Private credit has become an increasingly mainstream allocation for Australian wholesale investors, offering contractual income, asset-backed security, and return drivers that are largely independent of listed market volatility. But the growth of the sector has also brought a broader range of managers to market — ranging from highly experienced credit professionals to relatively new entrants with limited track records across a full credit cycle.
Unlike listed assets, private credit funds are not subject to continuous market pricing or standardised public disclosure. The quality and depth of information provided to investors is, in large part, a function of each individual manager’s governance standards and transparency culture. This places a significant premium on investor due diligence — and makes the ability to identify early warning signs a genuinely important skill.
This article outlines the key red flags investors should examine when evaluating a private credit fund, and why each warrants careful scrutiny.
You Might Also Like: Private Credit Risk Management
Lack of Transparency
Transparency is often the clearest indicator of how a fund is managed. In private credit, the underlying assets are loans — and while borrower identities are legitimately confidential, there is very little else about a well-run loan portfolio that should be opaque. The terms of each loan, the security structure, the industry and geographic composition of the book, covenant frameworks, and the performance of individual positions are all information that a confident, competent manager should be willing to share with investors in appropriate detail.
Funds that provide granular reporting on their loan portfolios — borrower industries, loan terms, LVR ranges, covenant status, and risk exposures — are demonstrating something important: they have nothing to hide, and they understand that informed investors are better long-term partners. Funds that offer only broad summaries, or that report returns without explaining the portfolio composition underlying those returns, are asking investors to rely on trust rather than evidence.
The way a manager communicates during difficult periods is equally revealing. Any credit portfolio of meaningful scale will experience occasional stress — a covenant breach, a delayed repayment, a borrower requiring restructuring. How a manager reports these events, and how promptly, tells investors a great deal about governance culture. Managers who communicate proactively and plainly when things go wrong are demonstrating the same discipline that protects capital. Those who go quiet or reframe problems as minor administrative matters are not.
When transparency feels limited or the reporting feels engineered to present a particular picture, investors should ask direct questions and assess not just the answers, but the willingness to engage.
Unclear or Layered Fee Structures
Fee arrangements in private credit can be genuinely complex, and that complexity is not always innocent. While most funds disclose management fees and performance fees clearly, the more significant issue often lies in fees that are less prominently disclosed — or that are structured in ways that create incentives misaligned with investor interests.
Borrower-paid establishment or origination fees are a common example. On the face of it, these fees are paid by the borrower rather than the investor, which can make them appear inconsequential from an investor’s perspective. But they are not neutral. A manager that earns a material upfront fee each time a new loan is written has a structural incentive to prioritise deal volume over long-term credit quality. Returns are generated at origination — before the underlying credit risk has had time to play out — which does not align neatly with the investor’s interest in durable, recoverable capital.
The relevant question is not whether origination fees exist — they are a standard feature of many lending markets — but whether they are disclosed clearly and whether the manager’s overall incentive structure keeps the manager’s interests genuinely aligned with investor outcomes over time.
If calculating the true cost of investing requires significant effort, or if the fee waterfall is structured in a way that obscures the effective rate of manager compensation, that is a reason to proceed carefully. A well-run fund should be able to explain its fee structure plainly and defend how it aligns manager and investor incentives.
You Might Also Like: Wholesale Investors Are Increasing Allocations to Australian Private Credit
Related Party Lending
Related party lending — where a fund deploys capital into businesses owned, controlled, or otherwise connected to the manager or its affiliates — is one of the more significant structural risks in private credit and one that warrants close examination.
The concern is not that related party transactions are inherently improper. In some circumstances they may be commercially sound. The concern is whether they are assessed on a genuinely arm’s-length basis — with the same rigour, pricing discipline, and covenant structure that would apply to an unrelated borrower — or whether the relationship creates, even subtly, a lower standard of scrutiny. Credit standards that are relaxed for related parties, whether in terms of pricing, LVR, covenant protection, or security quality, represent a direct transfer of risk from the manager to the investor.
There is also a capital allocation question. A manager that has the option to deploy funds into third-party opportunities sourced through genuine market origination, or alternatively into related-party transactions, should be making that choice purely on the basis of risk-adjusted return. Investors need confidence that decisions are driven by credit quality and return outcomes, not by the convenience of existing relationships or internal commercial interests.
Adequate disclosure of related party exposure — including the nature of the relationship, the terms of the transaction, and the governance process by which it was approved — is the minimum standard. The involvement of an independent credit committee or external oversight in approving related party transactions provides additional comfort. Without clear disclosure and independent governance, related party lending remains a red flag that demands scrutiny.
Conclusion
Assessing a private credit fund requires looking beyond the headline return and the marketing narrative. Strong performance in private credit is a function of structure, governance, and process discipline — and the red flags outlined above are typically indicators that one or more of these foundations is weaker than it should be.
A well-managed fund should provide clarity, not complexity. It should disclose fees plainly, report performance honestly — including through difficult periods — and demonstrate that capital allocation decisions are made purely in the interests of investors. When those qualities are present, they build the kind of confidence that supports a durable investment relationship. When they are absent, no headline return is sufficient justification to proceed.
Identifying these warning signs early is not a counsel of excessive caution — it is the basic discipline that protects capital and supports informed decision-making in an asset class where the quality of the manager is the most important variable of all.
Speak with Rixon Capital
Rixon Capital focuses on senior secured, asset-backed private credit to Australian SMEs and emerging corporates. Our approach is grounded in disciplined underwriting, transparent fee structures, detailed portfolio reporting, and governance frameworks designed to keep manager and investor interests fully aligned.
Contact us to arrange a confidential discussion about your investment objectives.
This article is for informational purposes only and does not constitute financial product advice. It is intended for wholesale investors as defined under the Corporations Act 2001 (Cth). Past performance is not a reliable indicator of future performance. Investors should consider their own objectives, financial situation, and needs before making any investment decision.
