Australian private credit has grown from a niche allocation into a mainstream asset class over the past decade, attracting capital from family offices, high-net-worth investors, and institutional allocators alike. The market has grown materially — estimates place it at over $225 billion — and the structural drivers behind that growth remain intact.
The appeal is well understood: contractual income, asset-backed security, and return drivers that are largely decoupled from listed market volatility. What is less frequently discussed is the discipline required to consistently deliver those outcomes. In private credit, strong returns are not a function of market timing — they are a function of process. Rigorous risk management, applied consistently before and after capital is deployed, is what separates managers who perform from those who merely launch.
This article outlines the core risks inherent in private credit and the best practice frameworks that professional managers use to address them in the Australian market.
What Is Private Credit?
Private credit refers to non-bank lending: capital raised directly from investors and deployed as loans to businesses, typically outside the traditional banking system. Where those loans are secured against tangible assets — property, equipment, receivables, or other collateral — the strategy is commonly described as asset-backed lending, and that security package forms the primary line of defence for investors in a default scenario.
For Australian investors, private credit can serve two complementary purposes. It delivers relatively predictable income through regular cash interest payments, and it provides portfolio diversification for investors who may otherwise be concentrated in listed equities or property. Neither benefit is automatic, however — both depend heavily on the quality of the manager and the rigour of the underlying credit process.
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Key Risks in Private Credit
A clear-eyed understanding of the risks in private credit is a prerequisite for evaluating any fund. The principal risks are as follows.
Credit Risk
Credit risk is the primary risk in any lending strategy — the possibility that a borrower cannot meet its repayment obligations. In private credit, this risk is managed through thorough upfront due diligence, conservative loan structuring, and the quality of the security taken over borrower assets. It cannot be eliminated, but it can be meaningfully mitigated through disciplined underwriting.
Liquidity Risk
Private credit is, by its nature, illiquid. Loans cannot be sold on a secondary exchange, and capital is committed for defined terms. Redemption windows exist for structural reasons, not as a limitation on investor convenience, and investors must align their own liquidity needs accordingly before committing. It is worth noting that this illiquidity is not purely a constraint — it is also a source of return. The illiquidity premium available in private credit has been assessed at meaningful levels relative to liquid fixed income alternatives, and investors are directly compensated for the capital commitment they make.
Interest Rate Risk
Rising interest rates increase borrowing costs for borrowers, which can affect their capacity to service debt. In well-structured private credit portfolios, loan covenants are calibrated to provide genuine headroom — ensuring that declines in earnings or increases in financing costs remain manageable within the borrower’s debt service capacity. Floating rate structures, which are common in Australian private credit, also mean that rising rates translate into higher income for investors, partially offsetting the pressure on borrowers.
Operational and Manager Risk
The quality of the fund manager is not a secondary consideration — it is the primary variable. A manager’s experience, credit culture, and approach to portfolio monitoring are the most important determinants of investor outcomes. Operational infrastructure, governance frameworks, and the depth of the investment team all feed directly into the reliability of risk management over time. In an asset class where there is no liquid market to bail out a poor decision, process quality is everything.
Best Practice Risk Management Frameworks
Rigorous Due Diligence
Sound risk management begins before a dollar of capital is committed. Comprehensive due diligence means reviewing borrower financials, cash flow projections, industry dynamics, and the quality of the management team. Where the loan is asset-backed, independent valuations of the collateral should be undertaken to verify adequate cover. Conservative loan-to-value ratios provide a tangible buffer in the event of default, and well-structured covenants provide the early warning system that allows managers to identify deterioration before it becomes a loss event.
This is not pessimism — it is preparation. The goal is not to assume every borrower will fail, but to ensure the portfolio is structured to absorb stress when it inevitably occurs in isolated cases.
Portfolio Diversification
Diversification in private credit is not a theoretical concept — it is an active portfolio management discipline. Spreading exposure across borrowers, sectors, and where relevant, geographies, reduces concentration risk and limits the potential contagion effect of any single loan underperforming.
A well-diversified loan book also supports more stable income streams over time. The goal is not to avoid all credit events — some degree of impairment is a normal feature of any lending portfolio at scale — but to ensure that no single event has a disproportionate impact on investor outcomes.
Active Monitoring
Risk management does not conclude at settlement. Ongoing borrower monitoring, regular financial reporting reviews, and periodic covenant testing allow managers to identify emerging issues early — when there is still time to act. The ability to intervene proactively, whether through a covenant renegotiation, a security top-up, or an accelerated repayment, is materially more valuable than responding to a default after the fact.
The quality of a manager’s monitoring framework is often what distinguishes those who preserve capital through difficult periods from those who discover problems too late.
Manager Alignment
Alignment between fund managers and investors is an important governance consideration. Mechanisms such as co-investment alongside the fund and performance-linked remuneration structures ensure that managers participate directly in both the risks and the outcomes of the portfolio. Where a manager has meaningful skin in the game, the incentive to maintain disciplined credit selection and robust governance is reinforced by self-interest, not just obligation.
Credibility in private credit is built over time. It reflects a consistent record of responsible underwriting, transparent reporting, and sound governance — not short-term performance in benign conditions.
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Regulatory and Compliance Considerations
Private credit funds in Australia operate within a regulatory framework overseen by the Australian Securities and Investments Commission (ASIC). As the market has grown, ASIC has increasingly focused on standards of disclosure, valuation, liquidity management, and fee transparency across the sector.
ASIC has flagged concerns about opaque fee structures, inconsistent valuation methodologies, and weak governance in parts of the market. In response, it has outlined principles for what good practice looks like across these dimensions. This increased regulatory attention is, on balance, a constructive development. It raises the bar for the industry, provides investors with clearer benchmarks for evaluating managers, and helps distinguish funds that are genuinely well-run from those that are not.
For investors, regulatory scrutiny is not a substitute for independent due diligence — but it does provide a useful framework for the questions worth asking.
The Benefits of Getting Risk Management Right
Disciplined risk management delivers tangible benefits for both investors and fund managers — not just regulatory compliance.
For investors, it enhances capital preservation by reducing the probability of adverse outcomes. It also supports more stable and predictable income streams, which are the defining characteristic of a well-run private credit portfolio. The goal is not to eliminate risk — lending always involves risk — but to ensure that risk is identified, priced, and managed within a framework that is designed to protect capital first.
For fund managers, best practice risk management builds the kind of market credibility that cannot be manufactured through marketing. In an increasingly competitive environment, a demonstrated commitment to transparency, governance, and disciplined underwriting differentiates a fund over a full market cycle. It also supports the development of long-term investor relationships — the kind built on consistent performance and clear communication, not on the initial promise of elevated yields.
Conclusion
Private credit continues to attract strong interest from Australian investors, and the structural case for the asset class remains sound. But long-term performance in private credit is not delivered by market conditions — it is delivered by process.
Rigorous due diligence, conservative loan structuring, genuine portfolio diversification, and disciplined ongoing monitoring are the foundations of a private credit portfolio that can perform consistently across different market environments. For investors, understanding how these practices work — and asking managers to demonstrate them — is the most important step toward making a well-informed allocation decision.
Speak with Rixon Capital
At Rixon Capital, risk management is not a compliance function — it is the foundation of how we invest. We specialise in senior secured private credit to Australian SMEs and emerging corporates, with a focus on disciplined underwriting, conservative structuring, and transparent reporting.
Contact us to discuss how our approach to private credit may complement your investment portfolio.
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.
