The recent Federal Budget and accompanying changes to Australia’s capital gains tax regime have generated plenty of
commentary, much of it focused on who wins, who loses and what it all means for entrepreneurship, housing and economic
growth. Those debates will continue. But for investors, a more practical question emerges. When the rules of the game
change, where does capital go?
The answer may not be where most people are looking. For years, the Australian investment landscape has gently nudged
investors toward assets where a significant portion of returns arrive in the form of capital gains. Listed equities, private equity
and venture capital have all benefited from a system that rewarded patient holders of appreciating assets. Private debt,
meanwhile, has always been something of a different beast. It is less interested in dreams and more interested in cash flow.
Less concerned with what an asset might be worth in five years and more focused on what it can pay today. It is, in many
respects, the tortoise in a market that often celebrates hares. And as the old Aesop fable reminds us, the tortoise occasionally
has his day.
Warren Buffett once observed that “only when the tide goes out do you discover who’s been swimming naked.”
For much of the past decade, abundant liquidity and favourable tax treatment allowed investors to focus overwhelmingly on
growth. Future valuations mattered more than current income. The promise of tomorrow often outweighed the cash flow of
today. The Budget changes subtly alter that balance. Not dramatically. Not overnight. But enough to matter.
When the after-tax value of capital appreciation declines, the relative attractiveness of contractual income inevitably rises.
Investors do not need to change their return objectives; they simply need to look at them through a different lens. A dollar is
still a dollar. The path it takes to reach an investor’s pocket, however, has become more important. This is where private debt
begins to look particularly interesting.
Unlike private equity or venture capital, private debt does not require a favourable exit market. It does not need valuation
multiples to expand. It does not depend on the next funding round occurring at twice the previous valuation. Its returns are
largely earned along the way. Interest payments arrive monthly or quarterly. Fees are contractual. Security packages are
negotiated upfront. The investment thesis is often built around cash generation rather than future optimism. There is
something reassuringly old-fashioned about the model.
For much of the post-GFC era, income was scarce. Investors searching for yield were pushed further and further out along the
risk spectrum. Today, however, higher interest rates have restored the value of contractual cash flows. The tax changes simply
reinforce a trend that was already underway. As a result, we believe private debt now finds itself benefiting from two powerful
currents at once. The first is economic. Higher base rates have increased income generation across many lending strategies.
The second is behavioural. Investors increasingly recognise that a return earned today is often more certain than a gain hoped
for tomorrow.
That does not mean private debt replaces equities, private equity or venture capital. Far from it. The world still needs
entrepreneurs. Businesses still need growth capital. Equities will remain one of the most effective long-term wealth creation
tools. But investing has always been a game of relative attractiveness rather than absolutes. One of the oldest ideas in
modern investing has been that capital appreciation should sit at the centre of every portfolio discussion. The Budget changes
encourage investors to revisit that assumption. Not abandon it. Simply question it.
In doing so, many investors may rediscover an asset class that has spent years quietly compounding returns in the
background. Private debt has never been the loudest voice in the room. It does not produce the spectacular success stories of
venture capital. It rarely generates the headlines of listed equities. It seldom captures the imagination in quite the same way.
Yet in a world where tax policy increasingly favours certainty over speculation, income over appreciation, and cash flow over
promises, its virtues are becoming harder to ignore.
