By Michael Frearson, Executive Director and Head of Fixed Income, Real Asset Management
Following news of redemption gates across several property-backed funds, a large Sydney developer in administration owing billions, and ASIC’s warning of the sector’s ‘first significant cracks’, investors may well be reconsidering their allocations. But while much of the commentary is suggesting this is a directional call on private credit, the more effective assessment is structural. The gap between the best and worst private credit funds is widening as investors re-evaluate risk. There are two key risks investors should focus on – the first being the credit risk in the portfolio, and the second the liquidity risks inherent in private assets.
I believe that these two problems are being conflated. The first is the credit problem, whereby concentrated property development and construction lending leads to completion, presale and builder-solvency risks compounding, meaning a single sponsor failure can leave lenders funding subcontractors to finish sites before any recovery. The second is the structural problem: open-ended vehicles are offering periodic liquidity against inherently illiquid assets.
None of this should surprise investors. ASIC’s 2025 sector surveillance exercise, set out in REP 820, had already flagged gaps in governance, valuation, disclosure and conflicts, and named private credit an enforcement priority. The asset failures are surfacing now because the of a mild property market slowdown, and a rise in investor uncertainty and interest rates, after four years of benign economic conditions.
Private credit is not one asset class. It is a label spanning a very wide range of risks that separate when put under stress. It includes corporate lending, asset backed lending, regulated lending, and property development and construction lending – each with a vastly different risk/return payoff. The discipline the moment calls for is the one every credit desk should already run: look through the label to the exposure. I believe every fixed income investor should be asking five questions of their assets.
First, what secures the loan, and how far do you trust the reported security value and therefore the portfolio LVR? Development and construction lending carries construction, completion and presale risk, because the value of the security depends on a project being finished. A mortgage over an existing, independently valued property does not. Where the collateral is speculative or yet to be built, a reported LVR is really an estimate; where it is an existing asset with a licensed independent valuation behind it, it is closer to a fact. As part of this process, interrogate capitalised interest too: PIK that reflects an inability to service in cash flatters headline yield and can mask credit quality deterioration.
Also read: Commercial Real Estate Debt: A Growing Market Under Greater Scrutiny
Second, who is the borrower, and how granular is the book? A diversified pool of many small loans to unrelated borrowers behaves nothing like a concentrated book of large facilities to a handful of sponsors. Concentration is the transmission mechanism that turns one administration into a fund-level event; ask what a single borrower, or a single project, can represent.
Third, how transparent is the structure, and can you see what the manager sees? ASIC’s principles for private credit funds done well (REP 823, November 2025) set a plain benchmark: consistent reporting, fair and independent valuations, and clear disclosure of fees, conflicts and related-party lending. If a fund cannot show you its arrears, its valuation methodology and its liquidity terms in a consistent format, that opacity is itself the risk signal.
Fourth, what are portfolio arrears actually doing? Consistent monthly reporting of 90-plus-day arrears, hardship included, is the earliest read on turning asset quality. Where it is not disclosed, you are flying blind to the risks that maybe building in the portfolio.
Fifth and finally, where does liquidity actually come from when redemptions arrive? Where the assets are standardised and saleable, regulated mortgages that clear into bank warehouses or to institutions, redemptions can be met by selling assets at current values. That market stayed open through COVID and the dislocations since. Where the assets cannot be sold, liquidity depends on cash buffers, refinancing, new inflows or the manager’s balance sheet, all functions of sentiment rather than of the assets. Australia’s near-40-year securitisation market, with no credit losses to date on rated RMBS, behaves so differently under stress than a portfolio of development loans that treating the two as one exposure is a mistake.
The question for fixed income investors, then, is whether a given structure can withstand a shift in both the credit cycle and investor behaviour. My expectation is a flight to quality, not out of the asset class, but toward transparent, well-priced, genuinely secured exposure, and away from vehicles that depend on sentiment holding. Expect credit margins and risk premia to widen across public and private markets as risk is repriced, reversing four years of compression, with a continued bias to floating rate while rates stay higher for longer. Regulatory scrutiny will accelerate that sorting, which is why it should be welcomed. It does not threaten well-run credit funds; it rewards them, by making the differences more transparent.
