INTHEBLACK November 2025 - Magazine - Page 38
F E AT U R E
LISTEN
to a podcast
episode on the rise
of private credit
READ
an article on
Australia’s
sophisticated
investor rules
LISTEN
to this story
38 INTHEBLACK November 2025
“The majority of private credit in Australia
is investing in an Australian first-registered
mortgage so, as an investor, you’re investing
in the top of a capital structure of a company
and you’ve got the security of some form
of first mortgage over real property.
That means that if something goes wrong
with that company and situation, you’re the
first to get paid.”
However, Brooke adds that not all private
credit is the same.
“You may be investing in a non-recourse
loan between the private credit manager
and the borrower, and not have direct rights
to the mortgage, which means that you don’t
really have any protection in place. This has
to be properly understood by an investor.”
Morrison says that any further regulatory
action is likely to focus on reporting
requirements.
“I think the regulators should focus on
how credit funds market themselves and
report performance to their investors —
information and statistics at a portfolio
and loan level on loans in default or arrears,
loans approaching default and the borrower
leverage metrics, for example,” he says.
“None of that is required to be reported
at the moment. In fact, many do not report
the list of loans that are made.”
IS A BUBBLE BREWING?
The rapid growth of private credit has
raised concerns about a potential bubble.
David Bell, executive director at
The Conexus Institute, says that the size
of both market and yield shows that if
a bubble exists, it has not popped yet.
“Yields are coming in a bit, but there
still seem to be quite attractive returns
available for investors, so I don’t feel like
we have reached bubble status yet,” he says.
“I also think that there is a new supply of
corporates looking at these markets as a
financing mechanism, so you’ve got supply
matching up to demand to some degree.”
Brooke says that a bubble may not be due
to lending or investing, but rather the spike
in private credit managers.
“Out of the 308 we found operating
in Australia, over 200 of them are operating
less than A$50 to A$100 million in overall
funds, and that’s small, whereas the top 20
in Australia are commanding about
90 per cent of overall volume.
“The heart of this discussion is that there
are more Australians retiring or coming
up to retirement than ever, yet there is less
access to financial advice than there has
ever been in decades that I remember,”
adds Brooke.
WHAT INVESTORS SHOULD
LOOK OUT FOR
Along with loan collateral, Brooke suggests
that investors examine a private credit
manager’s track record.
“Has the manager returned 100 per cent
of the invested capital to their investors
on all loans that have been exited since
their inception? If you’re looking for
some sort of safety and security outside
of equities, then you want to know that
these people and businesses have a
proven track record of about 10 years
or more and have preserved the capital
of their investors.
“Also, it is important that there is no
individual in an organisation who can
approve a loan on their own,” Brooke says.
“It should be approved unanimously,
through an experienced credit committee,
to avoid conflicts of interest.”
Bell suggests focusing on expected
investment outcomes.
“With private credit, you can observe
the running yield of a portfolio, but it is
much more important to factor in
expected losses, default rates and some
assumed recovery rates to come up with
a total expected return,” he says.
“My rule of thumb for avoiding financial
disasters is to avoid the combination
of leverage and illiquidity, and look out
for fraud,” adds Bell. “And once you’re clear
on your return risk and liquidity profile,
you have to ask yourself whether the returns
on offer really stack up.” ■
