The rise of private credit

Private credit has moved from a niche corner of institutional finance to one of the fastest-growing global asset classes. Investors worldwide are shifting away from traditional fixed-income products — where yields remain compressed and liquidity is often traded for low real returns — towards direct lending and structured private debt.

In New Zealand, the trend is now gaining serious momentum. With bank lending becoming more constrained, and businesses seeking flexible, relationship-driven capital, private credit has stepped into a vital role: funding the productive economy through disciplined, cashflow-anchored lending.

Global perspective: why the private credit wave began overseas

Overseas markets, especially the US and Europe, saw the first major boom in private credit following the Global Financial Crisis. As banks faced tighter regulations and capital adequacy constraints, they reduced lending to middle-market borrowers and transitional real estate. Private credit funds filled that gap — providing capital faster, with more flexible structures, and with deep sector expertise.

The outcome has been transformative:

• In the US, private credit has grown into a multi-trillion-dollar market, with leading funds like Blackstone, Ares and Oaktree delivering consistent risk-adjusted returns above listed debt indices.
• In Europe, mid-market direct lending and real estate-backed credit have become mainstream institutional allocations, often yielding 8–12 % p.a. in senior secured positions.
• Asia-Pacific has followed, with Australia leading the region — supported by pension-fund allocations, non-bank lenders, and a strong appetite for private, income-oriented investments.

New Zealand is the next frontier. While smaller in scale, it shares similar structural drivers: conservative banks, capital-hungry businesses, and investors seeking returns uncorrelated to public markets.

Why New Zealand is ready for private credit

Several forces are converging:

1. Bank retrenchment — Local banks are increasingly focused on low-risk, vanilla exposures, leaving growth businesses and non-core property transactions under-served.
2. Productive lending demand — Developers, operators and business owners still need capital for expansion, transition and refinancing, but require structuring flexibility that banks can’t provide.
3. Investor evolution — Wholesale and institutional investors are more educated, comfortable with illiquidity, and seeking alternatives that offer stable yield with strong downside protection.
4. Regulatory and demographic alignment — With an ageing investor base and relatively low household leverage compared to other OECD markets, the environment favours income-generating alternatives like private credit.

As in Australia a decade ago, the emergence of professionalised, transparent, and well-governed private credit managers in New Zealand is catalysing this shift.

Target returns vs fixed returns: why flexibility matters

Traditional fixed-income investments (bonds, term deposits, and listed notes) promise fixed returns — but that rigidity often comes at a cost. In a volatile rate environment, fixed yields can quickly become uncompetitive, while inflation and duration risk erode real value.

Private credit operates differently.

• Target returns are performance-driven, not arbitrary. They reflect the real economic yield achievable from disciplined, cashflow-secured lending.
• A target allows the manager to optimise deployment, balance risk and reward, and pass through gains to investors when market conditions improve.
• Unlike fixed returns, target structures maintain alignment — investors benefit when the portfolio performs, and the manager remains incentivised to preserve capital and generate consistent yield.

In short, target returns are a feature, not a flaw: they acknowledge that private credit is an active strategy, not a static instrument.

Cashflow: the foundation of sound lending

Many people still view private lending through the lens of property security or headline profit margins. That’s a mistake.

At its core, sustainable private credit is about cashflow underwriting — ensuring the borrower has real, recurring income capable of servicing and repaying the debt. Security is a secondary safeguard; cashflow is the primary repayment source.

The discipline is simple but powerful:

1. Analyse the cashflows — Are they recurring, diversified, and resilient under stress scenarios?
2. Match structure to capacity — Debt service must align with timing and volatility of inflows.
3. Use security as protection, not justification — If repayment relies on selling the security, it’s no longer lending — it’s speculation.

By focusing on cashflow first, private credit supports businesses and projects that are truly viable — not those propped up by inflated asset values or unsustainable leverage.

How NetFunds approaches private credit

At NetFunds, we structure senior and mezzanine lending solutions where the cashflow profile, not just collateral, underpins repayment. Our philosophy is pragmatic:

• We lend to borrowers who can demonstrate robust operating performance and sound governance.
• We target returns that reflect real-world risk, aiming to outperform static fixed-income alternatives.
• We build resilience into every deal — conservative LVRs, tested covenants, and active monitoring.

This approach positions our investors to earn attractive, risk-adjusted yields while supporting productive, long-term growth across New Zealand’s property and business sectors.

Looking ahead

Private credit in New Zealand is still early in its cycle, but the trajectory is clear. As the market matures, disciplined lenders who understand cashflow, structure, and governance will define the next generation of non-bank finance.

For investors, the opportunity lies in backing managers who combine local insight with global standards — those who see private credit not as a temporary yield trade, but as a core building block of diversified wealth.

At NetFunds, that’s exactly our mission: to provide institutional-grade access to the real economy through transparent, cashflow-anchored private credit.

- Dave Armstrong, Director