Chicken Little: Lessons from 30 Years in Private Lending

Mankind has a short memory — and in finance, that forgetfulness comes at a price. After three decades in private lending, I’ve seen the same cycle repeat itself three times. Each time, I’ve raised the warning flag. Each time, the industry has dismissed it as professional jealousy. Each time, I’ve been proved right.

I don’t deal in complex spreadsheets or dress up my views in jargon. My conclusions come from experience — and from watching the human side of money: fear, greed, complacency, and hubris.

Cycle One: The Solicitor Trust Account Boom

The mid-1990s were a heady time in Queensland property. Solicitor trust account lending was booming, overseen by the Queensland Law Foundation. My peers and I were rejecting deals for solid reasons — weak security, overvalued projects, shaky borrowers — only to see those same deals picked up by other lenders desperate to place money.

The “Greed is good” mindset of the 1980s was alive and well. Lenders weren’t asking, is this a good loan? They were asking, how quickly can I get this money out the door?

I warned it would end badly. It did. The collapse was brutal: investors lost millions, projects stalled, and reputations were destroyed.

The fallout ushered in the Managed Investments Act in 1997. GPS transitioned to operate under the new rules. Many competitors disappeared. Those who stayed learnt hard lessons — or so we thought.

Cycle Two: The Temptation of Leverage

By the mid-2000s, memories of the trust account collapse had faded. Cash was plentiful again. That’s when a major institution came to me with an offer: cheap money to leverage the GPS loan book.

After some thought, I gave them a figure. They declined — but then said they’d happily sign me up if I added a zero or two. That alone told me all I needed to know. If I wouldn’t trust myself with that much money, why should they?

Once again, lenders were lending because they had to lend. I raised the warning flag again. Once again, it was dismissed.

This time, the reckoning was the Global Financial Crisis (GFC). Over-leveraged loan books were exposed. Easy money dried up overnight. Borrowers defaulted. Many lenders didn’t survive.

The lesson? Don’t gear up your book unless you can stomach the day it all reverses.

Cycle Three: The Covid Crunch

Fast forward to the late 2010s. A decade had passed since the GFC. A whole new wave of private lenders had entered the market — most without any crisis experience.

Cash was piling up. Deals were being done that shouldn’t have been. GPS tightened its lending standards and, when we couldn’t find quality deals, returned funds to investors rather than stretch for yield. It wasn’t popular, but it was the right call.

When Covid hit, liquidity vanished. Projects stalled. We had already positioned ourselves conservatively. We worked closely with borrowers to manage through the uncertainty — and we came out stronger.

Cycle Four?

Now, in the mid-2020s, I’m seeing the same early-warning signs. Private equity has poured into the private lending space. Many new entrants are flush with cash and feel pressure to put it to work. Loan books are being leveraged again.

I’m concerned that inadequate disclosure is creeping back in, particularly around subordination — where retail investors unknowingly take a back seat to banks providing wholesale lines. That’s a familiar recipe for pain.

History says the correction is coming. Whether it’s triggered by rising rates, a property slowdown, or a liquidity shock, I don’t know. But the music will stop, and those without a chair will be left standing.

What Investors Should Watch

For investors, high returns can be a red flag. If the rate is far above the market, you may be taking on far more risk than you realise — whether it’s weaker collateral, higher loan-to-value ratios, or subordinated positions. Understand exactly where your money sits in the capital stack.

For developers and builders, know your lender. Cheap funding can be dangerous if it’s not sticky. If your lender’s cost of capital is too thin, they may not survive a shock. And if they’re relying on wholesale lines from larger institutions, those lines can be pulled with little warning.

Why This Time Feels Different — and the Same

There are differences this time: the speed of information, the rise of non-bank capital, and the pressure from global private equity. But the fundamentals are the same. Too much cash chasing too few quality deals leads to bad lending. Bad lending leads to corrections.

The last three times, GPS has come through intact because we lend only when we want to lend — not because we have to. We know our borrowers personally. We return investor funds when we can’t place them prudently. We grow at a sustainable pace.

That discipline isn’t glamorous, but it’s the reason our investors have never lost capital in over 30 years.

The View From Here

I hope I’m wrong. I always do. But my track record is three-for-three on calling these downturns. This time, I’m dusting off the Chicken Little sign again.

If you’re an investor, don’t be seduced by yield without understanding the risk. If you’re a borrower, make sure your lender can stand by you in a storm. And if you’re a fellow lender, remember: sometimes the best deal is the one you don’t do.

Caution is not weakness. It’s the foundation of longevity. And longevity, in private lending, is the rarest asset of all.

Disclaimer: This article is prepared by Richard Woodhead. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.