiquidity, and limited transparency.

• Liquidity: Equities can be sold almost instantly on public markets. Private credit is different - investors are often locked in for years, with redemption windows tightly controlled. This illiquidity is a key trade-off for higher yields.

  
  

• Default Risk: If a borrower cannot repay, investors face potential losses. Fund managers mitigate this through diversification, covenants, and rigorous underwriting.

  
  

• Market Risk: In downturns, defaults may rise and asset valuations can be pressured, though income streams often remain more stable than equity dividends.

  
  

The Case for a Blended Approach

For investors weighing private credit against equities, the answer need not be either-or. Equities provide long-term growth potential, while private credit offers contractual income and diversification. A balanced allocation across the two asset classes can smooth portfolio volatility and provide both growth and stability.

Final Thoughts

Private credit is no longer a niche institutional strategy. It has matured into an accessible, income-focused option for investors who want more than the traditional equity-and-property playbook. For those comfortable with longer lock-up periods and credit risk, private credit can be a powerful complement to equities in building resilient portfolios.

References

1. PitchBook Data – Global Private Credit Report 2023

2. Australian Financial Review – Growth of Non-Bank Lending in Australia

3. Investopedia – Liquidity Definition

4. CFA Institute – Alternative Investments: Private Debt

5. Preqin – Private Credit Fund Structures and Liquidity

   
   

Disclaimer: This article is for general information and education only. It does not take into account your personal objectives, financial situation, or needs. Nothing here should be considered financial advice, investment advice, or a recommendation. All investments carry risk, and you may lose money. Before making any financial decisions, consider seeking independent advice from a licensed professional.