05 Sep Understanding Alternatives: Private Equity, Private Credit, and Unlisted Property

Understanding Alternatives: Private Equity, Private Credit, and Unlisted Property

When most people think about investing, the first things that come to mind are shares on the stock market or term deposits with the bank. But there’s a growing category of investments known as alternative assets, which includes private equity, private credit, and unlisted property.

These investments can diversify a portfolio and potentially enhance returns — but they also carry unique risks such as reduced liquidity and greater complexity. Let’s unpack what they are, how they work, and their role in a portfolio.

Private Equity

What it is: Private equity (PE) involves investing in companies that aren’t listed on the stock exchange. These might be:

• Household names that stayed private: Ikea, Mars (the chocolate company), Aldi, or Deloitte.
• Businesses that were private before listing: Canva is still private, while Atlassian started private before going public

How it works: Investors (usually through a PE fund) buy into these companies, aiming to grow or restructure them and sell at a higher value.

Benefits:

• Access to high-growth companies before they reach public markets.
• Potentially higher returns than listed equities.
• Experienced managers often drive operational improvements.

Risks:

• Liquidity: Funds are usually locked up for 7–10 years.
• Volatility: While valuations aren’t updated daily, the underlying businesses can still be vulnerable.
• Concentration: Returns may depend on a small number of successful companies.

Private Credit

What it is: Private credit means lending to businesses outside the traditional banking system. Instead of owning shares, investors provide loans.

What it includes:

• Direct lending – loans to mid-sized companies that don’t issue bonds or borrow heavily from banks.
• Mezzanine financing – a mix of debt and equity, often used for business expansion.
• Distressed debt – lending to companies under stress, with potential for higher returns if they recover.

Example: A private credit fund might provide loans to a large logistics company expanding its fleet, or to a property developer building a new industrial park.

Benefits:

• Attractive regular income through interest payments.
• Lower correlation to share markets.
• Can be secured against assets of the borrower.

Risks:

• Liquidity: Funds are typically locked in for multiple years.
• Credit risk: If borrowers default, capital can be at risk.
• Economic cycles: Defaults tend to rise during recessions.

Unlisted Property

What it is: Unlisted property funds pool money from investors to buy real estate that isn’t traded on the stock exchange.

Examples of unlisted property holdings:

• Office buildings – CBD towers or suburban business parks.
• Industrial properties – warehouses, distribution centres (a fast-growing sector driven by e-commerce).
• Retail centres – large shopping centres or neighbourhood malls.
• Healthcare/education facilities – aged-care centres, childcare, or private hospitals.

How it works: Investors receive returns from rental income and potential capital growth over time.

Benefits:

• Consistent rental income.
• Diversification away from shares and bonds.
• Exposure to sectors with long-term growth drivers (e.g., logistics, healthcare).

Risks:

• Liquidity: Exits may only be available at set intervals, not daily.
• Valuation lag: Property values often adjust slowly compared with listed markets.
• Sector-specific risks: e.g., office demand falling due to remote work.

Why Add Alternatives to a Portfolio?

When added thoughtfully, alternatives can:

• Diversify risk – they behave differently from traditional shares and bonds.
• Provide income – private credit and property often generate steady cash flows.
• Enhance growth – private equity offers access to companies not available on the ASX.

But investors must weigh these against:

• Lower liquidity (money tied up for years).
• Higher complexity and fees.
• Potential volatility in underlying assets.

Final Thoughts

Private equity, private credit, and unlisted property are not everyday investments — but they can play an important role in a diversified portfolio. They provide access to opportunities outside traditional markets, but also come with trade-offs.

For most investors, these alternatives sit as “satellites” alongside core holdings of shares and bonds. The right mix depends on your goals, time horizon, and risk tolerance.

If you’d like to explore whether alternatives could fit into your investment strategy, speak with your financial adviser before making any decisions.

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Spark Advisers Australia Pty Ltd ABN 34 122 486 935 AFSL No. 458254 (a subsidiary of Spark FG ABN 15 621 553 786)