Private credit is facing a credibility test. Redemption gates at several funds, a major developer collapse, and sharp comments from the corporate regulator have all recently landed. Investors are rightly paying attention.
There are genuine headwinds in parts of the market: higher costs, constrained liquidity, slower absorption rates. We don’t dismiss any of that. But these conditions are indicative of a cycle, not the crisis that many headlines will have you believe. Australia’s population growth, its structural housing undersupply, and constrained development activity all continue to support the long-term outlook for real estate, and for the private credit that funds it. Nothing about the current headwinds faced by certain sectors changes that underlying picture.
What it should change is how sharply investors are looking at manager quality. No two private credit fund managers are the same, and periods of volatility are when those differences surface. Two managers can hold loans that look identical on a term sheet – same sector, similar loan-to-value ratio, comparable pricing – and produce completely different outcomes. What actually determines the result is the depth and discipline of the underwriting behind the headline return, not the return itself.
In buoyant markets, investors have often judged performance primarily through the lens of returns. But returns alone are an incomplete measure of manager quality. In tighter, more volatile conditions, the focus shifts to how those returns were generated, what risks were taken to achieve them, and how effectively those risks are managed when conditions change. That is what separates managers: not the return profile in isolation, but the discipline, underwriting, and risk management that sit behind it.
Nine years, four cycles, three clear lessons for investors
In the nine years since Zagga was founded, we have navigated four distinct market cycles: the pandemic and resulting shutdowns that slowed transaction activity; the rapid rate-hiking cycle that reset borrowing costs; the inflation spike that drove construction costs sharply higher; and the current period of tighter liquidity and heightened market uncertainty.
Each cycle tested different parts of the market and reinforced the importance of remaining focused on facts, fundamentals, and the quality of the investment manager entrusted with your capital. For investors, there are three key lessons in downside protection:
In today’s conditions, it must be the unwavering focus with every investment assessed on its own merits – loan by loan, sponsor by sponsor, asset by asset. This conservative approach matters in every cycle, becoming even more profound when conditions tighten.
In stable markets, most managers can present a conservative position. The more meaningful test is whether that discipline is reflected in the structure of the loan book: conservative loan-to-value ratios, selective deployment, rigorous underwriting, and active risk management.
Nine years and four cycles prove how a manager actually behaves under different kinds of pressure – not once, but repeatedly.
Diversification, stable income, and attractive risk-adjusted returns have drawn increased investor participation in real estate private credit. As the investor base broadens, these fundamental lessons become increasingly important.
Risks and opportunities
Institutional and wholesale investors have long recognised the potential of real estate private credit within a diversified portfolio, including its income characteristics, relative stability, and low correlation to public markets. Sophisticated investors understand the risks, including the illiquid nature of real estate private credit and the need to invest across long-term horizons. However, as the investor base expands, these risks have become less understood.
With retail capital flowing in, some funds are offering investors daily or near-daily access to capital, while investing in substantially less liquid underlying loans. This is causing issues and highlighting the risks that arise when redemption terms and investor expectations are not appropriately aligned with asset duration.
It is this mismatch showing up in the headlines, not a weakness in the underlying asset class. Illiquidity is a feature not a flaw. In periods of elevated redemption activity, a manager may otherwise be required to retain significant liquidity, realise assets earlier than intended, or restrict withdrawals to protect the interests of the broader investor base. A cycle-tested manager that deploys with discipline, can best protect capital.
Well-capitalised, experienced investors are viewing the current environment through a longer-term lens and seizing opportunities created by the current market dislocation. This has included the acquisition of sites from administrators, assets associated with distressed developers, and prospective secondary transactions where existing holders are seeking liquidity.
These opportunities are not without risk. The present environment reinforces the importance of investor due-diligence and rigorous manager selection, particularly as the number of private credit players expand. Investors should scrutinise not only a manager’s historic returns and origination capability, but also its governance structures, credit discipline, and risk-management frameworks that underpin those outcomes.
Growth and governance
The industry’s response to this current cycle has been to coordinate on governance practices. This is a positive outcome and, in our view, the right approach. The Financial Services Council’s new guidance sets a consistent standard, introducing rules on valuation independence, liquidity stress-testing, leverage, and terminology. It’s a direct response to the corporate regulator’s push for tighter self-regulation across the sector, and one that we welcome.
We’ve long supported this kind of standard because it makes explicit what disciplined managers should already be doing. A sector that has grown as quickly as private credit needs consistent practice across the board. Managers already underwriting and reporting to this standard should welcome a framework that makes this the baseline, not the exception, rather than treat it as a compliance burden to be managed.
What this means for investors right now
For many investors and advisers, the current environment reinforces the importance of returning to first principles: manager quality, disciplined underwriting, downside protection and a demonstrated ability to deliver through changing market conditions.
The uncomfortable truth for investors is that a credibility test like this one is only visible in hindsight. What separates managers is not what they say about their approach, but whether that approach can withstand the tests across cycles and protect investor capital precisely when it matters most. That’s the substance behind the three lessons of the past nine years: capital preservation has to be the goal by default; discipline is only proven under pressure; and a track record only means something once it has been truly tested.
