Private credit is yielding more than equities, offering income and downside protection – even as spreads tighten, says Perpetual's Michael Murphy.
- Private credit yields unusually high
- Higher income, more defensive
- Find out about Perpetual’s credit and fixed income capabilities
Private credit yields remain unusually high relative to earnings yields on equities – a gap that has persisted despite falling rates and tightening spreads.
Portfolio manager and senior high-yield analyst Michael Murphy says that the yield on credit became relatively more attractive as cash rates rose through 2022 and has remained so since.
That means credit is offering investors a combination of higher income and lower volatility as the global economy faces the prospect of modest growth and geopolitical uncertainty.
“The best time to be in private credit was probably two years ago – but the second-best time is now," he says.
“You’re getting a better yield than the earnings yield on equities – and, if you’re doing it right, you can be confident that it’s going to be defensive if there is an economic downturn.”
Credit premium
The earnings yield on the ASX 200 currently sits around 4.4 per cent, compared to an RBA cash rate target of 3.85 per cent and market expectations of a drop in the cash rate to around 3.0 per cent by February 2026.
“But as at 31 May, our loan portfolio had yield to maturity of 8.9 per cent and a spread over the cash rate of 5.6 per cent,” says Murphy.
“A well-tenured portfolio means that we have a number of loans that were added when spreads were higher, meaning the spread of the overall portfolio is higher.”
Even as spreads compress as the cash rate falls, the yield will likely still remain ahead of equities, he says.
Credit advantages
Murphy says credit investors are well placed in times of economic uncertainty because they have priority over equity holders when companies face financial difficulties.
“In a challenging environment, we’re the first to get paid, and equity gets what’s left.
“You can do particularly well if you’re focused on quality and you’re investing in the names that you’re confident can withstand some economic headwinds.
“Equities have been very well supported, and the earnings yield is quite tight despite the current risks.
“In a time of more modest economic growth, earnings growth in equities is going to be fairly modest.”
Quality the key
Despite the attractive returns and improving risk profile, Murphy says some advisers remain reluctant to fully embrace Australian private credit – in part because the market is still developing.
“It’s a far more evolved market in the US – it’s been around a lot longer, and you’ve had time for players to emerge and build up sizable funds and teams and track records.
“Here, it’s a bit more early stage – and there’s been a proliferation of credit shops pop up almost overnight.”
Australian private credit is relatively attractive compared with the US, with spreads at least 1 per cent higher than comparable US credits.
It also benefits from stronger documentation, a more creditor-friendly framework, protections for minority holders, and often less competitive intensity, says Murphy.
But he says it’s important to use a manager with a good track record and keep the focus on quality.
“We do speak to advisers who are a bit sceptical on the space – every second person they see is trying to sell them a new credit fund. And there’s a big variation in the degree of capabilities of those managers.
“Private credit is a spectrum. It goes from what we’re targeting – high-quality, large corporates – to someone lending $10,000 to the local coffee shop.”
About Michael Murphy and Perpetual’s Credit and Fixed Income team
Michael is a portfolio manager and senior high-yield analyst with Perpetual’s credit and fixed income team.
Michael manages Perpetual Loan Fund – a portfolio of private and syndicated loans that forms a crucial component of the ASX-listed Perpetual Credit Income Trust (ASX: PCI) and Perpetual Pure Credit Alpha Fund.
Perpetual offers a range of cash, credit and fixed-income solutions.
Our credit and fixed income team are specialists in investing in quality debt.
They take a highly active approach to buying and selling credit and fixed income securities and invest extensively across industries, maturities and the capital structure.
Learn more about Perpetual’s Credit and Fixed Income capabilities
Questions? Contact a Perpetual account manager