Private credit specialist Zagga makes the case for steady income beyond the stock market

• Investors look elsewhere as equities stretch and dividends shrink
• Zagga has built a record of steady returns and capital protection
• Private credit gains ground as housing demand grows

With equity market valuations looking increasingly stretched and dividend yields under pressure, investors are starting to wonder if the old playbook is past its use-by date.

When share prices climb faster than profits, dividend yields naturally shrink. So while stocks look elevated, those once-reliable cheques don’t carry the weight they used to.

For income-hungry investors, the hunt is on for something steadier.

One corner of the market that’s quietly moving into the spotlight is private credit – and in particular, real estate-backed private credit.

It sits outside the daily push and pull of share prices, with returns tied to interest rates rather than market mood.

It’s that growing investor attention that Tom Cranfield, executive director of risk and execution at real estate private credit firm Zagga, has been watching closely.

“From my perspective, we don’t benchmark ourselves against how equity markets are performing.

“But certainly, we do see capital flows.

“There’s increased volatility [in the stock market], people aren’t seeing their returns, and they’re worried about markets being in bubbles or frothy,” he told Stockhead.

That sums up the mood neatly.

Equity markets rise, fall, and sometimes froth over. Private credit, by design, tries to stay out of that noise and remain uncorrelated to public markets.

Defence and discipline

Cranfield says Zagga’s focus is simple: consistency.

The firm positions itself as the defensive, income-generating corner of a portfolio – the bit designed to tick over steadily while everything else rides the waves.

“So, from that perspective, our focus is on isolating ourselves from volatility, being consistent, being stable, and allowing that return hurdle that we set to be met in the best manner possible.”

And if you want proof that discipline matters, Zagga’s record helps.
Since its inception in 2019, Zagga’s flagship feeder fund has never missed a monthly return target. That sort of run doesn’t happen by accident, it comes from being highly selective and deeply disciplined.

Out of $4.5 billion worth of transactions reviewed, only 17% were written. Half the approved borrowers have since come back for repeat transactions, some on their sixth or seventh loan.

Investors, Cranfield argues, notice that discipline.

“If you double click and dig in deeper, you will see that the takers of that capital have been coming back and re-utilising us as a lender, and as a manager with expertise, on multiple occasions.

“We would say that gives investors comfort that we’re doing something right.”

Capital preservation first

Of course, reliability means nothing if capital isn’t protected.

Zagga has executed more than 300 transactions, successfully exiting over 200 of them, with investors receiving their capital back every time.

“Managing money is in our DNA. That’s the first thing that we have to do every day, and we have to do that efficiently and effectively,” said Cranfield.

The firm keeps its loan-to-value ratios conservative, typically around 65%. On a $10 million asset, for example, that leaves a $3.5 million equity buffer to absorb shocks.

Combine that with infill residential projects in supply-constrained metro markets, and you’ve got defensive settings that don’t rely on blue-sky speculation.

Zagga primarily invests in build-to-sell residential projects in metropolitan areas as part of its defensive strategy.

“There’s a supply-demand imbalance, and that creates favourable tailwinds for investments.

“It shapes how we set our strategy and how we talk to our investors.”

Read later: In a choppy world, SMSFs are steering toward calmer waters in private credit

Volatility drives portfolio rethink

The same forces driving repeat borrowers to Zagga are pushing investors to reconsider the old portfolio playbook.

If the old 60/40 portfolio was gospel, the new hymn sheet is starting to sound different.

Alternatives and private markets are edging in. Cranfield isn’t in the business of suggesting allocation percentages (he’s not a licensed adviser), but he’s clear about the trend.

An ageing population and the need for stable income are driving alternatives and private markets into the mainstream.

In Australia, private credit is still catching up to the US and UK, where it already holds a bigger slice of the lending pie.

Here, it’s been propelled forward as banks are kept back from parts of the commercial real estate debt market due to capital constraints.

That gap has left room for specialist managers, like Zagga, to step in.

Rates, liquidity, and the road ahead

But with rates heading down, equities are back in vogue.  Does that dull the case for private credit?

Not necessarily, says Cranfield.

He believes private credit can become a steady and reliable choice, backed by expertise and a proven track record.

“We are here to be a part of a portfolio, and it’s something that you should consider being in your portfolio in a meaningful way.”

The trade-off, of course, is liquidity.

Investors can’t hit “sell” like they would on an ETF. Zagga’s funds are semi-liquid, offering monthly rather than daily access.

But in exchange, investors get a contractual income stream that isn’t marked-to-market every afternoon.

And here’s the thing, private credit isn’t just about investor yield. It’s also playing a role in addressing Australia’s housing crunch.

Private credit is starting to nudge 20% of the commercial real estate debt market.

“I think that we’re playing a meaningful role. I think that role will continue to increase.

“We’re very proud that we can play a role in helping to assist solve the housing crisis in Australia.”

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This article was developed in collaboration with Zagga, a Stockhead advertiser at the time of publishing. 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.