Private Credit vs. Public Credit in Australia: Key Differences & Investment Risks

Posted on: 4 February 2025

Credit markets are a fundamental part of Australia's financial system, providing capital to businesses, governments, and individuals. Investors can choose between private credit and public credit, depending on factors such as risk appetite, liquidity needs, and expected returns. With Australia’s evolving financial landscape, particularly the rise of non-bank lending and alternative credit markets, understanding these two forms of credit is more crucial than ever.

This article explores the key differences, risks, returns, and investment opportunities in private credit vs. public credit in Australia.

Understanding Private Credit in Australia

Private credit refers to loans and debt financing that are not publicly traded on exchanges. Instead, these transactions occur privately between lenders and borrowers, offering customised financing solutions.

Key Characteristics of Private Credit in Australia

Privately negotiated loans: Unlike bonds, private credit transactions happen directly between lenders and borrowers.
Higher yields: Due to increased risk and reduced liquidity, private credit investments typically offer higher interest rates.
Less liquidity: Investors may need to hold positions until maturity, as there is no active secondary market.
Fewer regulatory requirements: Compared to public credit, private credit involves less oversight from regulators like ASIC and APRA.

Common Sources of Private Credit in Australia

Non-bank lenders and private equity firms
Direct lending funds
Mezzanine financing (hybrid debt-equity instruments)
Distressed debt funds

Understanding Public Credit in Australia

Public credit includes debt instruments that are issued and traded in public markets. These include Australian government bonds (Commonwealth Bonds), corporate bonds, and municipal bonds, which investors can buy and sell on exchanges or through brokers.

Key Characteristics of Public Credit in Australia

Publicly traded: Bonds and other securities are traded on platforms like the Australian Securities Exchange (ASX).
Transparent and regulated: Issuers must adhere to strict disclosure requirements under ASIC regulations.
Higher liquidity: Investors can buy or sell public credit instruments more easily.
Lower yields: Due to lower risk and market liquidity, returns on public credit investments are generally lower.

Section	Topics Covered
Introduction	Overview of private and public credit in Australia, role in financial markets
Understanding Private Credit in Australia	Definition, characteristics, sources of private credit
Understanding Public Credit in Australia	Definition, characteristics, sources of public credit
Key Differences Between Private and Public Credit	Market accessibility, regulation (ASIC & APRA), liquidity, transparency
Investment Structures in Private Credit	Direct lending, mezzanine financing, distressed debt, special situations
Investment Structures in Public Credit	Australian government bonds, corporate bonds, municipal debt, hybrid securities
Risk Factors in Private Credit	Liquidity risk, credit risk, interest rate risk, regulatory risk
Risk Factors in Public Credit	Market risk, credit rating downgrades, inflation risk, interest rate sensitivity
Returns and Yield Comparisons	Typical returns in Australian private vs. public credit markets
Liquidity Considerations	Which is more liquid and why?
Regulatory Differences	ASIC and APRA regulations, disclosure requirements, investor protections
Accessibility for Investors	Who can invest in private credit vs. public credit in Australia? Institutional vs. retail investors
Market Trends and Growth of Private Credit	Expansion of private lending, role of non-bank financial institutions
Market Trends in Public Credit	Role of bond markets, economic influences, RBA impact
Impact of Economic Cycles on Credit Markets	How recessions, inflation, and interest rate changes affect private vs. public credit
Pros and Cons of Private Credit	Advantages and disadvantages for Australian investors
Pros and Cons of Public Credit	Advantages and disadvantages for Australian investors
How to Choose Between Private and Public Credit	Investment objectives, risk tolerance, liquidity needs
Future Outlook for Credit Markets	Trends in alternative lending, digital finance, regulatory changes
Conclusion	Final thoughts on private vs. public credit investment in Australia

Common Sources of Public Credit in Australia

Australian Commonwealth Government Bonds (ACGBs)
State and municipal bonds
Corporate bonds (investment-grade, high-yield)
Hybrid securities (convertible bonds, preference shares)

Key Differences Between Private and Public Credit in Australia

Feature	Private Credit	Public Credit
Market	Private, negotiated between parties	Public, traded on ASX and OTC markets
Regulation	Lightly regulated (ASIC & APRA oversight but fewer disclosures)	Highly regulated, strict disclosure requirements
Liquidity	Low liquidity, long holding periods	High liquidity, easily tradable
Returns	Higher yields to compensate for risk	Lower yields but greater security
Access	Institutional and wholesale investors	Open to retail and institutional investors

Regulatory Considerations in Australia

Private credit is subject to Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) oversight but faces fewer regulatory hurdles.
Public credit must comply with stricter ASIC regulations, including disclosure requirements and investor protections.

Returns and Yield Comparisons

Private credit in Australia often offers returns ranging from 6% to 15%, depending on risk levels and loan structures. Public credit yields vary, with government bonds yielding around 3%-5%, while corporate bonds and hybrids can offer slightly higher returns.

Pros and Cons of Private Credit in Australia

Pros:

Higher potential returns compared to public credit
Customised lending solutions
Less exposure to public market volatility

Cons:

Limited liquidity, making exit difficult
Higher borrower default risk
Mostly restricted to institutional and wholesale investors

Pros and Cons of Public Credit in Australia

Pros:

Easily tradable on the ASX and OTC markets
Transparent pricing and regulation
Accessible to retail investors through bonds and ETFs

Cons:

Lower returns compared to private credit
Market volatility can impact bond prices
Interest rate risk, particularly for long-duration bonds

How to Choose Between Private and Public Credit in Australia

Investors should consider:

Risk tolerance - Public credit suits conservative investors, while private credit is for those willing to take on higher risk.
Liquidity needs - Public credit provides easy access to funds, while private credit requires longer-term commitments.
Return expectations - Higher returns in private credit may be attractive, but investors must be comfortable with its risks.

Conclusion

Both private credit and public credit play vital roles in Australia’s financial markets. Private credit offers higher returns and flexibility but comes with higher risk and lower liquidity. Public credit, on the other hand, is transparent, liquid, and lower-risk, making it an attractive option for many investors.

Understanding the differences between private and public credit in Australia can help investors make informed decisions based on their financial goals, risk appetite, and liquidity preferences.

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Investing 101

Private Credit vs. Public Credit in Australia: Key Differences & Investment Risks