Private credit funds and the high-yield pitch: what retirees need to see behind the "stable income"

If you've been offered an investment promising a generous, regular income — well above what a term deposit pays — with a unit price that barely moves, there's a good chance it was a private credit fund. These products (also called private debt) have boomed, and they're being marketed hard to retirees, often dressed up as "defensive," "fixed income," or a "term-deposit alternative." The income is real. The problem is the framing: a high yield and a flat-looking price are exactly what make private credit feel safe, when in fact the yield is payment for risks a term deposit simply doesn't carry — the risk that borrowers default, and the risk that you can't get your money out when you need it. This article explains what private credit funds actually are, the risks hiding behind the yield, how they're taxed and assessed by Centrelink, and what to check before you go anywhere near one. It is general information only, not personal advice.

What does a private credit fund actually do?

It pools investors' money and lends it directly to borrowers — businesses, property developers, or projects — outside the banking system, then pays you the interest as a regular distribution, usually monthly or quarterly. It's "private" because those loans aren't traded on any public market; they're negotiated, held, and valued privately. The sector grew because banks pulled back from some lending after tighter rules, and non-bank lenders stepped into the gap, funded increasingly by retail and retiree money chasing yield. As ASIC's MoneySmart puts it plainly, when you invest in private credit you're receiving returns for taking credit risk and liquidity or maturity risk (MoneySmart). The marketing leans on a high, steady income and a price that doesn't bounce around — and both of those features are precisely where the danger hides.

Is the yield a bargain, or is it the risk, priced?

This is the single most important thing to understand. A private credit fund pays more than a term deposit because its borrowers are often those who can't or won't borrow from a bank, and they pay a higher interest rate because they're higher risk. ASIC's review of the Australian market found much private credit is invested in sub-investment-grade credit — borrowers rated in the BB+ to CCC range — with investors warned to expect considerably higher losses in an economic downturn, particularly in real estate construction and development (MoneySmart). If a borrower defaults, the fund can lose capital, and that loss flows through to you. The extra yield is compensation for taking default risk, not a free upgrade. Any pitch that frames it as "higher return, same safety as a deposit" has the logic backwards: in investing, a higher yield almost always means more risk, not less.

Is the "stable unit price" the most misleading part?

Because the loans aren't traded on a market, the fund values them itself on a model basis, so the unit price often looks flat and calm, with none of the visible ups and downs of shares or listed property. That stability feels like safety. It isn't. Private credit is far less transparent than public markets — it can be hard to get information on what the fund invests in, how its loans are valued, and how performance is really measured (MoneySmart) — so a smooth price can simply mean the fund isn't yet reflecting trouble in its loan book. Problems can stay invisible until a default crystallises them, and then the price can drop in a sudden step rather than a gentle slide. Don't mistake a quiet-looking price for an absence of risk; sometimes it just means you can't see the risk yet.

Why is liquidity the big issue for a retiree?

Private loans can't be sold quickly, so private credit funds typically invest in less liquid assets and offer only limited redemption windows (monthly or quarterly), and many explicitly reserve the right to "gate" (limit) or suspend withdrawals, sometimes with lock-up periods on top. In a downturn — exactly when defaults rise and you might most need your cash — you may find you can't get your money out, and where a fund uses leverage it can be forced to sell assets at unfavourable prices to meet redemptions (MoneySmart). That's the same frozen-fund scenario that traps investors and, for a pensioner, becomes a Centrelink issue as well. The rule to live by: private credit should only ever be money you can genuinely afford to have locked away for years, and your near-term spending must sit somewhere liquid instead.

What other risks are worth naming?

Some funds borrow themselves (leverage), amplifying both the yield and the losses. Many are concentrated — a handful of large loans, or heavy exposure to one sector such as property development — so a single bad loan can hurt out of proportion. And because these are private loans, your outcome depends almost entirely on the manager's lending discipline: how well they pick borrowers, structure security, and manage arrears. A manager who hasn't been tested through a full economic cycle, including a real downturn, is an unknown quantity, and a lot of the funds that have sprung up in the boom simply haven't been.

Are these term deposits?

A bank term deposit is protected, up to $250,000 per account-holder per authorised deposit-taking institution, by the government's Financial Claims Scheme. A private credit fund has no such protection — the scheme covers deposits with banks, building societies and credit unions, not managed-fund investments (APRA, https://www.apra.gov.au/about-financial-claims-scheme). There is no government guarantee and no capital guarantee, and the "stable unit price" is not a promise. Despite the "fixed income" label, private credit carries credit and liquidity risk that belongs much closer to the growth end of a portfolio than to the cash-and-bonds "defensive" end. Filing it mentally next to your term deposits is the central, costly mistake — and it's an easy one to make, because some of these products are deliberately given the look and feel of a term deposit.

What is the tax and Centrelink picture?

For tax, private credit distributions are largely interest-like income, assessable in the year you receive them, usually reported through an annual trust or attribution managed investment trust (AMIT) statement, and generally unfranked — so there are none of the franking-credit refunds you might get from shares. For Centrelink, units in a private credit fund are a deemed financial investment: their value counts in the assets test, and they're deemed to earn income under the income test (DSS Social Security Guide 4.4.1.10, https://guides.dss.gov.au/social-security-guide/4/4/1/10), which means the actual high yield is irrelevant to your pension assessment — chasing yield in private credit does nothing for your Centrelink position. And if the fund ever freezes, it becomes a failed-investment situation: you'd notify Centrelink, have the holding revalued, and potentially apply for it to be exempted from deeming while it's inaccessible (DSS Social Security Guide 4.4.1.40, https://guides.dss.gov.au/social-security-guide/4/4/1/40).

What do worked examples look like?

These show the two errors retirees most often make with private credit. They are illustrative only, not personal advice, and suitability depends on your circumstances.

Frank, 73, has a large slice of his savings in term deposits and is tired of the modest return. An adviser-promoter shows him a private credit fund paying a much higher distribution, with a unit price that's been flat for years, described as a "defensive fixed-income" holding, and Frank is ready to move a big chunk of his "safe" money across. On these facts Frank is about to make the classic mistake: treating a credit-risk asset as a term-deposit substitute. The higher yield isn't a bargain — it's payment for the risk that the fund's borrowers default and the risk that he can't withdraw when he wants to. The flat unit price he finds reassuring reflects model valuation, not a guarantee, and could drop suddenly if loans go bad, and unlike his term deposits this fund has no Financial Claims Scheme protection behind it (APRA). On these facts it is generally rational, if he wants any exposure at all, to treat it as a growth and risk holding sized small, to keep his genuinely defensive money and his near-term spending in deposits and liquid assets, and never to fund the private credit position by draining that safety buffer. Frank shouldn't move a "big chunk" of safe money into something that isn't safe — the label "fixed income" doesn't make it so.

Glenys, 69, invested a meaningful sum in a private credit fund a couple of years ago for the income, which has been paid reliably. Now she wants to withdraw a large amount to help with a family situation, and discovers the fund only allows quarterly redemptions and has just announced it's "limiting" withdrawals because too many investors want out at once. On these facts Glenys has run into the liquidity risk that the steady income disguised. The distributions arriving on time told her nothing about whether she could get her capital back on demand, and now, when she needs it, the fund is gating redemptions — possibly because the underlying loans can't be turned into cash quickly, and possibly because the loan book is under stress. She may have to wait, take a partial redemption, or in a worse case find withdrawals frozen entirely. The lessons are two: liquidity is the first question to ask of any income product, not an afterthought, and money you might need to access should never sit in something that can lock you out. If the fund does freeze, on these facts it is generally rational for Glenys (as a pensioner) to notify Centrelink so the holding can be revalued and, where it qualifies, exempted from deeming while it's inaccessible (DSS Social Security Guide 4.4.1.40, https://guides.dss.gov.au/social-security-guide/4/4/1/40). The income was never the issue; getting the capital back when life demanded it was.

The thread through both cases is the same: private credit can pay an attractive income, but that income is the reward for credit risk and illiquidity, not a free lunch — and the "defensive fixed income" marketing invites retirees to file it in the wrong, dangerous mental bucket. If you're considering it, reframe it as a growth and risk asset, ask about liquidity first (how and when can you redeem, and can they gate or suspend?), interrogate the loan book (secured or unsecured, loan-to-value ratios, arrears and default history, ideally through a downturn), assess the manager's track record and fees, and remember there is no government guarantee — this is not a term deposit. Keep it a small part of a portfolio, never funded by selling your genuine defensive ballast, and keep your near-term spending in liquid assets. Because yields, default histories, the deposit-guarantee cap, deeming rates and tax rules all change, confirm the current detail, read the Product Disclosure Statement carefully, and get personal advice before investing. When an income looks too good for the apparent risk, the missing risk is usually liquidity and default — and in private credit, that's exactly where it lives.

Sources

• MoneySmart — What is private credit?
• APRA — Overview of the Financial Claims Scheme
• DSS Social Security Guide 4.4.1.10 — Overview of deeming
• DSS Social Security Guide 4.4.1.40 — Exemption of Financial Investments from Deeming