Part 1 of a white paper by La Trobe Financial’s CEO, Chris Andrews
Australian property lenders and private credit managers are under greater scrutiny than they have faced in years.
That scrutiny is healthy.
A difficult cycle reveals decisions made years earlier. How large the loans were, and what concentration limits applied. Whether the book leaned on a small group of big borrowers, or was genuinely diversified. Whether equity exposures were sitting in the portfolio dressed as debt. What security was taken, who governed the valuations, and how much liquidity was held before anyone needed it as a buffer against volatility.
Sometimes – and for some managers – that process of revelation can be painful, because “private credit” is a label, not a description of risk. Two funds can advertise the same target return, describe themselves in identical language, and own entirely different portfolios.
One fund may hold thousands of small, first-mortgage loans across a diversified portfolio. Another may hold a few dozen large positions concentrated across a small number of borrowers, projects or regions. A third may combine senior lending with subordinated debt, equity positions or investments in businesses owned by the manager.
They are different investments.
We have seen this before
None of this is new to us. We have been writing to investors for decades about the importance of getting the basics right, and for any student of history, the case studies are not hard to find. The last time Australian mortgage funds were tested at scale, the same weaknesses did the damage: concentration, opacity, and liquidity that had never been designed for stress. We said so at the time; we kept saying it while markets were rising and money was cheap; and we are saying it again now.
In late 2008, as the global financial crisis took hold, the Federal Government’s bank deposit guarantee triggered a sector-wide run on mortgage funds. The Colonial First State Bricks & Mortar Fund, the Challenger Howard Mortgage Fund, the Perpetual Monthly Income Fund and many others all suspended redemptions. Funds that had borrowed short and lent long had no way to meet the demand.¹
And it wasn’t just liquidity that was at stake. In 2008, MFS (later known as Octaviar) collapsed and was later found to have used $150 million of investor funds in related party transactions for its own corporate purposes.² Provident Capital and Banksia Securities failed in 2012, both after building poor quality, highly concentrated portfolios in complex, opaque structures that left investors with little understanding of what they were really investing in and a far weaker claim on the assets than they expected.³ In 2013, LM Investment Management, a roughly $3 billion Gold Coast property fund, went into liquidation after channelling investor money into related party loans to its own development projects.4
And these aren’t just historical issues. In 2020, we saw Mayfair 101 collapse after high-yielding, risky portfolios were sold as cash-like investments.5 The Dixon Advisory business failed in 2021 after years of concentrated investment and conflicts of interest.6 Most recently, the Shield and First Guardian disasters saw investor funds channelled through a complex and opaque web of entities and allegations of misuse of investor funds, related-party transactions and conflicted arrangements.7
There are many more examples. The names change; the pattern does not. Concentrated assets, opaque strategies, capital used for the corporate purposes of related parties rather than for investors, under-prepared management, weak liquidity frameworks, and the steady blurring of the line between debt and equity until nobody could say where one ended and the other began.
If history doesn’t repeat, it sure does rhyme
Which brings us to today. And once again the newspapers are full of stories of strife in the sector. Some funds are frozen or have added restrictions on top of their normal redemption frameworks. Others are reporting sudden, unexplained spikes in the levels of defaulting loans. Some funds are entangled in opaque corporate structures, or hold substantial proportions of their investments in equity positions – a sure sign of portfolio stress. We are also seeing the re-emergence of related party loans and investor funds being used for the corporate purposes of the manager.
It is especially alarming to see the apparent panic caused by the collapse of a single home development business in Western Sydney. Whilst regrettable, and painful for those affected, it is utterly normal for developers (like all types of borrowers) to experience financial stress periodically and, occasionally, to fail.
The only way that such an event could cause problems for a lender (and, more to the point, its investors) is if that lender had lent too much and had taken insufficient care to protect its investors’ capital.
What’s regulated and what isn’t
Mortgage schemes are the largest and longest-established part of Australian private credit, and ASIC has regulated them under Regulatory Guide 45 since 2008.8 RG 45 was written as some of the episodes described above were unfolding: it opens by citing the turbulence in debt markets and the mortgage funds that suspended withdrawals. Its benchmarks and disclosure principles read as a roll call of the timeless causes of fund failures – liquidity, scheme borrowing, loan portfolio composition and diversification, related-party transactions, valuation policy, loan-to-valuation ratios, distribution practices and withdrawal arrangements. It doesn’t tell managers how to manage their funds, but it does require that they be highly transparent as to what they are doing and why they are doing it.
One problem is that RG 45 covers only part of the market. It applies to registered mortgage schemes offered to individual investors – now often called “real estate credit” – and no further. Corporate and business lending strategies, wholesale funds open only to sophisticated and institutional investors, and listed credit trusts all sit outside it. This means that two products both described as “private credit” can carry very different disclosure obligations, and that the RG 45 benchmarks an investor might reasonably expect to compare them on will only have been reported by one. Knowing which rulebook applies is a good starting point.
In every example of lender failure outlined above, the warning signs were visible to anyone who asked the right questions. They fall into four areas:
- Diversification: how concentrated the portfolio is;
- Asset quality: whether property due diligence has been conducted and the security position is real;
- Portfolio composition: whether debt is really debt and how it is disclosed to investors; and
- Liquidity: how investors get access to their money and where that money comes from.
We take each in turn below.
Concentration changes the outcome
Every lender will encounter borrowers that come under pressure. That is part of lending. Arrears rise, they fall, they sit flat. On their own they say very little about a portfolio, and a manager who reports them honestly is simply describing the ordinary business of credit.
The question that matters is different. Can one borrower, or a small group of them, become every investor’s problem?
That is a question about concentration, not about arrears.
A handful of small loans in difficulty inside a portfolio of thousands is manageable. The same number of large loans inside a portfolio of fewer than one hundred is something else entirely.
This is why exposure should always be expressed by portfolio value and the number of loans. A fund can report a modest count of loans under management while a significant share of investor capital sits behind them.
When credit is easy and property values are rising, concentration can be mistaken for conviction. A small number of large loans to repeat borrowers may look efficient. Strong borrower relationships may be presented as evidence of origination capability. Rapid asset growth may be celebrated as success. And it’s certainly easier to originate large volumes of AUM that way.
The weakness in this model only becomes visible when a borrower stops performing. By then the arithmetic is settled. You cannot make a concentrated position granular after the event, and you cannot diversify yesterday’s lending once projects stall and redemption requests rise.
Diversification is one of the central protections available to an investor, and it has to be built into the portfolio from the beginning.
Security must be real
“Secured” is a word, not a guarantee. But it points to the quality of the asset that an investor is investing in.
Investors should ask whether the fund holds a first registered mortgage, whether another lender ranks ahead of it, what value supports the loan and how recently that value was independently assessed.
They should also understand whether their capital is being used as debt at all.
A loan secured by a first registered mortgage over real property has a different risk and recovery position from mezzanine finance, an equity investment in a development or an investment in an operating business.
Those structures determine who is paid first, who absorbs the first loss and what recovery options are available when a borrower experiences difficulty.
Keep debt as debt
The distinction between debt and equity is critical. Blurring the line in a fund described as “credit” or “income” points to a worrying lack of discipline.
What’s more, the distinction matters most when a manager uses investor capital for its own corporate purposes.
Where investor capital may be used to acquire businesses or fund related parties, that use should be expressly permitted by the mandate and clearly disclosed to investors.
Equity, subordinated credit and business acquisitions can all be legitimate strategies. Each carries its own risks, governance requirements and liquidity characteristics, distinct from those of a diversified portfolio of arm’s-length, secured loans targeting consistent, predictable income.
When a manager uses investor capital to acquire a business, investors may carry operating risk, integration risk, valuation risk and the commercial fortunes of that business. Their capital may also become exposed to decisions made for the benefit of the manager’s broader corporate group rather than the mandate investors selected.
The governance challenge is clearest when the same organisation holds equity in a borrower, lends to that borrower, participates in valuing the asset, determines whether the loan should be amended or extended and controls what investors are told.
Information barriers can control who knows what. They cannot remove the economic conflict underneath, and that still requires independent governance.
The simplest question remains the best one:
Did my money buy a loan, or did it buy a business?
They are not the same investment.
Liquidity has to come from somewhere
Liquidity cannot be treated as a promise printed on a product page.
If a fund offers investors periodic access to their capital, the manager should be able to explain where that liquidity comes from.
It may come from scheduled principal repayments, borrower interest, cash holdings, committed facilities, asset sales or a combination of these. Whatever the source, it must be credible, sufficient and matched to the fund’s assets and investor terms.
A liquidity mismatch stays hidden while redemptions are modest. It shows up the moment they are not.
Footnotes
1 Perpetual joins Challenger in redemption halt, Investor Daily, 24 October 2008; Colonial First State freezes investors’ cash, ABC News, 27 October 2008. By late October 2008, 24 mortgage and property funds holding $14.4 billion on behalf of approximately 93,000 investors had suspended redemptions. https://www.abc.net.au/news/2008-10-27/colonial-first-state-freezes-investors-cash/183428
2 Australian Securities and Investments Commission v King [2020] HCA 4. In November 2007, $150 million was drawn down under a facility available only to the Premium Income Fund and applied to repay debts of other MFS group companies. The Supreme Court of Queensland found 217 contraventions of the Corporations Act 2001 (Cth). https://www.hcourt.gov.au/sites/default/files/assets/cases/02-Brisbane/b29-2019/ASIC-KingSP.pdf
3 Banksia Securities Limited was placed in receivership on 25 October 2012 owing approximately $660 million to around 16,000 debenture holders. Creditors of Provident Capital, a $130 million debenture issuer, resolved to liquidate the company in the same month. ASIC to investigate Banksia collapse and scrutinise unlisted debentures, SmartCompany, 1 November 2012. https://www.smartcompany.com.au/finance/asic-to-investigate-banksia-collapse-and-scrutinise-unlisted-debentures/
4 LM Investment Management, which claimed funds under management of around $3 billion, was placed into voluntary administration on 18 March 2013 and subsequently wound up. Investment fund in administration after ABC probe, ABC News, 19 March 2013. https://www.abc.net.au/news/2013-03-20/lm-investment-enters-administration-after-4-corners-expose/4583470
5 Australian Securities and Investments Commission, Mayfair 101 enforcement activity. The Federal Court found that Mayfair 101 group companies made false or misleading representations in marketing their fixed income notes, including comparisons with bank term deposits, and failed to disclose that investor redemptions had been suspended from March 2020. https://asic.gov.au/about-asic/asic-investigations-and-enforcement/enforcement-activities/mayfair-101
6 Dixon Advisory and Superannuation Services entered voluntary administration in January 2022, after the Federal Court imposed a $7.2 million penalty for failures to act in clients’ best interests. Its in-house US Masters Residential Property Fund fell heavily in value. Dixon Advisory’s fall from grace: four lessons for all investors, SuperGuide, 16 February 2022. https://www.superguide.com.au/smsfs/dixon-advisory-lessons-investors
7 Australian Securities and Investments Commission, Shield Master Fund and First Guardian Master Fund. Around 5,800 investors placed money in Shield and around 6,000 in First Guardian, with losses estimated at more than $1 billion. ASIC has commenced multiple investigations and court proceedings. https://asic.gov.au/about-asic/news-centre/key-matters/shield-master-fund
8 ASIC, Regulatory Guide 45: Mortgage schemes – improving disclosure for retail investors, first issued 2 September 2008 and most recently updated in March 2026. https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-45-mortgage-schemes-improving-disclosure-for-retail-investors
