How Private Credit is a Ballast to Markets in Times of Volatility

Markets are rarely quiet. Right now, investors might feel like they’re facing it all: rising interest rates, commodity price swings, geopolitical instability, and shifting government policy. In an environment like this, the question of where to allocate capital can feel more pressing—and more difficult—than ever.

I think this is a good moment to revisit one of the more overlooked asset classes available to investors: private credit. It’s a broad term that covers a wide range of lending structures. At one end you have higher-risk strategies: mezzanine debt, distressed debt funds, unsecured business lending, invoice financing, and second-mortgage lending secured against operating businesses rather than land. These can offer higher potential returns but carry significantly more risk. At Bowery, we operate at the more conservative end of the spectrum within private credit—first-registered mortgages against property at reasonable loan-to-value ratios.

Is it exciting? No—that’s precisely the point. When markets are volatile, a ballast isn’t meant to accelerate, it’s meant to stabilise.

What’s driving volatility right now?

Volatility is coming from several directions at once.

1. Equity markets have been rattled by a convergence of forces. The escalation of conflict in the Middle East has disrupted global energy supply chains, sending oil prices sharply. At the same time, ongoing trade policy uncertainty, US tariffs in particular, have added another layer of unpredictability to corporate earnings and investor sentiment. For Australian investors, this is especially relevant: the ASX is heavily weighted towards resources and financials, making it particularly sensitive to sudden shifts in global risk appetite. When geopolitical shocks or trade disruptions hit, the ripple effect through the local market can be swift and significant.
2. Currency markets have also seen movement, with the US dollar becoming more attractive as investors retreat from risk.
3. Then there are interest rates. The Reserve Bank of Australia has delivered multiple rate rises in a relatively short period, increasing the cash rate three times in early 2026, bringing it to 4.35%. This isn’t volatile in the way that equities are, but it carries real-world consequences for households and businesses. Any change in the cash rate flows through mortgage repayments, business borrowing costs, and ultimately consumer confidence.
4. Layer on top of that the policy noise. Discussions around changes to negative gearing and capital gains tax concessions have created an environment where even experienced advisors are revisiting their asset allocation assumptions.

Private credit behaves differently. Here’s why.

Dodging the direct line.

The key distinction of private credit (the kind we specialise in) is that its performance is not closely coupled to the same market forces that drive equity or commodity volatility. Gold prices, the US dollar, the oil price, geopolitical flashpoints: these don’t have a direct line to the returns on a first mortgage backed by Australian property.

While equity markets can swing wildly based on daily sentiment, research cited by the RBA confirms that private credit typically exhibits lower volatility than publicly traded assets. By stepping away from the ASX, investors can find a performance profile that is steadier and more predictable.

The variable that matters most for private credit? House prices.

The Australian residential property market has, historically, been incredibly resilient. Through the GFC, through COVID-19, through multiple recessions—each time there were concerns, property values proved more stable than most other asset classes. In the decade leading up to 2025, average Australian house prices rose by 29% in real terms, significantly outperforming household income growth.

This resilience is reinforced by the way we structure our lending. We maintain conservative loan-to-value ratios—typically 75% or below for individual mortgages in the contributory model and even lower for the diversified fund. That means the value of the underlying property would need to fall by 25% before it starts to put investor capital at risk. That kind of decline, while not impossible, is rare in Australian residential markets, and it provides a meaningful buffer for investors.

A natural hedge against inflation & rising rates.

One of the more interesting characteristics of private credit in the current environment is its relationship with interest rates.

Inflation erodes the value of many investments. But when inflation rises, central banks typically lift interest rates—and that generally translates into improved returns for private credit investors. Because private credit loans are short-term in nature, maturing rates are regularly reset to reflect the current interest rate environment — meaning investors can capture the benefit of higher rates as each loan cycle turns over.

With Bowery, in the contributory model, our investments have a fixed rate for the term of each individual loan. A 12-month investment made today at 9.8% aims to return 9.8% for that period, regardless of what happens to the official cash rate in the interim. But once that investment term has ended, the investor steps back into the market and, if they elect to invest in another loan opportunity offered by Bowery, picks up whatever target investor rate of return Bowery is offering at the time. If the RBA has lifted rates in that window, a higher target rate typically flows through in the next investment cycle. Conversely, even if the RBA has cut the cash rate during the term of a loan, the investor has already locked in the higher target rate for the full term of that loan — they only step into the lower interest rate environment if they subsequently decide to invest returned capital in another loan, not before.

In Bowery’s diversified fund, the same principle applies, but the repricing happens more gradually. As older loans roll off and new loans are written at higher interest rates, the fund’s blended return begins to edge upward. How much it moves at any given time depends on the size of the refinanced loan relative to the rest of the portfolio and the extent of the rate change.

A headwind for equities, a tailwind for private credit.

For construction loans, each tranche is drawn at the prevailing rate which is fixed at the time it is issued. At Bowery, private credit investors are not locked out of the benefit of rising rates the way that holders of long-duration fixed income might be.

Compare this with equities. When inflation rises and interest rates follow, equity valuations typically compress. Higher borrowing costs pressure company earnings, and future cash flows are discounted at a higher rate. Private credit doesn’t share that vulnerability.

The portfolio logic.

Stability has a role.

Sound portfolio construction usually involves balancing growth assets against more stable ones. It’s not about avoiding volatility entirely—some exposure to higher-risk, higher-return markets makes sense for most investors. But the proportion of a portfolio sitting in volatile assets should reflect an investor’s stage of life, their income needs, their broader financial circumstances and objectives, and their appetite for drawdowns.

In the current environment, we’ve seen investors—particularly those who are net savers with established asset bases—move more of their capital into interest-bearing investments. As rates rise, the return available from private credit becomes increasingly attractive relative to equities and more traditional fixed income products. Investors who rely on term deposits may find those returns compress to near nothing when rates fall; and may choose to move up the risk curve into private credit.

Now that rates have risen again, private credit offers the kind of potential yield that for certain investors makes it a meaningful component of a well-constructed portfolio rather than merely an alternative.

What about policy risk?

Let’s keep policy changes in perspective.

It would be remiss not to acknowledge the major reforms to negative gearing and capital gains tax (CGT) announced in the 2026 Federal Budget. The Government has moved to abolish negative gearing for established properties purchased after May 12 2026, and the 50% CGT discount is being replaced by a model indexed to inflation. While these are the most significant changes to property tax in decades, our view remains measured.

History shows that changes of this kind tend to affect market sentiment and investor confidence more than they cause fundamental structural collapses. Treasury modelling suggests these reforms will slow house price growth by around 2 percentage points for a couple of years. That’s meaningful for first-home buyers entering the market, but it’s a moderation, not a correction. For investors in private credit secured against property, the takeaway is that the underlying asset base remains intact.

There will be some adjustment…

Victoria’s experience with higher property taxes has demonstrated that tax settings do affect market activity in general. But for investors in private credit, secured by first mortgages at conservative LVRs, this kind of gradual adjustment is very different from the sudden volatility that can devastate an equity position. Our response is the same as always: lend sensibly, choose borrowers carefully, and maintain the structural protections that allow us to navigate through whatever the market presents.

Staying grounded when markets aren’t.

Volatility, by definition, doesn’t last forever.

But the decisions investors make during volatile periods—whether and where they move capital, what they hold, what they exit—have lasting consequences. Private credit, and specifically first mortgage residential lending at conservative LVRs, offers investors a place to sit that is generally insulated from many of the forces currently unsettling other markets.

A genuine ballast in a portfolio that needs one.

Private credit will not capture the upside of an equities surge. But that’s a fair trade-off for many investors. What it offers instead is a relatively predictable return that tends to improve over time as interest rates rise—a genuine ballast in a portfolio that needs one.

We’re not in the business of telling investors how to allocate their capital—that is the role of their advisors. But as a general comment we do think the case for considering private credit is stronger today than it has been in some time. The volatility all around it is, in a way, the argument.

The investor ship is swaying…

Weigh yourself down with a portfolio ballast.

Get in touch with the Bowery team to learn more about how private credit could play a role in your portfolio.