Much of this activity, he says, takes place in areas where banks have stepped back since the global financial crisis. Regulatory changes reduced banks’ ability to use short-term customer deposits to fund long-term loans, creating space for non-bank lenders to operate.
That withdrawal has contributed to what Richardson describes as a supply-demand imbalance for bilateral loans to global mid-market corporations. “The fund manager is able to negotiate with the borrower really good contractual protections to preserve capital,” he says. These protections often include monthly reporting, giving the lender early warning if a borrower’s performance deviates from plan, and senior security in the capital stack.
Selectivity is central. “We tend to lend to companies that are defensive in nature – non-cyclical, with a reason to be there,” he says. “They have stable income streams, strong cash conversion, and very low capital intensity, so they don’t have to keep reinvesting heavily in the business.” Loan-to-value ratios typically sit between 30 and 50 per cent.
Nehemiah Richardson, chief executive and managing director of Pengana Credit and subsidiary term-account platform, TermPlus.
Another feature is floating-rate income, which adjusts with benchmark interest rates. “If the income floats, it can move with rates, which for certain investors can be important,” Richardson says.
Diversification is a recurring theme in Richardson’s approach. In a balanced portfolio of cash, fixed income and equities, heavy concentration in listed shares can leave investors exposed to sharp downturns. “While you can get great upside when markets are up, you can also have big downside when they’re down,” he says. “Diversifying across asset classes – and within them – can help manage that.”
Within private credit, this means avoiding concentration in a single manager or geography. “No single manager will always outperform, so you want to be as diversified as you can. The US and Europe can have different dynamics, so having exposure to both makes sense,” he says.
Richardson also stresses the importance of understanding how income is generated. “Number one, understand what’s creating the income and what the risk is. Number two, understand the frequency and nature of the income – is it fixed or floating? Number three, know when you get your capital back, and how liquid or illiquid it is,” he says.
Liquidity arrangements vary widely, from daily access through listed structures to fixed lock-up periods via a term account, and some products may impose penalties for early withdrawal. “It’s very important to know if you will get your money out as and when you expect it” Richardson says.
This renewed focus on income is mirrored in global developments. Independent advisers say structures in global private credit are shifting to accommodate demand for more predictable distributions, while still a relatively illiquid asset class.
Marcus De Kock, alternatives investment director for the Pacific region at Mercer.
Marcus De Kock, alternatives investment director for the Pacific region at Mercer, says demand from wealth managers and individuals has driven a proliferation of new structures. “We’re seeing a lot of semi-liquid or evergreen funds coming to market, and that’s really been driven by the retail and wealth management side,” he says.
He notes that private credit’s floating rate structure has acted as an inflation proxy in recent years. “It’s historically been floating rate debt, and in the inflation environment we’ve had, that’s been a real benefit in portfolios,” he says.
At the same time, he cautions that flexibility brings trade-offs. Semi-liquid funds can provide more frequent access, and as such investors need to ask hard questions about how that liquidity is being provided – whether through cash buffers, liquid credit or redemption limits. “The underlying loans are still typically buy-and-hold, so it’s important to understand where the liquidity comes from,” De Kock says.
This renewed focus on income stability is taking place against a backdrop of subdued household confidence. The Westpac–Melbourne Institute Consumer Sentiment Index in July rose slightly to 93.1, but remained well below the neutral level of 100. “Australia’s consumer sentiment recovery experienced another ‘false start’,” the Institute reported, noting that cost-of-living pressures and concerns over economic conditions remain elevated.
For Richardson, the appeal of certain income strategies is less about chasing overly high returns and more about protecting the portion of capital allocated to fixed obligations. “If you have excess assets and you’re fine accumulating, that’s great – but if, for example, you are relying on capital to generate income to meet everyday needs, it is critical that you have stable, reliable income while protecting your capital,” he says.
As access to global private credit broadens in Australia, it is becoming part of the conversation about how to build resilience into a portfolio. “In credit, the return you get is the interest on your capital. You don’t get upside on the capital itself, just your capital back. So you want to minimise downside. To do so, diversification is critical. You want to minimise concentration risk, and make sure you’re building something that can withstand whatever comes next,” Richardson says.
For those looking to safeguard their income against market volatility, the questions remain the same: where does the income come from, what risks underpin it, and how accessible is the capital? The answers, Richardson says, are critical in determining whether a strategy fits the role it is meant to play in a broader investment mix.
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