The world is an uncertain place. From on again, off again Trump tariffs and escalating geopolitical tensions to softening rate cycles, investors are facing significant headwinds.
The smart money – from institutions to high-net-worth-investors (HNWIs) – is recognising the need to defend wealth from rising volatility. Yet, increasingly, public markets are not providing the diversification or defence needed to ride out market turbulence.
Traditionally, multi-asset portfolios have relied on the negative correlation between bonds and equities for diversification. Yet, increasingly, we are seeing a positive correlation in public markets. 2022 was an extreme example, where we saw significant correlated dips in both bonds and equities. With current heightened volatility in global markets, investors need true diversification and downside protection via uncorrelated asset classes.
This search for diversification has driven the rise of alternative asset classes, like private credit, with approximately $40 billion currently outstanding in Australia1. Real estate private credit, specifically, offers unique diversification benefits as it provides exposure across three asset classes: fixed income, property, and alternatives. This diversified exposure means it has low to negative correlation with traditional assets and public markets.
The demand, and appeal, is growing.
In 2024, Australia’s private credit market saw year-on-year growth of more than six percent2. Institutional money is leading the way, with Australia’s largest super funds, like Australian Super and Aware Super, allocating billions to the sector. Cbus is on-record noting it wants to triple its exposure in the coming 18 months. Globally, advisers are also jumping on board, with 60 percent of advisers planning to allocate at least 10 percent of client portfolios to private markets in 20253. Private credit has established itself as a go-to asset class for investors seeking diversification and defence in times of uncertainty.
Globally, the sector is expected to nearly double to US $2.8 trillion by end-20284. Yet, Australia’s market opportunity remains largely untapped. This is rapidly changing. Australian family offices are actively exploring opportunities, with investment exposure growing from under 10 percent in 2019 to almost 40 percent in 20245. The wealth of Australian HNWIs is also reaching record highs, with growth outpacing global peers. Research shows private credit is a stand-out asset class for these individuals given the attractive risk-adjusted returns and capital preservation6. We are seeing these trends reflected in Zagga’s investor base. In the financial year to date, our funds under management (FUM) have grown by almost 30 percent. More than 40 percent of our investors are HNWIs, while almost 15 percent of investment comes from family offices.
Australia is uniquely placed to seize the private credit opportunity, particularly in real estate. The real estate sector continues to benefit from long-term population growth, infrastructure investment, and a robust regulatory framework, making it a reliable asset class for investors seeking stable yields, reliable income, and capital preservation. At the same time, tightening bank lending conditions and a growing demand for alternative financing have created significant opportunities, providing institutional-grade investments with attractive yields and lower correlation to traditional asset classes.
For income seeking investors, the benefits are hard to ignore.
Private credit offers compelling, predictable, and stable returns, with distributions funded by interest payments from the underlying loan. For example, Zagga delivered average monthly returns of 9.80 percent p.a.7. Yet, unlike equities, private credit can offer greater downside protection given the security offered by a senior lender position. This risk-adjusted income continues to perform during periods of economic downturn and serves as a shelter from inflation making it an attractive choice in volatile times.
Our burgeoning market has captured the attention of investors from across the Asia-Pacific (APAC) region. Australia’s solid economic foundations and promising growth prospects are driving interest from serious investors seeking exposure to stable returns, portfolio diversification, and defensive investment opportunities, within a well-regulated market. With a well-developed legal and regulatory framework, robust governance, and a resilient economy, Australia stands out as an ideal destination for long-term capital deployment. This appeal has only strengthened with heightening tensions between the US and China and the collapse of China’s property sector. Today, 15 percent of Zagga’s FUM comes from APAC investors, with affluent markets like Singapore and Japan driving inflows.
To meet this growing appetite, Zagga registered its flagship unlisted fund, the Zagga CRED Fund, as a Foreign Investment Trust in Japan last year.
We are not alone, competition from Australian private credit funds is steadily rising in APAC. As global uncertainty persists, the opportunity to capture premium returns through Australian real estate private credit is only growing.
Today, investment risks are heightened. This has seen many investors turn to income-producing, debt investments to defend and protect portfolios. Diversification is the golden rule of portfolio construction and investors are increasingly recognising the need for alternative asset classes, like private credit, to achieve this. With Australia’s real estate private credit sector capturing the attentions of domestic and offshore investors, private credit is set to establish itself as the asset class of choice for investors seeking to defend and grow their wealth amidst rising global uncertainty.
1. RBA, October 2024 (https://www.rba.gov.au/publications/bulletin/2024/oct/growth-in-global-private-credit.html) | 2. Nuveen, December 2024 (https://www.afr.com/companies/financial-services/private-credit-continues-rapid-expansion-20241128-p5kuao) | 3. Hamilton Lane, January 2025 | 4. Future of Alternatives 2028, Preqin, 2023 | 5. Preqin & Australian Investment Council, 2024, Australian Private Capital Market Overview | 6. CapeGemini World Wealth Report 2024 | 7. As at December 2024.
