Private credit has become one of the fastest-growing corners of Australian finance. With more than 100 managers now active in the market, capital is flowing into non-bank lending at a pace not seen in decades (RBA, 2024₁). But amid the boom lies a reality that headline figures tend to obscure: the quality gap between managers is vast, and most investors aren’t looking at the right things.

Is Every Private Credit Manager Created Equal?

No. Established operators often lend to institutional standards, but a wave of newer entrants lack deep credit experience. Industry observers sometimes call them “private credit tourists”: managers drawn to the market by opportunity, without having navigated a full credit cycle. ASIC’s 2024 review of private credit₂ flagged that some fund managers, particularly those targeting wholesale investors, exhibited conflicts of interest, opaque fee structures, and less robust risk management. The concern is straightforward: a rising market can mask these differences in quality until conditions turn.

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How Are Some Managers Chasing Yield and Why Does It Matter?

With competition intensifying, some managers pursue higher returns at the expense of safety. Common risky practices include:

- Subordinated lending:

- Stretched LVRs:

- Concentrated exposure:

- Loose covenants:

These strategies can generate attractive short-term returns. But when the cycle turns, loans with thin equity cushions and lower priority are far more vulnerable to loss.

What Does Disciplined Lending Actually Look Like?

Institutional-grade managers tend to share a set of common practices: First-mortgage priority: senior secured loans with first claim if a borrower can’t repay.

- Conservative LVRs:

- Diversification:

- Transparent governance:

- Alignment of interest:

According to RBC Wealth Management₃, the managers with the strongest track records of capital preservation are those that maintained credit discipline through multiple cycles, not those that chased the highest headline yield. When credit standards slip, it is investors who bear the cost through loan losses and impaired returns.

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Mortgage Funds (A Major Segment of Private Credit), Are They All the Same?

No, and the structural differences matter as much as the manager’s track record. As a major segment of Australian private credit, mortgage funds come in several forms, each with a different risk, liquidity, and return profile:

- Pooled vs Contributory:

- Registered vs Unregistered Schemes:

- Open-Ended vs Closed-Ended Funds:

Each structure suits different investor needs. The key is understanding which trade-offs you’re accepting.

Is Well-Managed Private Credit Risk-Free?

No. Even the most disciplined private credit manager carries inherent risks that investors should weigh:

- Liquidity risk:

- Default risk:

- Valuation risk:

Investors should look beyond headline yields to examine a manager’s transparency, governance, and track record, and ensure they understand both the strategy’s risk profile and its redemption terms.

The Bottom Line

Private credit’s rise in Australia has created genuine opportunities for investors seeking yield and diversification beyond traditional bank products. But one private credit fund is not interchangeable with the next. By understanding the different fund structures and scrutinising a manager’s lending practices from mortgage position and LVR discipline to governance and regulatory status, investors can separate institutional-grade operators from the “tourists”. The next article in this series examines the structural forces driving private credit’s growth, and why the shift away from traditional fixed income may be more permanent than many expect.

Sources: ₁RBA, Growth in Global Private Credit
₂ASIC, Private Credit-Findings and Observations, 2024.
₃RBC Wealth Management, Our take on the public pillorying of private credit
Disclaimer: This article is general information only. It does not constitute financial advice or a recommendation to invest in any particular product. Investors should read the relevant Product Disclosure Statement (PDS) and consider whether an investment is appropriate for their circumstances before making any investment decision. All investments carry risk, including the potential loss of capital.

Articles by Rhodes Asset Management

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