Pitcher Partners Investment Services (Melbourne) | The information in this article is current as at July 9, 2025.
Key points
- The Australian private debt sector is under scrutiny from ASIC and the media for valuation practices and transparency.
- Regulatory and media attention ensures capital flows to higher-quality credit providers, boosting investor confidence.
- Private credit is growing as banks reduce exposure, offering tailored funding and attracting investors with good returns.
The Australian private debt sector is currently in the spotlight, with the Australian Securities and Investments Commission (ASIC) on a fact-finding mission to better understand the risks and information asymmetries involved in private asset investing. ASIC’s discussion paper, published in late February 2025, has sparked heightened interest in the sector and the diverse range of managers that operate within it. This comes amid growing media scrutiny around valuation practices, impairment recognition, and the transparency of private market vehicles—issues that have raised broader concerns around investor protection and potential systemic risks in less regulated areas of the financial system.
This increased regulatory and media attention is a positive development for the asset class, particularly as investors continue searching for higher-yielding alternatives to ASX-listed hybrids (Q1 2025 newsletter). In the absence of such oversight, capital might otherwise flow to lower-quality credit providers—those lacking the resources, capital base, or experience to manage loan challenges effectively. Problem loans, for instance, may arise when a property development encounters delays, cost overruns, or covenant breaches—often the result of unforeseen construction issues or the need to replace a financially stressed builder. Greater oversight in these areas helps support both investor confidence and the long-term health of the sector.
Private credit has been a clear beneficiary of structural shifts in the lending landscape, as traditional banks continue to scale back exposure to certain sectors. This retreat has been driven by a combination of regulatory tightening, more conservative capital requirements, and the growing complexity of borrower needs—particularly in areas like property development, specialised corporate lending, and bridge finance. This shift has created space for private credit managers to step in and offer tailored funding solutions that banks are increasingly unwilling or unable to provide.
Investors in private credit have been drawn to the asset class for its combination of attractive floating-rate returns and embedded structural protections. One common feature is the equity buffer—typically between 30% and 40%—which functions much like a conservative loan-to-value ratio (LVR). This ensures that borrowers contribute a meaningful level of equity upfront, providing lenders with a margin of safety against potential changes in asset valuations. However, as the sector grows more complex, manager selection remains critical. Focus should be placed on managers with a demonstrable track record through economic cycles, robust corporate governance, and disciplined underwriting frameworks.
More recently, the private credit sector has seen an increase in provisioning activity and adjustments to loan valuations, reflecting a more cautious and prudent approach to portfolio management. This trend has been influenced by valuers adopting more conservative stances— particularly for larger or more complex transactions—to ensure fair treatment for both existing and incoming investors. Post COVID legacy projects have also faced headwinds from higher construction costs and delays, while a wave of builder and subcontractor insolvencies has disproportionately affected second-lien exposures, rather than first mortgage positions. These developments underscore the importance of rigorous underwriting standards and proactive portfolio monitoring.
While defaults are an inherent part of direct lending, top-tier private credit managers—supported by diversified portfolios and strong risk management—are generally able to absorb individual credit events without materially impacting portfolio-level outcomes. This remains a key differentiator for investors assessing manager capability.
In contrast, traditional banks face growing limitations in managing distressed loans. A significant, albeit less publicised, shift of experienced restructuring professionals from banks to private credit managers has weakened banks’ internal capabilities. At the same time, stricter capital requirements have incentivised banks to offload troubled loans at steep discounts rather than pursue longer-term restructures. Private credit managers, by comparison, have the flexibility, expertise, and capital to actively manage workouts and maximise recoveries—further reinforcing their growing relevance in today’s credit markets.
Importantly, investors should also consider non-investment risks within private credit funds. Many vehicles offer limited consumer protections and utilise internal trustees and valuation processes, with little or no independent oversight. These governance gaps are legitimate concerns and have informed our decision to limit coverage in this space to a select group of high-quality managers who welcome ASIC’s increased scrutiny.
For investors, the key takeaway is clear: not all private credit managers are created equal. Those with robust underwriting practices, strong governance frameworks, and hands-on workout experience are best positioned to navigate market inefficiencies and deliver resilient returns. As the sector continues to mature, thorough due diligence remains essential to accessing the full potential of private credit investments.
