Buyer beware: Private credit as a defensive play

Financial advisers grapple finding a meaningful place for private credit in portfolios as investment experts urge them to carefully consider the risks of making it part of the defensive allocation.

The Stockbrokers and Investment Advisers Association (SIAA) Conference in Melbourne today discussed differences between traditional fixed income products, and private credit and alternative strategies.

Financial advisers, a panel of experts said, are at an interesting juncture - should they include private credit in the defensive portion of a diversified portfolio?

Schroders Australia head of credit Helen Mason told advisers: "Buyer beware."

"Do your due diligence. If you can't figure out what's in the portfolio and what's driving the returns, then how can you possibly understand the risk? And how can you price that risk?" she told the panel.

"It is very important to understand the fixed income landscape and what you want to be invested in. It's no doubt that we're in a more volatile period of time - that inflation is going to be higher and stickier and rates are going to be higher - and that will put pressure on corporates and households."

MA Financial group executive head of global credit solutions Frank Danieli said in the defensive part of a 60-40 portfolio, with the 40% being defensive and historically invested in bonds and liquid fixed income to deliver a source of income, there are several aspects that should be top of mind when considering private credit.

"How much within that 40% can I trade off liquidity in order to capture a premium return? That premium is delivered because of less liquidity and different liquidity features, but also due to proprietary origination and so on," he asked.

"When you think about it in that way, that has quite a good role within balanced portfolios."

Danieli observes that private credit has a "definitional problem" some advisers are grappling with. To tackle this, they should first start with defining what private credit is.

"Private credit is a loan that's not on a bank balance sheet, and not in the bond markets, but a loan on a spectrum of risk, [ranging from] investment-grade replacements to sub-investment grade replacements to opportunistic and high-risk alternatives. Each of those can have a valid place in people's portfolio, depending on client objectives.

"Once you deal with that question, then you have to say, how do I get it? Historically, this was an asset class available only to very large institutional investors.

"It is important not to start with, how do I get it? It's what within the private credit landscape do I actually want within a portfolio, and then where do I access it? They're the two questions that we see clients grappling within our channels," he said.

The private credit sector is facing unprecedented regulatory scrutiny in which regulator ASIC has put product providers on notice for opaque practices and transparency issues, particularly around fees.

To help address this, Danieli said advisers should consider the "first layer of the onion" to be the portfolio composition around disclosure and transparency.

If a fund has 150 loans, he said, it is important to understand which sectors these operate in, the type of loans and their credit characteristics and so on.

In layer two, advisers should be asking, 'Where's my risk-adjusted return coming from and is the product provider making these clear in investment documents?'

Other aspects to consider are what returns the loan portfolio generates after considering fees, if the fund is leveraged, the performance of a loan and possible defaults.

The final layer, he noted, is structural and governance transparency.

"The nature of how you're set up, what segregation of duties are in place and what independent processes or outside review that you have within the business. How do you conduct valuations and determine your credit ratings and so on? That all needs to be clear," Danieli said.

"It's not just about what's [in the fund]. It is about where are my returns coming from, and how's the governance working within this business?"

Financial Standard is the official media partner of the 2026 SIAA Conference.