Private Credit Luncheon

Private credit has become a significant part of Australia’s financial landscape, with assets of around $200 billion. It offers diversification and attractive returns, but several challenges require careful consideration by institutional investors.

What are some of the key challenges?

Concentration in Real Estate Development

Up to 60% of the Australian private credit market is tied to property construction and development, which is cyclical, cash-flow negative, and vulnerable in downturns. This raises systemic risk concerns.

However, some argue this concentration reflects the business and fee models of certain managers—who favour short-tenor, fee-rich loans—rather than a limitation of the asset class itself. With the right resources and origination capability, diversified portfolios across sectors and industries are achievable.

Misaligned Incentives & Fees

Some managers rely heavily on upfront borrower fees, incentivising short-term lending and frequent recycling of capital. Practices such as net interest margin capture and selective investor treatment highlight potential conflicts of interest.

Capability Gaps

Not all managers have the resources or expertise to underwrite complex corporate or structured credit. This can result in a bias toward “simpler” real estate lending and uneven risk management standards across the industry.

Transparency & Valuation

Inconsistent impairment recognition, infrequent or internal valuations, and promotional emphasis on “steady income” raise questions about the true risk-return profile of some funds. In some cases, distributions may be supported by capital rather than income.

Retailisation Risks

Private credit is increasingly marketed to retail investors who may lack the tools to assess illiquidity, valuation practices, or sector concentration risks. This retailisation trend increases vulnerability to mis-selling and heightens the risk of reputational and systemic issues.

Liquidity Mismatch

Redemption features in some funds are misaligned with the long-dated, illiquid nature of underlying assets. This mismatch could become acute in a stressed market.

In this luncheon co-hosted with State Street Investment Management, we will discuss:

• How can institutions ensure manager incentives are aligned with long-term investor outcomes?
• What exposure limits to real estate development lending are prudent?
• Should independent quarterly valuations and impairment recognition be a minimum requirement?
• How should the industry address risks associated with the retailisation of private credit?
• Is there a role for an investor-led code of conduct to raise standards in transparency, governance, and reporting?

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