Private credit is booming globally for a reason: it boosts returns and diversifies portfolios. So why aren’t more South African pension funds paying attention?
By Vernon Wessels
South African pension funds are gradually embracing private credit, not just as a tool to boost returns, but also as a way to diversify amid persistent market uncertainty.
Globally, the asset class has already attracted billions of dollars, with institutional investors piling in to such an extent that it’s attracting scrutiny from regulators about potential systemic risks from over-exposure. South African funds, however, have lagged.
Part of the reason for the slow adoption, says Creation Capital CEO Kasief Isaacs, stems from regulatory changes. Amendments to Regulation 28, which now allows up to 15% of a fund’s assets to be allocated to alternative investments such as hedge funds, private equity and private credit, only came into effect in 2023.
“Most pension funds had 95% or more of their portfolios in traditional asset classes until very recently,” he tells Today’s Trustee. “There’s a mindset shift required.”
Private credit, also known as private debt or direct lending, is a form of non-bank lending in which debt instruments are issued directly to borrowers, bypassing public markets. This includes loans, asset-backed lending, mezzanine finance, and the financing of infrastructure. It can be extended to everything from governments to small businesses.
Globally, the private credit market has grown from $200bn in the early 2000s to over $3-trillion today. The market is expected to reach $3.5-trillion by 2028, according to the Alternative Investment Management Association. For Isaacs, the opportunity also exists to expand Creation Capital’s assets under management (AUM) more than threefold over the next five years, to R10bn.
A survey by data and analytics firm Preqin found that average global allocations to alternative assets increased from 18% to 20% over the past five years. McKinsey data shows institutional investors typically dedicate about 13% to private equity, 7% to private credit, 4% to infrastructure and 3% to real estate.
In South Africa, by contrast, allocations to alternative assets remain modest, with recent estimates putting it at around 4%.
Where to start
Isaacs recommends that trustees of local pension funds start small, with a 2% to 5% allocation. Once returns prove consistent and the funds experience the income-generation and hedging features of private credit, allocations can be built towards 5% to 10%, alongside a similar exposure to private equity.
“They both have roles to play in a well-balanced, diversified portfolio,” Isaacs says.
This market, however, has its critics. Ratings agency Moody’s and the Federal Reserve have flagged risks that lax lending standards could lead to a wave of defaults if the global economy worsens. Regulators are also watching non-bank lenders more closely, due to concerns about the lack of transparency, insufficient disclosure, and the lack of robust stress-testing compared to traditional banks.
Even so, investors haven’t been deterred, as private credit structures often include floating interest rates, which provide a built-in hedge against rising inflation, while also offering a lower correlation to stocks and bonds.
What further sets the asset class apart is flexibility, says Isaacs, as lenders negotiate terms directly with borrowers, securing stronger covenants, collateral, as well as Environmental, Social and Governance-linked conditions. This provides downside protection, enabling investors to align their capital with purpose, and get greater cash-flow certainty from the underlying investments.
“We see enormous need in infrastructure and SME finance. These are real economy investments with a tangible social impact,” he says. “For trustees, that’s a chance to meet both return and ESG mandates.”
It’s clear that South Africa’s small and medium-sized enterprises are in urgent need of capital. The funding gap now exceeds R350bn, according to Finfind’s 2025 MSME Access to Finance Report. “Private credit is stepping in where banks often don’t,” says Isaacs, “helping small businesses grow, expand and, importantly, keep South Africans employed. This is a chance for pension funds to deepen their developmental role.”
The private credit market has come under fire for being illiquid, meaning investors who need quick access to cash may struggle to sell their assets. However, Isaacs believes this obstacle can be mitigated by constructing a well-diversified portfolio that balances private assets with more liquid listed holdings, such as equities, bonds or cash.
Brent Blankfield, head of private credit at Westbrooke Alternative Asset Management, says private credit spans numerous sub-sectors and structures, allowing managers the chance to match investors’ cash-flow needs. Still, trustees must be clear about their investment objectives, liquidity needs and risk appetite, he told a panel discussion hosted by the Southern African Venture Capital and Private Equity Association (SAVCA) this year.
More attractive opportunities
Private markets – including private equity – offer access to growth and diversification that’s increasingly hard to find in public markets, particularly in niche sectors, says Navin Lala, client director at Old Mutual Alternative Investments.
Lala cites the shrinking pool of listed companies: “The US equity market, which makes up nearly half of [the] global market cap, has seen the number of listed companies decline from over 8 000 in 1996 to fewer than 3 700 today.”
By contrast, around 95 000 private companies globally generate more than $100m in annual revenue, vastly outnumbering the 10 000 listed firms of comparable size, Lala says.
This growing gap means that the private-asset universe – which is 850% larger than the listed space – holds more attractive opportunities for long-term investors. Infrastructure, for instance, stands out for its long-term, inflation-linked cash flows and defensive characteristics.
The liquidity trade-off is a “reality investors need to accept”, Lala says. “But illiquidity allows the underlying assets to grow and compound value over time. Chasing short-term liquidity often comes at the expense of long-term returns.”
Like all asset classes, private markets – including private credit – shouldn’t be seen as a replacement for stocks and bonds. But they do offer a complementary set of tools, especially in a world of stretched equity valuations. Go in with both eyes open.
