Australian Private Credit: Lend Into the Noise

The noise is loud and, far from “protecting” investors, it is drowning out what may be among the most attractive lending conditions in years. In our view, new loans are now paying lenders more for less risk. Across the market, spreads have widened and covenants have moved in the investor’s favour, so the same pricing now comes with less leverage and tighter terms: in our observation, loans that priced at 8% a year ago are being written at 10% or more. Is now the time to look at the asset class, not away from it?

Even in this dislocation, Australian private credit still holds structural advantages over offshore markets, the US above all. With capital scarce, the power is firmly with the lender, and so is the return. The winners will be chosen strategy by strategy and loan by loan: short, new and simple, because complex projects in an uncertain macro environment leave little room for error.

Offshore institutions have already decided. Temasek and Canada’s CPP Investments have just backed a $1 billion raise for Australian real estate debt, citing “attractive opportunities”.1 In our view, they are looking past the headlines to Australian security, Australian creditor rights and a new vintage of loans written on today’s terms.

Selective headlines about the demise of private credit blur two things that are not the same: an old loan in trouble, which Australia’s creditor rights let a lender work out quickly, and a new loan written on today’s prices, costs and covenants. If local investors heed those headlines, offshore institutions take the returns of the new vintage. That would be a transfer of wealth from local investors to offshore buyers willing to look through the noise.

Bathla Group collapsed into administration on 25 August owing about $3.4 billion, most of it to 43 lenders.² It ran almost twice as many special purpose vehicles as employees, ASIC says,³ and its land bank, enough for 14,000 homes,⁴ now sits with the administrators. ASIC Commissioner Simone Constant sees “the first significant cracks” in the sector.³

It would be dangerous to dismiss all the noise as hysteria. An internal RBA memo from May concluded that defaults are rising and will keep climbing through 2026.⁵ Some managers have been slow to mark down loans in trouble, and some funds promised more liquidity than their loans could provide. Both are now paying for it.

But the scale of problem loans, workouts and recoveries is nowhere near systemic, and the way they are being resolved is validating the local market and its structural advantages. Security is being enforced, assets are being restructured or sold, and we expect many lenders to recover most of what they are owed, although outcomes will vary loan by loan.

Put simply, Bathla is a poor reference point for the industry. Its size, its complexity and its concentration in a single sponsor set it apart, and its $3.4 billion is less than 2% of the market Alvarez & Marsal estimates at more than $220 billion.⁶ The RBA’s own briefings put the default down largely to “a firm-specific debt management issue”.⁵

The broader market is diversified across thousands of unrelated borrowers, lending secured against property, invoices and equipment that can be valued and sold. Heavy asset backing and a fast recovery process are structural advantages of the local market, and one sponsor’s failure does not dent them.

Real estate credit lends project by project, so outside a system-wide shock its problems are idiosyncratic. Each lender’s security sits over a specific site, and its recovery turns on what that site is worth, not on the solvency of the group above it. Bathla’s lenders are owed about $3.1 billion against a $4.9 billion portfolio of 219 sites.² The RBA, looking at the sector as a whole, sees no system-wide risk.⁷ Aura’s funds have no exposure to Bathla, and our credit process is designed to avoid lending to groups of similar structural complexity; both flagship funds focus on simple, diversified, shorter-duration loans.

In our view, the higher and more worrying defaults are in the US. Fitch’s US private credit default rate reached 6.3% in the year to August, the highest it has recorded since it began tracking the sector, and almost half of those defaults were distressed maturity extensions.⁸

A larger problem is building behind those numbers. US direct lending is concentrated in software and other sectors that artificial intelligence is now disrupting, and the collateral in those loans is largely intangible: code, contracts and customer relationships that hold their value only while the business is needed. When a borrower’s product is displaced, there is little to seize and less to sell, and recoveries will be far lower than on hard assets.

The structure of the offshore market compounds the problem. Private credit there is largely an arm of private equity: most of the largest managers have their roots in buyout firms,⁹ and the loans are secured over the cash flow and enterprise value of private-equity-owned companies. Those companies are heavily geared in their own right. On KBRA’s figures, the median US middle-market borrower carries gross debt of 6.1 times EBITDA and covers its interest 1.6 times over, and the business development companies that hold the loans typically add fund leverage of about 1:1 on top.¹⁰ A thin cash-flow cushion, intangible collateral and two layers of debt make a very different proposition from a first mortgage over land.

Australia’s stress has appeared through falling property values, where recovery depends on the quality of the underlying hard asset. The noise has largely come from the media highlighting some genuinely poor underwriting and some redemption restrictions. The RBA’s assessment stands apart from that noise: most loans continue to perform and are well collateralised.⁷

Australian funds, by contrast, lend mostly against property and receivables (Chart 1), assets that can be valued and sold, and carry little or no leverage at the fund level. A default here does not drag the lender into an expensive and time-consuming Chapter 11 restructuring. Recoveries in Australia can be faster, and the reason is the law.

Australian law puts the secured lender in control. On default, the lender appoints its own receiver under the security document, with no court application; the receiver takes control of the asset and sells it, with a duty to achieve market value. Even in administration, a lender secured over the whole business can still enforce within the first 13 business days.¹¹ A US lender faces an automatic stay, a borrower still in control and a costly court process that can override its claim.

Short duration is also a distinguishing feature of the Australian market. A US book of five-year loans keeps its old spreads and covenants for years. An Australian book that mostly repays within two years rolls onto today’s terms as macroeconomic circumstances change.

For all the noise, Australian private credit will outlast this period because it does work the banks have left. From 2015, tighter capital rules made development, construction and small business lending expensive for banks to hold. Non-bank lenders filled the gap and now account for just over a tenth of business credit.⁵ We expect that to persist. What has changed is the spread on offer, and with it the return to investors.

Housing is where it is most embedded. Two years in, completions are running 124,000 homes behind the pace the Housing Accord requires, even though a record 248,733 homes are under construction:¹² the pipeline is full, but projects are taking longer to finish. Banks come in late, at completion or close to it, and leave the earlier stages, from land to construction to unsold stock, to private lenders.

The same is true of small business, where non-bank lenders finance the invoices, equipment, vehicles and short-term property loans that banks cannot hold economically, not because of the risk but because APRA’s capital charges make them punitive to carry. A fund can hold thousands of these loans, and its income does not depend on a single project being finished.

If private credit retreated, the housing shortfall would widen and small businesses would pay more for credit, or go without. Private credit is not going to be “shelved”. The only questions are who lends, and on what terms. That is the inconvenient truth for its critics: if local investors step back, the lending will still be done, by offshore institutions that will take the return.

Private credit has grown from around $35 billion in 2014 to more than $220 billion today,⁶ open to every class of investor. Almost all of that growth came through a decade of falling rates that ended with a 0.10% cash rate and a house price boom.

Now rates, building costs and house prices have turned against borrowers at once. In the year to June, 3,472 construction companies became insolvent, about a quarter of the total,¹³ yet the development cycle resets and continues, as it always has. At the fund level, some managers have gated redemptions. Gates delay money; they do not of themselves lose capital.

Where there is genuine credit stress, it is landing on idiosyncratic cases of poor underwriting, in some instances outright fraud, and on complexity, in buildings and in structures. Because most private credit lends against a specific asset, not to the developer, the loss is confined to that asset and to the lender who chose it.

After a 450 basis point rise in the cash rate, from 0.10% to 4.60%,¹⁴ and two inflation shocks in five years, stress is hardly surprising; it is part of any normal cycle. The question is how it is resolved, and Australian private credit is resolving it through its structural advantages: security enforced in weeks rather than years, and hard assets that can be valued and sold.

Selection comes down to underwriting discipline and to the choice of simple over complex; in this period the opportunity sits in smaller, simpler loans. A simple project has a deep pool of builders and an exit that can be sold in stages. A complex one has a thin pool of specialist builders, one completion and one sale. Bathla was complex twice over: 2,500 homes under construction at once,⁴ and 540 companies that behaved like one borrower.³

Cost overruns come from construction, so the more of a project is construction, and the less of its value is land, the more an overrun costs. A 30% overrun costs 9% of end value on a simple build that is 70% land, and 25.5% on a high-rise that is 85% construction. At a 75% loan-to-value ratio (LVR), the lender’s cushion, the borrower’s equity beneath the loan, is 25% of value. The same overrun uses just over a third of that cushion on the simple build and wipes it out on the high-rise (Chart 2).

That cushion is why Aura concentrates on simpler projects. Spreads have widened for simple and complex loans alike, and offshore institutions are still committing capital. For the risk taken, the simple end now pays better, and the wider spread comes with lower leverage and tighter covenants. 

Current stress sits largely in loans written between 2021 and 2023, against cheap money, cheap construction and rising prices. The cash rate is now 4.60%, the highest since 2011,¹⁴ against 0.10% through 2021. Building costs rose 29.5% in five years but only 2.8% in the past year:¹⁵ the surge landed on loans already written. Capital city home values are 6.4% below their March peak.¹⁶

Those loans are absorbing all three at once. Construction loans usually capitalise interest, so a late project’s loan grows every month. Take a loan on an apartment project, written at 65% of its end value. A year’s delay at 10% adds 6.5% of value in interest, and a lender-funded overrun of 5% of value takes the loan to 76.5%. A 6% fall in the end value then puts the LVR at 81%. No payment has been missed.

Complex builds absorb more of every shock. They take longer, so more interest capitalises, and when a builder fails, a townhouse project can usually find another, while few builders will take over a half-finished tower and its defects. Delays on simple builds are shorter for the same reason: the work can be re-let quickly, so less interest accrues before the project completes. Overruns of 30% are not far-fetched after the past five years, and at that size a high-rise loan at a 75% LVR is through its cushion, while a simple build would need an overrun above 80% (Chart 3).

On our estimate, many managers that raised money from 2019 to 2024 have 10% to 20% of their books in workout. Most of that capital is not impaired and will likely be recovered, and if that holds, it is a validation of Australia’s creditor-friendly framework and the strength of the underlying security, rather than an indictment of the sector. Some of the interest will not be recovered, and until a workout produces cash, accrued interest cannot fund distributions or redemptions, which is why the running yield on some of the larger funds in the sector has already fallen.

A loan written today carries none of that baggage: it is sized on today’s rates, costs and values, stress-tested for rates higher still, and priced accordingly. In our view, that is an advantage for Aura in this cycle. Unlike many managers that raised money between 2019 and 2024, the MM Real Estate Credit Fund (MM1) has no 2021 to 2023 book to work out: it is a new vintage, written since its launch in November 2025.The vintage effect is not confined to real estate. In corporate and asset-backed lending, a portfolio of short loans that recycles its capital every few months is constantly repricing to prevailing rates and to stress as it emerges in each sector. That is why, in our view, it carries less economic sensitivity than a long-dated book, and why the Aura Private Credit Income Fund (APCIF), which has recycled short loans for nine years, has largely avoided the vintage problem.

ASIC’s review of 28 funds last November found opaque fees and margins, valuations that flattered entry and exit prices, conflicts poorly managed and varying degrees of risk management.¹⁷ Since then the regulator has moved from review to enforcement. By April its enforcement team was visiting managers and issuing compulsory notices for documents.¹⁸ In September Commissioner Constant told the sector it was “well beyond warnings” and should “prepare for enforcement action”,³ and in October ASIC halted offers in three mortgage funds over their disclosure.¹⁹ So far the enforcement has been about disclosure, not losses.

Regulatory oversight is positive for the long-term sustainability of Australian private credit and its place in the financial system. Common standards for valuation, liquidity and fee disclosure make the asset class easier to compare and to own, and will draw more institutional capital; weak structures will be found out. ASIC is not writing rules for a sector it expects to disappear, or one it is seeking to shut down: private credit is a permanent fixture of Australia’s capital markets, and permanent fixtures get regulated. It is another point the critics miss.

Scarcity of capital is the defining feature of this market today, and competition is thin. The larger players are grappling with redemptions, several have frozen them outright, and a gated fund pays investors out rather than writing new loans. Funds that can still lend are being paid more to take less risk.

The need for the capital has not gone away, from 1.2 million homes²⁰ by 2029 to half-sold projects and small businesses. With fewer lenders at the table, spreads in the deals we review have widened by 100 to 300 basis points depending on the loan, so what priced at 8% a year ago is now written at 10% or more. In the smaller loans MM1 targets, the change is most visible in what the borrower now gives up.

Interest reserves that used to cover three months now cover six to nine. Covenants are tighter. Feasibilities that once carried a 5% contingency for higher interest costs now carry 10%. And leverage has come down with it: the same 10% loan rate is now written at 50% to 60% of value, against 60% to 70% a year ago. Across the deals we review, the reset is consistent.

One recent example is a residual loan facility, the finance that carries a finished project’s unsold units while they sell. A large Sydney credit manager, not Aura, wrote it at about 11% after fees, senior and floating, for 12 months at below 65% of value. A year ago it would have cost 8% to 9%. The project has its occupation certificate and almost a third of its units have settled; when its financier stepped back, the unsold stock needed a new lender, on the new lender’s terms.

In our view, conditions for new lending are more favourable than they have been for some years. We expect them to persist while local investors remain on the sidelines, which is what makes it a contrarian position; a stronger institutional bid is what could compress spreads sooner.

In our view, private credit is not in structural decline, and the current dislocation does not of itself warrant a retreat from the asset class.

Capital is scarce, margins are wider and borrowers are conceding terms they would not have accepted a year ago. In this market, selection matters more than usual: the opportunity sits with managers writing new loans at today’s prices, while funds that depend on new applications to meet redemptions are more exposed if inflows slow.

In real estate credit, where the repricing is sharpest, attractive risk-adjusted returns can be found in small first mortgages on simple builds and on finished stock. In small and medium-sized enterprise (SME) and asset-backed lending, they are in broad, short-dated books that recycle capital constantly.

Across both, complexity is to be priced, not necessarily avoided. Large apartment and complex commercial construction, mezzanine debt and preferred equity all have their place when the return pays for the risk, and in select cases it already does. For now, the irony is that some of the most attractive returns for the risk sit in the simplest, most senior part of the market. Mezzanine debt and preferred equity are not where Aura’s flagship credit funds operate.

Much of the risk is already priced in. We think we are close to the peak of the dislocation: falling prices, higher rates, nervous investors and high-profile defaults, all at once. Lenders no longer need to take as much risk to achieve loan rates of 10% or more.

In our view, rates in Australia are also closer to the top than the bottom. Headline inflation remains below its March high but rose to 4.3% in September,²¹ and unemployment has risen to 4.7%, its highest since 2021.²²

Long-term institutional capital is not walking away.

Temasek and CPP Investments backed a $1 billion raise for Australian real estate debt in October,¹ and the Abu Dhabi Investment Authority has committed about $1.7 billion to Australian real estate credit since 2022.²³ Korea’s National Pension Service moved to lift its stake in one of Australia’s largest private credit managers in May,²⁴ and Lunate, also from Abu Dhabi, agreed in April to buy into one of the country’s largest non-bank lenders.²⁵ Singapore’s CapitaLand bought an Australian private credit manager outright in December 2024.²⁶

The contrast is stark. Long-term institutional capital is investing in Australian private credit at lower leverage, wider margins and tighter terms, while some local investors retreat on the strength of headlines.We know which side of that trade we want to be on.

Aura’s two private credit funds are built on simple loans: APCIF, nine years of small, short loans, most of them outside property, and MM1, a new vintage of first mortgages on simple builds.

Both are short by design (Chart 4), and neither has any exposure to Bathla.