The Hidden Risks of Private Credit: What Every Investor Should Know

Private credit is booming in Australia, it’s everywhere.

It’s marketed as a great way to earn higher returns, but a new report for ASIC (Australia’s financial regulator) reveals some serious risks that could catch everyday investors off guard.

What is private credit?

Private credit means lending money to businesses or projects outside of the traditional banking system. While it is a legitimate investment structure, the fact that banks won’t touch these projects should raise an immediate red flag as to level of risk involved.

The Top Concerns of Private Credit Investing

(as identified by ASIC’s expert review)

1. Hidden Fees and Costs

Some fund managers keep extra fees paid by borrowers, but don’t tell investors about them. This means you might be paying much more than you realise, and your returns could be lower than expected.

“Non-disclosed remuneration can be a multiple of up to three to five times the publicly disclosed fund management fees,” the authors of the report said.

2. Conflicts of Interest

Managers sometimes make decisions that benefit themselves, not investors. For example, they might lend to companies they’re connected to, or keep a bigger share of the profits, again, without disclosing this to investors.

3. Unclear Valuations

Many funds don’t get their investments valued by independent experts, or don’t do it often enough. This can make investments look safer or more valuable than they really are, hiding potential losses.

That combination, the authors said, risks overstating asset values and under-reporting impairments – especially acute in property development where value swings are dramatic.

4. Poor Transparency

About half of all private credit money in Australia goes into risky real estate construction. Some funds pay out regular income to investors, even when the projects aren’t making money yet. Sometimes, these payments come from new investor money or loan capital, not real profits (did someone say Ponzi scheme?).

Not all funds clearly explain how risky their investments are, or how easy it is to get your money out. Important terms are sometimes used in confusing ways, making it hard to know what you’re really investing in.

So What Could Go Wrong?

• If property values fall or projects fail, you could lose money.
• If managers aren’t honest about fees or risks, you might not get the returns you expect.
• If you need to withdraw your money quickly, you might not be able to.

How Can You Protect Yourself?

• Ask questions about all fees and how your money is invested.
• Check if investments are valued by independent experts, and how often.
• Be cautious with funds that promise high returns or regular payments, especially if you don’t understand where the money is coming from.
• Know the rules for getting your money back if you need it.

Bottom line: Private credit can be risky and complicated. Make sure you understand the risks and ask for clear information before investing your hard-earned money.

The information provided is factual only and does not constitute financial advice. If you need to speak with a Financial Adviser before making a decision, you can contact us via the button below.