Private Credit 101: What It Is and Why It's Growing

Why the Asset Class Deserves Attention

Private credit has become one of the most discussed topics in institutional investment circles globally, yet for many professional investors — including property developers, business owners, and their advisers — the mechanics of the asset class remain unclear. This article sets out the fundamentals: what private credit is, how it generates returns, and why it has grown so significantly in recent years.

What Is Private Credit?

Private credit refers to debt financing provided directly to businesses and borrowers by non-bank lenders — typically professionally managed funds — outside of public capital markets.

Unlike publicly traded bonds, private credit facilities are negotiated directly between the fund manager and the borrower. This allows for customised security structures, faster execution, and terms tailored to the specific circumstances of each transaction.

In practice, the asset class covers a wide range of facility types: term loans, revolving working capital facilities, property development funding, bridging finance, and equipment lending, among others.

How Returns Are Generated

Private credit returns are derived almost entirely from contractual interest income — the interest charged to borrowers across the portfolio. This is a fundamentally different return profile from equity investment, where returns depend on asset price appreciation, dividends, or an eventual liquidity event.

Because interest is established at the outset of each facility, private credit delivers:

• Predictable, recurring income that is largely independent of equity market conditions
• Low correlation with the volatility of listed markets
• A capital preservation orientation, supported by security registered against identifiable assets

Why Global Allocations Have Grown

Global private credit assets under management have grown at over 15% per annum in recent years. This reflects structural forces that are unlikely to reverse quickly.

Bank retrenchment. Rising regulatory capital requirements have caused banks across most developed markets to reduce exposure to SME and mid-market lending. Non-bank lenders have filled a genuine financing gap — they did not manufacture one.

Demand for income. Investors seeking consistent, contractual returns have increasingly looked beyond traditional bond markets to private credit as a credible alternative — particularly in environments where fixed income yields have compressed.

Diversification. Private credit offers a return stream that is largely uncorrelated with listed equity and public bond markets, which holds genuine value in portfolios seeking meaningful diversification.

The New Zealand Opportunity

New Zealand's private credit market sits at sub-2% penetration relative to comparable markets in Australia, the United Kingdom, and North America. The structural funding gap for New Zealand SMEs is estimated at over NZD 30 billion annually — driven by the same bank retrenchment dynamics visible globally, but amplified by New Zealand's concentrated banking sector.

This underpenetration does not reflect weakness in the underlying market. It reflects that New Zealand has been slower to develop a non-bank lending ecosystem, which creates a genuine opportunity for disciplined managers with local origination capability.

What Investors Should Assess

When evaluating a private credit opportunity, several factors warrant careful scrutiny:

Security structure. Is every facility secured against identifiable assets? What is the loan-to-value ratio, and how is that value assessed and monitored throughout the loan term?

Manager experience. Has the manager originated, managed, and successfully repaid similar loans before? A track record of capital recovery is more informative than a track record of origination volume alone.

Portfolio diversification. Is capital concentrated in a small number of borrowers or sectors, or spread across facilities with genuinely different risk profiles?

Governance. Are credit decisions subject to independent oversight through a formal investment committee, or does authority rest with a single decision-maker?

This article is for educational purposes only and does not constitute financial advice. Investors should seek independent advice before making any investment decision.