Australian private credit is facing its first meaningful test in years. The failures of Bathla Group and Jon Adgemis, both significant users of private credit, have unsettled investors and contributed to redemption restrictions across several funds. ASIC has gone further, with chair Sarah Court describing what the regulator sees as the first significant cracks in the sector.
The headlines matter, but they do not prove that private credit is broken. The issues now surfacing reflect the sector’s rapid growth – and the digestion of loan books written in the accommodative conditions of 2022–24. Legacy portfolios assembled when capital was abundant are now facing higher rates, tighter liquidity and greater borrower stress.
Property loans are measured in years; redemption windows can be measured in months. When confidence falls, that mismatch may require a fund to slow withdrawals while loans are repaid or realised.
A redemption cap is the mechanism for managing that mismatch. Rather than selling assets into a falling market to meet withdrawals, a manager limits the proportion of capital returned each period so that loans can run to repayment. MA Financial, Centuria Bass, Merricks and Longreach Credit have each introduced some form of limit in recent weeks. The cap exists to protect the investors who remain; without it, those who redeem first are paid from the most liquid assets, leaving the rest holding the least liquid.
Confidence is also not the only driver. MA Financial attributed part of the rise in redemption requests to uncertainty following proposed tax changes in the federal budget, alongside publicity concerning unrelated managers. Where investors are repositioning ahead of the move from the CGT discount to indexation, the outflow reflects tax planning rather than any view on credit quality.
Gating, therefore, deserves scrutiny, but it does not itself prove that investor capital has been lost. Nor do two large, complex failures establish a systemic problem. Private credit remains systematically and economically important because it finances housing and businesses in areas where banks often do not compete. The appropriate response is greater selectivity about managers, portfolios and liquidity structures.
Delays, cost movements and sales slippage are normal features of development. Properly structured loans use borrower equity, contingencies, interest buffers and drawdown controls so that these ordinary problems are absorbed before lender principal is affected.
The lender's real danger is the outlier. Credit returns are asymmetric: upside is capped at interest and fees, while one severe loss can erase the income from many performing loans. The average loan earns the return; the outlier determines whether the manager keeps it. The lender's job is therefore to identify situations where an ordinary setback could become an extraordinary loss.
Complexity does not necessarily make failure more likely, but it can make failure much more expensive. Borrower complexity - multiple related entities, overlapping lenders, cross-collateralisation and dependence on continual refinancing - makes exposures harder to understand and workouts harder to control. The recent Bathla and Adgemis failures illustrate how scale and complicated financial structures can magnify the consequences when conditions turn.
Project complexity creates the same problem. Class 2 apartment developments are not inherently poor credit. But after a builder fails, a replacement contractor must assess incomplete design interfaces, certification gaps, latent defects, and work it did not perform. Remobilisation, rectification and delay can cost far more than the remaining budget.
Simplicity does not eliminate problems; it preserves options. Smaller, standardised projects generally have a broader borrower and replacement-builder pool, shorter completion paths and more ways to sell, stage or restructure the development.
Headline leverage is only the starting point. Consider two projects with the same completed value and the same 25 per cent equity cushion. If construction represents 30 per cent of value, a 40 per cent cost overrun consumes about 12 per cent of value. If construction represents 85 per cent, the same overrun consumes 34 per cent - more than the entire cushion before any fall in end value.
LVR measures the starting buffer; development intensity determines how quickly it can disappear. The quality of the equity cushion depends not only on its size, but on how much value still has to be created.
The most useful question may not be simply, 'Does the base case work?' It may be: 'If the builder fails tomorrow, who can finish this project? How long will it take, what risks will they inherit, and how much of our buffer will remain?'
Transparent borrowers, understandable projects, strong land value, genuine diversification and liquidity terms aligned with loan duration should be regarded by investors with at least as much and arguably more, consideration than returns. The objective is not to find projects that never encounter problems. It is to avoid structures in which a common problem can become an outlier loss.
The recurring pitfalls in real estate credit reinforce the value of smaller, simpler and shorter-duration lending, where a broader pool of borrowers, lower lender competition and multiple paths to repayment or recovery can support more disciplined underwriting.
In real estate construction lending, the vintage of a loan book matters. Loans originated in 2021 and 2022 were written against interest rates near the bottom of the cycle and build costs that pre-dated the escalation that followed. Books written more recently are underwritten against today's rates, construction costs and valuations. The difference reflects the assumptions embedded at origination rather than the quality of the manager.
In an environment where capital is scarcer, disciplined lenders may also have greater ability to select borrowers, negotiate stronger protections and avoid complexity for which they are not adequately compensated.
Selected public sources
ABC News - Bathla Group enters administration (25 August 2026)
ABC News - Australian private credit fund limits redemptions (26 August 2026)
RBA - Financial Stability Review, March 2026
ASIC - Private credit sector put on notice (2026)