No growth, no problem. The case for private credit in a stagflationary environment

Australia is not yet in textbook stagflation, but the inputs are assembling. Inflation is proving stickier than the RBA anticipated and exacerbated by conflict-driven supply chain disruptions and economic growth is slowing.

The traditional 60/40 portfolio - equities for growth, bonds for stability - was built for a world where inflation and growth moved together. When they decouple, the logic breaks down. In this environment, the question is not simply how much risk to hold, but what kind.

1. What stagflation does to conventional asset classes

Bonds

• Rising rates mean falling prices, and duration hurts in an environment of uncertainty
• A 10-year bond loses c7% of its capital value for every 1% rate rise - and rates are still rising

What was viewed as a resilient asset in the traditional portfolio risks becoming a source of capital loss at precisely the moment investors need stability most.

Equities

• Rising RBA Cash Rate results in higher discount rates, compressing valuations on future earnings before a single dollar of margin pressure is felt
• Input cost inflation bites margins from one direction while softening consumer demand bites from the other

These pressures are exacerbated by an ASX 200 Index trading at a 20x PE relative to the 10-year average of 15-17x.

This implies a risk of a 15-25% equity market correction.

Property development

• Construction cost inflation erodes feasibility margins before the first noise complaint
• Elevated rates risk reducing buyer borrowing capacity, putting pre-sales at risk

Development loans sized on feasibility studies written in more benign conditions are being stress-tested by an environment their assumptions did not anticipate.

2. Why private credit behaves differently

While private credit is not immune to economic conditions, its structural characteristics mean it responds to stagflation differently and in some respects, favourably.

Two features are particularly relevant.

Floating rates

• Most Australian private credit is priced at a margin above BBSY
• When rates rise, investor returns rise in lockstep with no portfolio action required

Where rising rates impair bond capital values and compress equity multiples, private credit simply reprices in the lender's (and investor's) favour.

Downside underwriting

During diligence, private credit funds do not ask "can this business become the next Atlassian?" 

Blue sky forecasts are of little interest when underwriting as lenders do not participate in equity upside.

The question a credit investment committee seeks to answer is "under what conditions does this loan not get repaid, and what do we hold if it doesn't?"

Slower growth and higher input costs are not the stress scenario in private credit underwriting, they are the base case upon which loans are sized and approved.

While equities suffer when growth disappoints, private credit was never betting on it.

3. Asset-backed private credit in an inflationary environment

Asset-backed lending - where debt is sized against independently valued, tangible assets rather than earnings multiples - carries an additional and underappreciated advantage when inflation is elevated.

Firstly, the security base is observable.

Asset values can be independently verified at origination and monitored across the loan life, providing a level of transparency that earnings-based lending cannot match

Unlike EBITDA, which can be adjusted, reforecast, or add-back inflated, tangible collateral can be valued objectively by an independent party with no stake in the outcome.

In short, the lender always knows what it holds and what it is worth

More importantly, inflation works in the lender's favour.

Rising prices push the nominal value of real assets higher. The same inflationary impulse that erodes purchasing power and compresses development margins quietly improves the asset-backed lender's security position.

• A loan written at 65% LVR may sit at 60% two years later, driven by inflation alone
• While borrower margins may tighten, the lender's collateral cushion widens

This is the structural inverse of property development, where cost inflation erodes the margin while demand-side pressure compresses end values. Same inflationary environment, fundamentally different outcome.

Conclusion

Stagflation is uncomfortable for growth assets, unkind to duration, and particularly brutal for property development.

Corporate private credit is structured differently. Floating rates mean it earns more when rates are elevated. Underwriting focused on mitigating downside risk means slow growth and tighter margins are baked into loan sizing and covenants.

Asset-backed strategies carry the added advantage of collateral that appreciates with inflation, quietly strengthening the lender's position as other asset classes come under stress.

In short: equities need growth, bonds need falling rates, and property development needs a miracle. Private credit needs neither.