Private Credit is Booming But What About Your Liquidity?

Australia’s Private Credit Expansion

A decade ago, the term “private credit” to most Australian investors would’ve been known as a niche asset class; alternative asset management had not yet been considered as a core pillar or institutional and family office portfolios. Now, 42% of family office portfolios are now allocated to alternatives, indicating it to be a key driver in modern portfolios. Private credit in particular has emerged as one of the fastest-growing segments of the Australian private markets ecosystem.

Broader appetite for alternatives was visible across Australian markets in 2025 — for instance, ASX Small Caps outperformed the broader market by approximately 2.5 times, reflecting a wider rotation into non-traditional asset classes. Within private markets specifically, this trend has been driven by tightening bank lending and growing institutional demand. As traditional bank lending tightens and regulatory capital constraints limit the willingness of banks to fund certain segments of the economy, Australia’s private credit market has hit $224 billion.

This structural shift has accelerated in the past few years. According to research from the Reserve Bank of Australia, global private credit markets have grown substantially since the Global Financial Crisis, with non-bank lenders stepping into areas previously dominated by banks. Australia is following a similar trajectory, with strong demand for private real estate lending and corporate financing as borrowers seek flexible capital solutions. Industry forecasts suggest the domestic private real estate credit market alone could expand several-fold over the next five years as institutional and wholesale investors continue allocating capital to the strategy.

For investors, the appeal is clear: private credit strategies often target stable income streams and reduced correlation with public equity markets. In a volatile macro environment characterised by inflation shocks and rapidly changing interest rate cycles, the asset class has become an important component of diversified portfolios.

Family Offices and the Private Capital Shift

One of the most notable drivers of the expansion is the growing influence of family offices. Across Australia and globally, family offices have been steadily increasing allocations to private markets, adopting what is often referred to as an “endowment-style” investment model which favours private assets, real assets, and alternative income strategies over traditional public market exposures.

Recent industry analysis indicates family offices now account for a significant share of private capital deal flow in Australia, with some estimates suggesting they contribute close to 40% of activity in certain segments of the market. This shift reflects several structural forces:

the search for yield in a higher inflation environment
the desire for portfolio diversification
the ability of long-term investors to tolerate illiquidity in exchange for potentially higher risk-adjusted returns.

However, the rapid growth of private markets has also introduced new structural considerations. As more capital flows into closed-ended vehicles and longer-duration lending strategies, a growing portion of investor portfolios is being committed to assets with multi-year lock-ups. These structures can work effectively during stable market conditions, but they can present challenges when liquidity suddenly becomes valuable.

The Liquidity Trade-Off

Illiquidity is often presented as the price investors pay for enhanced yield. Yet the true cost of that trade-off tends to become visible only during periods of market stress. Regulators and researchers have referred to differences between public and private market pricing as the “liquidity illusion”. Because private assets are valued less frequently than publicly traded securities, they can appear less volatile even when economic conditions are changing.

The sharp global rate-hiking cycle of 2022 provides a recent illustration. As central banks rapidly lifted interest rates to combat inflation, public market assets repriced almost instantly. Investors holding liquid securities were able to rebalance portfolios, rotate into higher-yielding instruments, or take advantage of dislocations across credit and equity markets. Capital tied up in long-duration, lock-in private investments, however, had far fewer options. Yet, many private credit strategies continued to generate contractual income streams linked to lending agreements, which can provide a degree of stability within diversified portfolios.

This elucidates a core question facing private market investors today: “How do you capture the income benefits of private credit while maintaining enough flexibility to adapt in changing times?”

Credit seniority & precision execution

As private credit allocations expand, investors are increasingly examining how yield is generated, not just the headline return. Broadly, income in credit strategies is produced through two mechanisms: credit seniority in the capital stack and precision execution in credit markets. The seniority of assets refers to the structural order of priority in which assets are repaid in the event of defaulting or liquidation.

The hierarchy generally follows a well-established structure:

Senior secured debt
Senior unsecured debt
Subordinated debt
Equity

In practical terms, this hierarchy determines who is repaid first when a company’s assets are distributed during insolvency proceedings. Therefore, if a company goes bankrupt, the legal order regarding who gets paid back first benefits Secured Lenders from priority claims over assets. Positioning capital higher in the capital stack can therefore act as a structural layer of risk mitigation.

This pillar of risk management, often works in tandem with precision execution; an active operation of trading efficiently to maximise returns. In credit markets, execution refers to how effectively investments are sourced, structured, priced, and managed. Research in global fixed-income markets increasingly highlights execution quality as a measurable component of investment performance, particularly in fragmented or less transparent credit markets.

Together, these two approaches create complementary drivers of income: structural resilience through seniority, and operational efficiency through execution quality. For investors allocating capital to credit strategies, understanding this balance is central to evaluating how yield is generated within a portfolio.

What does protected liquidity look like?

From a portfolio perspective, liquidity plays an important strategic role. During periods of market stress, such as the global interest rate adjustments seen in recent years or the current eco-political tensions surrounding the world, liquid capital can allow investors to reposition portfolios as new opportunities emerge.Liquidity refers to how easily and quickly an asset is able to be turned into cash, this is an important aspect to note in one’s portfolio as you must balance maintaining liquidity for maximum financial flexibility when life throws things your way. Yet it’s especially tricky when keeping cash idle subjects it to inflation and misuse; however all investments come with a risk of losing capital.

There is a solution to this. Protected liquidity is the ideal balance of both situations, rather than choosing between keeping capital idle or locking it away for extended periods, some strategies aim to balance income generation with accessibility. The objective is to keep capital working while retaining the ability to adjust exposures as market conditions evolve. In practice, this approach may involve allocating capital to credit strategies that combine disciplined lending structures with access to liquid or actively managed credit markets, allowing portfolios to maintain both income characteristics and operational flexibility.

For many sophisticated investors, the ability to move capital can become as valuable as the income generated by underlying investments.

Growth and Resilience in Australian Private Markets

When economic conditions shift, investors must be focused on portfolio resilience – the act of balancing yield generation with liquidity management and structural risk protection. Conversations must shift from simply “where to allocate capital” to “how to allocate capital intelligently”, with the question remaining at the forefront for investors: “How resilient is your portfolio?”

Disclaimer

This article provides general information only and does not constitute personal financial advice. It has not been prepared with reference to your individual objectives, financial situation, or needs. Before making any investment decision, you should consider whether the information is appropriate for your circumstances and seek independent financial, legal, or tax advice. Investing in private credit and alternative assets involves risks, including the potential loss of capital. Past performance is not a reliable indicator of future results. Trivesta Funds Pty Ltd ACN 627 270 900 (Trivesta Funds) is a corporate authorised representative (AR No. 1274820) of Trivesta Capital Ltd ACN 126 975 282, which holds Australian Financial Services Licence No. 320497 (Trivesta Capital).