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As interest rates on term deposits continue to fall, investors are increasingly looking for alternatives to secure higher returns. Major banks have recently slashed rates on one-year and three-year term deposits, prompting a shift toward private credit funds, which currently offer yields between 8% and 10%.
This trend is driven by a global decline in bond yields, which has made traditional savings options less attractive. According to Daniel Dusevic (pictured), head of investor relations at private credit fund manager Capspace, the reduction in term deposit rates could lead more Australians, particularly those nearing retirement, to explore private credit as a viable investment alternative.
"Investors are seeing returns in the 8% to 10% range across private credit. We see those returns being maintained and even potentially going a little higher if Reserve Bank does raise interest rates next month, which remains a possibility given sticky inflation,” Dusevic said.
He also pointed out that private credit funds offer consistent income with lower risk compared to direct investments in equities or ETFs, making them an appealing option for those seeking to secure stable returns, especially in retirement.
In July 2024, the average interest rate on three-year term deposits was just 3.95%, while one-year rates were slightly higher at 4.60%, according to Reserve Bank data. These figures barely exceed the official inflation rate of 3.8%. In contrast, private credit funds are currently yielding significantly higher returns, with the potential for further increases over the next year.
Private credit investments, which are based on corporate loans, benefit from higher interest rates due to the floating nature of the returns linked to official rates.
“For income-seeking investors who are willing to take on more risk than that involved with cash or term deposits, private credit investments can deliver investors much higher yields,” Dusevic said. For example, the Capspace Debt Fund reported a 9.3% annual return in July, with interest paid monthly. The fund also offered a fixed annual return of 8%.
However, Dusevic cautioned investors to consider their liquidity needs and the capital protection offered by the fund before investing in private credit.
“A key factor for investors is to ensure their fund manager invests their capital well and protects it through security over the loans, including mortgages over property and general security agreements over the business assets in which the fund invests,” Dusevic said.
