This month’s article follows from our report in June that was an introduction to Private Credit. In that report we noted that Private Credit is a non-bank lending and loans are not traded on public markets, hence Private Credit. We noted the recent rise in attention and investment into in this asset class for all types of investors, the key characteristics of it and risks to consider.

In this paper we dig a little deeper as there has been continued interest and more so scrutiny of this asset class. Most recently with an ASIC report (820) being released on the 5th November 2025, specifically looking at Private Credit surveillance: retail and wholesale fund.

When Good Loans Go Bad: Could This Be the Next GFC?

With the rise of the asset class and interest in it, and with its recent history being in a relatively good lending environment, what happens if lenders start running into trouble, say in a recession? If a wave of borrowers suddenly can’t pay back their loans, will the whole private credit structure come crashing down like a Jenga tower, sending shockwaves through the broader economy? It’s a question on many minds, drawing uneasy comparisons to the US subprime mortgage saga that triggered the Global Financial Crisis (GFC).

Let’s rewind to the GFC for a moment. The 2008 crisis spread so widely because subprime home loans were repackaged into complex securities and sitting (often invisibly) on the balance sheets of banks and investors all around the world. When homeowners defaulted en masse, those securities plummeted in value, and because everything was interlinked (and nobody knew who held the duds), trust evaporated. Banks stopped lending to each other, credit markets froze, and the contagion engulfed the global financial system.

Is private credit the same kind of ticking time bomb? Unlikely, at least in Australia’s context, according to regulators. For one, the private credit market here is still relatively small compared to traditional banking, about $200 billion in assets versus well over $3 trillion in bank assets. The Reserve Bank of Australia noted in late 2024 that while private credit’s rapid rise globally has raised concerns about hidden leverage and unknown interconnections, in Australia the financial stability risks “appear contained for now”. In plainer terms, even if a bunch of these loans went bad, it probably wouldn’t imperil the major banks or the core plumbing of our financial system in the way subprime CDOs (Collateralized Debt Obligations) did in 2008. Australian banks have mostly left this space to the private funds, so they’re not heavily exposed to these loans on their own books. And unlike CDOs, private credit loans typically aren’t sliced up and sold on five times over, they tend to sit with the original lending fund until they’re repaid or written off.

That said, “contained” doesn’t mean painless. A downturn could still hurt investors and specific sectors. Private credit hasn’t been truly battle-tested at its current scale. Much of the growth happened in the past few years of generally benign economic conditions. This sector hasn’t weathered a major, widespread default cycle yet; not with $200 billion at stake. We got a small preview during COVID and in recent property market wobbles: a few high-profile development loans soured, and some funds had to quietly extend deadlines or restructure deals. In some cases, fund managers even stepped in to take over struggling projects, just to work the loan out and avoid losing investors’ money. These workouts can cushion losses, but they’re no silver bullet if defaults spike across the board.

If a wave of defaults did hit, the biggest impact would probably be on investors trying to withdraw their cash. Many private credit funds give investors the impression of liquidity (e.g. the ability to redeem monthly or quarterly up to some amount, yet their underlying loans might not mature for years). In good times, that’s fine; in bad times, it’s a recipe for stress. If defaults rise and investors panic, funds could impose gates or freeze redemptions, leaving investors stuck, at least temporarily, unable to get their money out until the loans mature and/or manager sells off loans (which could be at fire-sale prices in a crunch). This is very different from the GFC’s contagion through interbank markets; it’s more of a contained burn. But for the investor whose savings are tied up, it won’t feel “contained.”

Another key difference from the subprime saga is transparency, or rather, the lack of it. Subprime loans were at least tracked and rated (albeit poorly) by credit agencies, and their collapse showed up quickly on balance sheets. In contrast, private credit operates largely in the dark. Loans aren’t publicly traded or marked-to-market. If trouble is brewing, it might not become apparent until a fund formally revalues its assets or belatedly tells investors. Regulators worry about this opaqueness, because it could lull investors into a false sense of security and delay corrective action. The consensus is that a private credit downturn, while painful for those directly involved, is unlikely to trigger a dominoes-like systemic crisis.

Importantly, regulators aren’t sitting idle. The Australian Prudential Regulation Authority (APRA), which keeps tabs on banks, has started shining a light into this shadowy realm too. APRA is wary that private credit could pose an “emerging (possibly systemic) risk” to the broader financial system if it keeps growing unchecked, especially if dodgy practices go unnoticed. It doesn’t want hidden pockets of leverage or risk that could surprise everyone later. Meanwhile the Australian Securities and Investments Commission (ASIC), the regulator, is focused on protecting investors and making sure the funds aren’t cutting corners. That brings us to ASIC’s latest deep dive into private credit, which turned over some rocks and found a few creepy-crawlies underneath.

ASIC Opens the Black Box

ASIC recently performed a thematic review of 28 private credit funds (both retail investor funds and those for wholesale/sophisticated investors) and published its findings in Report 820 (November 2025). In regulator-speak, ASIC said the sector’s growth is a positive for the economy and investors “but only if done well”, and right now some players are not doing it well.

So what exactly did they find? In plain English, a bit of a mess: inconsistent disclosures, murky fees, potential conflicts of interest, imprecise valuations, and liquidity promises that might not hold up under stress. Let’s unpack a few of the details:

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• Everyone’s Above Average (On Paper) – Most funds noted remarkably low default rates on their loans, typically between 0% and 6%. Sounds reassuring, right? The catch: each fund defined “default” differently. Some only counted a loan as in default if it was officially past due; others perhaps only when legal enforcement began. In short, comparing default rates across funds was apples to oranges. ASIC fears that funds might be sugar-coating their reports, so that investors aren’t fully aware how many loans are troubled.

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• Opaque Fees and Secret Sauce – A lot of private credit funds make money in ways that aren’t immediately obvious to investors. Beyond the management fee you agree to, there are often “borrower-paid” fees: when the fund lends money, the borrowing company might pay an upfront origination fee, or default fees, or penalty interest if they’re late, etc. Ideally, since those fees come from the loan deal, they’d flow through to benefit the investors (who are effectively the lenders). But ASIC found many funds keep a chunk of that extra juice for themselves without clearly disclosing it. The fee opacity was such a concern that ASIC flatout warned that some setups might be breaching laws against misleading conduct.

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• ‍Valuations: Grading Their Own Homework – In traditional finance, if you hold loans or investments, you’re supposed to value them fairly and have some independence in that process. ASIC found that most private credit funds did not have an independent or separate process for valuing their loans. Often the same investment committee that made the loan call also oversaw its ongoing valuation. Why does this matter? Because if loans start deteriorating, you need someone objective to say “hey, this $100 loan is probably worth only $80 now, given the borrower’s troubles.” If the loan isn’t marked down, new investors might buy in at an inflated unit price, or exiting investors might get more than their fair share, hurting those who stay. ASIC highlighted cases where loan valuations were left unchanged despite clear signs of stress, and noted that in many funds, there was no effective separation between those who originate loans and those who monitor or value them. The good news: the better-run managers are already moving on this, as even industry leaders recognized this needed fixing, independent of ASIC’s report.

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• Liquidity Mismatch – As mentioned earlier, offering generous redemption terms on illiquid assets is a recipe for trouble. ASIC found a few funds living dangerously in this regard: touting frequent (say, monthly) withdrawals while holding loans that don’t come due for 2–5 years. Most wholesale funds did at least have liquidity management plans on paper. ASIC’s message: if funds keep this up, someone’s going to get hurt in a crunch, and it’ll erode trust in the whole sector.

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• Conflicts and Governance – Finally, ASIC flagged that a number of funds lacked robust policies to handle conflicts of interest. For example, half of the wholesale funds had no policy on fair allocation of deals when a manager runs multiple funds with overlapping strategies. Without such a policy, a manager could shove the best loan opportunities into the fund that pays them higher fees, and the worse deals into another fund, and no one would be the wiser. Some funds also didn’t have detailed credit risk or impairment policies documented, which suggests a rather ad-hoc approach to managing problem loans. In regulatorland, these kinds of oversights are red flags; if today’s benign conditions falter, will these managers handle it properly? ASIC’s report hints that some players might be reacting to it, rather than having strong processes, which isn’t comforting when billions are at stake.

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Overall, ASIC’s review concluded that while some private credit managers are doing a commendable job and setting high standards, many others need “material improvement” in practices around governance, transparency, fees, valuation and risk management. The regulator didn’t just scold; it also laid out 10 principles for “private credit done well,” basically a roadmap of best practices to strive for. And crucially, ASIC isn’t all talk, it has already taken action where it saw serious issues, issuing stop orders on certain funds’ marketing documents for misrepresentations, and even launching enforcement investigations into a few egregious cases.

Industry Response to ASIC’s Findings

Given the stern tone of ASIC’s findings, you might expect fund managers to be defensive. Instead, the public response from major players has been positive overall, welcoming more scrutiny and highlighting their practices or improvement in recent times.

In short, the general sentiment in the private credit industry is acceptance and support; at least publicly. Large reputable players are essentially saying: we have a lot of these best practices in place already because we’re experienced, and we’ll gladly help raise the bar for everyone else. Itdoes seem the major firms understand that if something goes horribly wrong at a dodgy fund, the reputational damage could spill onto them too.

Weighing the Rewards and Risks for Investors

So, what should investors make of all this? Private credit is being sold as the new frontier of income investing, often “promising” yields of 7–10% or more, paid in regular distributions, with the comforting narrative that these loans are backed by real assets or secure contracts. Indeed, a wellrun private credit fund can deliver steady, attractive returns. Many loans have floating interest rates, so if the Reserve Bank hikes rates, the loan returns can rise too, a potential hedge against inflation and rising rates. Unlike shares that can swing wildly, a portfolio of loans can feel boring in a good way: you collect your interest steadily, with low correlation to stock market ups and downs. Finally, private credit offers access to unique deals, financing real projects you can sometimes see and touch (an office building here, a solar farm there).

Private credit offers higher returns and steady income, in exchange for lower liquidity and higher risk. It provides diversification and access to unique opportunities but comes with significantly less transparency and significantly higher fees than traditional investments.

It’s vital to approach private credit with a clear understanding of the risks. Remember that this sector has grown fast and is “less tested through a full economic cycle locally, particularly at this scale”. We haven’t seen how a broad downturn would play out for these investments. That doesn’t mean disaster looms; it just means caution is warranted.

In summary, this asset class is tempting with potentially higher yields, however it is important to be familiar with the key characteristics specific to this type of investment. It is imperative to note the nuances of each investment (who is it lending to and what kind of loans they are doing), ensuring you understand the liquidity constraints (if you need the money back in the next year or two, don’t put it in a 5-year loan fund), and how well do they communicate and value their loans. We recommend a discussion with an adviser as to whether this is a suitable investment to help achieve investment objectives.