Episode Transcript

November 2025

Transcript

You’re listening to Unlocking Liquidity powered by PrimaryMarkets.

In this episode, we take a closer look at one of the most dynamic and fast-growing segments of Australian finance – private credit – and what investors should watch for before allocating capital.

Private credit has emerged as a major force in the investment landscape.

Once the preserve of large institutions, it’s now attracting attention from superannuation funds, wholesale investors, and even retail investors seeking higher yields and diversification beyond traditional equities and bonds.

By some estimates, Australia’s private credit market now exceeds 200 billion dollars, with real estate finance making up about half that total.

Done well, private credit plays a vital role in supporting economic growth. It fills the lending gaps left by banks – particularly in property development and mid-market corporate lending.

But as the Australian Securities and Investments Commission – ASIC – recently highlighted, investors need to tread carefully.

The same features that make private credit attractive – like higher yields, non-bank lending, and exposure to alternative assets – also carry hidden risks that may not be apparent in glossy marketing brochures.

So today, we’re unpacking ASIC’s key findings – and exploring the five big areas investors should focus on: conflicts of interest, fees and transparency, valuations, liquidity, and governance.

One of the clearest messages in ASIC’s report is the prevalence of conflicts of interest across the sector.

Unlike listed bonds or traditional bank loans – where fees and interest margins are clear – private credit managers often retain a large slice of borrower-paid fees.

These can include origination, restructuring, or even default-related fees – sometimes as high as 50 to 100 percent.

The problem?

That can create incentives that don’t always align with investors’ best interests.

For instance, if a manager earns more from arranging short-term loans than holding them, they might focus on volume over quality – a “churn” approach rather than long-term stability.

And then there are special purpose vehicles, or SPVs.

Some managers use them to lend at higher rates than they disclose to investors – keeping the difference as extra profit.

On paper, everything might look fine.

In reality, the manager could be pocketing part of the return investors think they’re earning.

ASIC has also noted related-party transactions – such as lending to property developers with whom managers have other business ties, or shifting loans between funds they control.

These may not always break the law – but they do raise questions about whether managers are truly acting in your best interests.

Let’s talk about fees.

Headline management fees are rarely the full story.

Some overseas managers return all borrower fees to the fund.

But in Australia, many retain them.

Because these borrower-paid fees often aren’t disclosed, the real cost of investing can be three to five times higher than what’s published.

For investors, that makes apples-to-apples comparisons almost impossible.

A fund that looks cheap on paper might actually be far more expensive once hidden fees are factored in.

Best practice – and what ASIC recommends – is full disclosure.

Ideally, all borrower-paid fees should be transparent and distributed back to investors.

Without that clarity, you could be overestimating returns – especially if part of the so-called “yield” is actually your own capital being returned to you.

Some property development funds, for example, have paid investors regular monthly distributions even though the loans produced no actual cash interest during construction.

Those payments came from new investor contributions or from the fund’s capital base – not genuine income.

It looks smooth and consistent – but it’s not sustainable.

Next, valuations.

Private credit relies heavily on accurate valuations of illiquid loans – yet ASIC found wide inconsistencies in how they’re done.

Some managers don’t conduct quarterly valuations, and others rely entirely on internal staff without independent oversight.

That’s especially risky in property development lending, where quoting loan-to-valuation ratios, or LVRs, based on forecast values – instead of current values – can seriously understate risk.

Investors should ask key questions:

Who performs the valuations?

How often are they updated?

And are they truly independent?

Remember – a valuation prepared for a borrower wanting to maximise their loan is not the same as one prepared to protect investors’ capital.

ASIC found examples where valuations were inflated, using gross rental assumptions rather than actual net rents – painting a rosier picture than reality.

Best practice means independent quarterly valuations, transparent methods, and full disclosure of valuation policies and loan concentrations.

Liquidity is one of the toughest issues in private credit.

The loans are often multi-year and illiquid, yet many funds market themselves as offering regular redemptions.

In reality, those redemptions often rely on new inflows or the refinancing of existing loans – a model that works only in good times.

Australia’s private credit market hasn’t yet faced a major downturn.

But when that day comes, liquidity could dry up fast.

In one recent case ASIC cited, a fund told investors that redemption requests wouldn’t be met until at least December 2025, and even then, only in staged six-monthly tranches through to 2027.

So, investors need to be realistic.

Closed-end funds with multi-year lockups offer higher yields precisely because they don’t promise early exits.

Open-ended funds, by contrast, may provide liquidity – but often at the cost of portfolio quality or returns.

Perhaps the biggest single risk in Australian private credit is its heavy exposure to real estate construction and development finance.

This segment has historically produced the most credit losses during downturns – both here and overseas.

Unlike income-producing property, construction loans often have no cash flow until completion.

Interest is typically capitalised – or paid out of loan drawdowns.

That means distributions to investors may not reflect genuine earnings.

ASIC warns that many funds targeting SMSF and retail investors are concentrated in this space, often advertising steady returns that don’t align with the underlying risk.

If the market turns, losses could be significant – particularly given the sub-investment-grade nature of much of this lending.

The key takeaway: know whether you’re effectively funding negative cash-flow projects, and whether your returns depend on timely project sales or refinancing.

Finally, governance.

Institutional-grade managers – especially those with global backing – tend to have independent boards, valuation committees, and experienced staff capable of managing troubled loans.

Smaller or newer managers may not.

ASIC also flagged concerning practices like “amend, extend, and pretend” – restructuring loans just to avoid recognising losses – or topping up distributions to hit neat monthly yield targets.

These tactics might maintain appearances in the short term – but they can mask deeper problems.

Private credit does offer real opportunities: attractive yields, diversification, and access to deals beyond the reach of traditional fixed income.

But investors can’t afford to take headline numbers at face value.

Fees, valuations, liquidity, and governance vary widely across the market – and the greatest risks lie in opaque structures, inconsistent reporting, and property-heavy portfolios.

So do your homework.

Ask the right questions:

How are managers compensated?

Who performs valuations?

What’s really behind the returns?

And what happens to liquidity if markets tighten?

As ASIC emphasises, Australia’s private credit market is still maturing.

The institutional end shows strong governance, but retail-facing funds often fall short of international standards.

For investors, that means one thing: vigilance.

Be sceptical.

Look beneath the surface.

Because in private credit, transparency isn’t just nice to have – it’s essential.

Done with care, private credit can play a valuable role in a diversified portfolio.

But without scrutiny, investors risk stepping into strategies where the manager’s interests are better protected than their own.

You’ve been listening to Unlocking Liquidity – powered by PrimaryMarkets.

At PrimaryMarkets, we provide trading and capital-raising solutions for companies and funds not listed on a stock exchange – giving sophisticated investors access to opportunities once reserved for institutions.

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PrimaryMarkets is reshaping how private capital moves – making it more transparent, efficient, and accessible.

To explore more opportunities, visit primarymarkets.com.

Thanks for listening – and join us next time as we continue to unlock liquidity in the private markets.

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