This material is intended only for High-Net-Worth, Qualified Investors, and Investment Professionals. Not intended for retail investors or for public distribution.
By Nilar Alom Ispahany
Key Takeaways for Investors
- Private credit’s problems are three separate issues — credit quality, rising defaults, and liquidity — not one systemic crisis. Conflating them makes it look scarier than it is.
- AI and software risks are real. However, not all software is equally exposed. Mission-critical, data-owning businesses are resilient.
- Valuation policy matters enormously in understanding what’s actually sitting in a portfolio.
- The asset class went through a predictable boom cycle — too much capital, compressed spreads, weaker terms — and is now normalising.
- The opportunities are in places that didn’t participate in the boom: distressed and special situations, asset-based finance, real estate debt, credit secondaries.
- Manager selection is the single most important variable right now. The era of easy beta in direct lending is over.
Source: Zeteo Wealth Partners, Investment Committee
Private credit was everywhere a couple of years ago. Now it’s in the headlines for all the wrong reasons. What changed?
The short answer: the asset class grew very fast, attracted a lot of new money — including retail money — and is now facing the kind of scrutiny that comes with being mainstream. A few years ago, private credit was a specialist corner of the market. Today it’s a roughly $1.7 trillion global industry. That growth brought benefits, but also brought pressure on standards, pricing, and fund structures.
There are three things worth separating out. First, there are genuine questions about credit quality in parts of the market — particularly loans made to technology companies at the peak of the cycle in 2021 and 2022. Second, there are concerns about what happens if defaults start to pick up from here. And third — the most immediate issue — there are a number of retail investors trying to exit these funds at the same time, which has put pressure on fund structures that weren’t designed for rapid outflows.
None of these three issues is trivial. But they’re also very different problems, and conflating them makes the situation look scarier than it is. Let me walk through each one.
When I look past the scary headlines, what do the actual numbers tell us about how private credit is performing right now?
Better than the coverage would suggest. The most direct measure of stress in a loan portfolio is the non-accrual rate — the percentage of loans where borrowers have stopped making payments. Across the largest publicly listed private credit vehicles, that number sits at around 1.5 to 2%. That’s not zero, but it’s broadly in line with long-run historical averages. It is not a crisis-level reading.
Yields have come down from their peak of over 12% in mid-2023, but a 9%-plus return on senior secured lending remains genuinely attractive. The premium over public credit markets — roughly 160 basis points over leveraged loans and close to 280 over high yield — means investors are still being compensated for the extra complexity and illiquidity.
The picture isn’t uniformly rosy. There are weaker pockets, particularly among smaller borrowers and in certain sectors I’ll come to shortly. But the narrative that private credit is in freefall simply isn’t supported by what we can observe in the data today.
How did we get here? Private credit sounded like such a compelling story just a few years ago.
It was — and in many ways, still is. But the story has moved through a predictable cycle that any long-term investor will recognise.
Private credit really took off after the 2008 global financial crisis, when tighter bank regulations created a gap in lending to mid-sized companies. A small group of specialist lenders stepped in, and because demand for money far exceeded the supply of willing lenders, those early players could set strong terms — high interest rates, tight covenants, strong borrower protections. Returns were excellent.
Then, as always happens with a successful strategy, more capital and more managers poured in. Competition intensified. When lenders compete for deals, they don’t lower their hands and say “I’ll take less.” They accept lower interest rates and weaker protective terms. By 2024, the illiquidity premium had compressed to the point where some experienced investors were asking whether direct lending still offered genuinely attractive risk-adjusted returns.
Understanding where we are in that cycle is the key to knowing what to do next.
I keep reading that private credit is dangerously exposed to software companies being disrupted by AI. How worried should I be?
This is a legitimate concern, but it needs context. Technology and software companies make up a meaningful slice of private credit portfolios — around 20 to 25% in many direct lending funds. That concentration is worth watching.
Where I do think caution is warranted is a subset of loans known as ARR loans — advanced to companies that weren’t yet generating cash profit but were growing revenue quickly. Lenders underwrote these against revenue multiples rather than cash flow. If AI disruption means those revenue streams never convert to sustainable profit, some of those loans could become problematic. Well-run managers saw this risk early and avoided it. Others didn’t — which is exactly why manager selection matters so much right now. And valuation policy matters a great deal in understanding the underlying risks of these loans.
So not all software loans are the same. How do you distinguish the good from the bad?
The difference mostly comes down to how deeply embedded the software is in the client’s operations, and who actually owns the data.
A software business that sits at the heart of a client’s compliance process, or that runs the front-to-back operations of a financial institution, is very hard to switch out even if a competitor emerges. The cost of failure — regulatory, operational, reputational — is just too high. These companies tend to have sticky, predictable revenues that are resilient to competitive pressure.
On the other side, a software tool that sits at the edge of a client’s workflow, doesn’t hold proprietary data, and is relatively easy to substitute is much more exposed to disruption. These are the businesses that warrant real scrutiny.
The broader takeaway is that the quality of analysis at the individual company level — not just the sector label — is what separates good lenders from mediocre ones. We’re entering a period where that distinction will show up very clearly in returns.
I’ve seen stories about funds being “gated” — people not being able to get their money out. Is this a sign of something seriously wrong?
Gating is alarming language, and I understand why it creates concern. But in the context of private credit fund structures, it’s worth understanding what gating actually is before drawing conclusions.
Semi-liquid private credit funds were always designed with quarterly redemption windows and limits — typically capping exits at around 5% of the fund’s value per quarter. This isn’t a new emergency measure. It was in the documents from day one. The cap exists to protect the investors who remain in the fund from being harmed by a rush of exits that would force the manager to sell illiquid assets at distressed prices.
What has happened recently is that more people are trying to leave these funds than the quarterly windows can accommodate. That is uncomfortable for those in the queue, and it reflects a mismatch between how some investors understood these products and what they actually are. But it doesn’t mean the underlying assets are worthless — it means the structure is working as designed to prevent a disorderly unwinding.
Was the “semi-liquid” private credit product simply a mistake — the wrong structure for the wrong investors?
I think it was the right product sold, in some cases, to the wrong investors — or without enough clarity about what they were actually getting into.
Private credit generates its return premium precisely because it is illiquid. Locking up your capital for years — foregoing the ability to sell at a moment’s notice — is the risk you’re being paid to take. The extra return that private credit has historically earned over comparable public credit exists because liquidity has a price, and you’re the one giving it up.
Semi-liquid structures offer a degree of flexibility relative to traditional closed-end funds, but they are not actually liquid. If you invested with the expectation that you could exit easily within a quarter or two if you changed your mind, that expectation was never well-founded. For investors with a genuine long-term time horizon — which is the right profile for this asset class — none of this changes the fundamental appeal.
It’s a lesson in matching your investment structure to your actual liquidity needs, and one we take very seriously in how we think about portfolio construction at Zeteo.
Is this an opportunity or a warning sign? Should we be adding to private credit, reducing it, or sitting tight?
My honest answer: it depends enormously on what you own and how you own it. There’s no single answer for private credit as a whole right now.
The part of the market that is genuinely under pressure — crowded direct lending to large, sponsor-backed companies with weaker documentation and heavy software exposure — deserves caution. Returns have compressed, spreads have widened (which is currently happening right now, particularly on offshore credit), default risks have increased (as macroeconomic landscape has materially shifted from 3 months ago), and some managers in this space will produce disappointing outcomes over the next few years.
But private credit is a much broader universe than just that. Some of the most interesting opportunities we’re watching right now are in corners of the market that barely participated in the boom years:
The key mental model I’m using right now: when sentiment turns sharply negative, it often overshoots. The best private credit managers are being marked down alongside the weaker ones. Over time, that gap will correct. Patience and selectivity are the watchwords.
What’s the single most important thing for a private credit investor to focus on right now?
Manager selection — by some distance.
A few years ago, almost anyone in direct lending could generate decent returns. There was enough demand from borrowers, yields were high, and rising rates were pushing returns up automatically. That era is over. We are entering a phase where the gap between the best and worst performing managers will widen considerably, and where genuine credit skill — the ability to assess a business, structure a loan properly, spot early warning signs, and act when things go wrong — will determine whether your returns are excellent or painful.
Alongside manager selection, diversification across strategies and entry points matters. Spreading exposure across different managers, different vintages, and different sub-strategies reduces the risk of being overconcentrated in exactly the parts of the market now under the most pressure.
And finally: make sure your allocation is sized appropriately for what it actually is — an illiquid, long-term holding. If that feels uncomfortable given your current situation, that’s worth a conversation.
Does private credit still belong in a long-term portfolio?
Yes — for the right investors, in the right structures, with the right managers. My view hasn’t fundamentally changed on that.
The structural case remains intact: banks will continue to pull back from certain types of lending, companies will continue to need flexible financing, and patient capital will continue to earn a premium over what public markets offer. The addressable market is enormous and still growing, particularly in Europe where the shift away from bank lending is less advanced than in the US.
What has changed is the bar for participating well. This is no longer a market where you can allocate broadly and expect good outcomes. The questions to ask are harder: which manager, which strategy, which vintage, how is this sized within the overall portfolio, and does my time horizon genuinely match the illiquidity I’m accepting?
Those questions have always mattered in private markets. They just matter a great deal more now. That’s exactly the kind of analysis we do on your behalf — and it’s why I’d encourage anyone with questions about their specific exposure to reach out for a conversation rather than making changes based on headlines alone.
The newsletter identifies real estate debt as an opportunity. Does that apply to Australia specifically, and why should Australian investors pay attention to this corner of the market?
Yes — and in some ways Australia is a more compelling setting for real estate private credit right now than most comparable markets. Let me explain why, and also where the nuance lies.
The structural case starts with a simple fact: Australian non-bank lenders currently hold only around 17% of the commercial real estate lending market. In the US that number is above 60%, and in Europe it’s approaching 50%. That gap represents both a growth opportunity and, more immediately, a genuine pricing advantage. Because bank lending standards remain tight and non-bank competition is still relatively limited, disciplined lenders in this market can negotiate terms and pricing that simply aren’t available in more crowded US or European markets. That spread premium is real and it translates directly into better risk-adjusted returns for investors.
Australia also has regulatory characteristics that make it structurally superior for lenders compared to offshore alternatives. Lending here is full recourse — if a borrower defaults, the lender can pursue the borrower’s personal assets, not just the underlying property. Historical loan recovery rates in Australia sit around 95%, compared to 66% in Europe and 50% in the US. There is no equivalent of Chapter 11 bankruptcy protection that allows US borrowers to restructure debt on terms that disadvantage lenders. And the short-tenor nature of most Australian real estate credit — loans typically run 12–24 months — means capital is recycling continuously rather than locked into multi-year positions at fixed pricing.
The distinction I’d draw for clients is between two quite different types of real estate credit. Senior secured lending on stabilised or near-complete assets at conservative loan-to-value ratios is, in my view, a genuine opportunity right now — a bond substitute with real structural protections and a meaningful yield premium over cash. Opportunistic and junior credit strategies targeting higher returns carry a materially different risk profile and require a specific client suitability assessment. Both can belong in portfolios, but not interchangeably and not for the same clients.
Australia’s housing shortage is well documented. Doesn’t that make residential development lending the obvious place to be — high demand, limited supply, rising prices?
This is exactly the question I find myself pushing back on most often right now, because the supply-demand narrative — while structurally true — doesn’t automatically protect lenders in the way people assume. And I think it’s important to be direct about this with clients.
The conventional logic runs like this: Australia needs roughly 240,000 new homes per year to keep pace with population growth. It’s consistently delivering 160,000–180,000. That gap has been accumulating for years, vacancy rates are near record lows at 1.7% nationally, and rents are growing at over 5% year on year. So demand is real, supply is constrained, and lending against residential development should be safe. I understand why that argument is appealing.
But here is where it breaks down. The profitability of development — and therefore the creditworthiness of developers — depends not just on how much buyers will pay for a finished apartment or townhouse, but on the margin between that sale price and what it costs to build. And that margin is being squeezed from both sides simultaneously right now.
Construction costs have risen more than 30% since COVID and remain elevated, driven by labour shortages, material costs, and competition for skilled trades from the massive public infrastructure pipeline — Western Sydney Airport, Sydney Metro, defence construction. These projects have committed timelines and can pay rates that private developers cannot match. On the revenue side, buyers are constrained by serviceability — they can only borrow what banks will lend them, and even with rate cuts, borrowing capacity hasn’t recovered to the levels developers need to clear stock at profitable prices.
When that margin disappears, developers don’t automatically fail — but they do pause, defer, seek additional capital, or in the worst cases, become insolvent. We have seen repeated builder insolvencies in the Australian market over the past two years — large, well-capitalised operators included. A lender holding a development loan against a project whose feasibility was underwritten at 2022 cost assumptions is sitting on a very different risk than the headline LVR suggests.
With low growth, sticky inflation, rising unemployment and real recession risk in Australia, how worried should I be about real estate credit exposure in my portfolio right now?
Genuinely worried — but calibrated to what you actually own and in what form. The macro concerns are real, but the Australian version of this risk is considerably more contained than what you’d face with equivalent exposure in the US or Europe. Let me explain both sides of that.
The risk is real for the following reasons. Growth is running around 2% — below trend and slowing. Unemployment is drifting higher and the RBA’s own forecasts have it rising further through 2027. Inflation is above target and sticky, meaning the RBA cannot cut aggressively to support the economy without risking a re-acceleration of price pressures. This combination — weak growth, persistent inflation, rising unemployment — is the definition of a stagflationary environment, and it is hostile to leveraged borrowers. Developers carrying large construction loans at floating rates face rising costs and softening buyer demand simultaneously. That is exactly the environment in which development loans go wrong.
But Australia has structural protections that genuinely matter. The full recourse lending regime means lenders have recovery options that don’t exist in most other markets. Historical recession experience — including the GFC, which was a severe global shock — saw Australian residential values fall 5–8% from peak and recover within 18 months, not the 30–50% corrections seen in the US, Ireland, or Spain. The supply shortage acts as a persistent floor: unlike a market where oversupply drives price declines, Australia’s structural undersupply means any price softening is likely to be shallow and short-lived. And the RBA has already begun cutting rates, with further cuts the direction of travel if the economy weakens materially.
The practical implication is this: the difference between a mild stress scenario and a genuine recession scenario is the difference between compressed returns and potential capital impairment on junior positions. Senior secured first mortgage lending at conservative LVRs has enough buffer to weather a mild recession — values would need to fall 25–30% before principal is at risk on a well-structured loan. Junior and mezzanine positions are far more sensitive and require a specific view on both the borrower and the asset before committing capital in the current environment.
If you’re asking whether now is a good time to be adding risk in Australian real estate credit — the answer is yes for the right instrument at the right price, and no for undisciplined exposure to development lending and junior debt. The distinction between those two things is where our work as your advisor is most valuable right now.
How should I be thinking about Australian real estate credit in my portfolio specifically — and what does the right allocation actually look like?
The starting point is to be clear about what role this allocation is playing in your portfolio. Australian real estate credit is not a single asset class — it spans a risk spectrum from conservative income generation at one end to opportunistic double-digit return strategies at the other. Treating them as interchangeable is one of the most common mistakes I see in this space.
For clients whose primary objective is income and capital preservation, the right place to be is senior secured first mortgage lending on stabilised or near-complete assets, targeting 7–9% net returns. At that level you are being compensated for the illiquidity and complexity premium, your structural protections are meaningful, and in any plausible Australian macro scenario your capital is well-protected. This is not the exciting end of the market — but it’s the end of the market where I can make a clean, confident recommendation right now without material qualification.
For clients with a genuine 2–3 year time horizon, no near-term need for the capital, and a clear understanding of the risk profile, a measured allocation to opportunistic Australian real estate credit — strategies targeting 12% or above — can make sense. But the sizing matters enormously. I’d think about this as 3–5% of total portfolio at most, sitting alongside a larger senior secured allocation rather than replacing it. At that size, a poor outcome on the opportunistic sleeve is uncomfortable but not portfolio-defining.
The question I ask before recommending any real estate credit manager right now is specific: have they stress-tested every active development loan against current construction cost assumptions, not the feasibilities written 18–24 months ago? Manager selection is the dominant variable in this environment. The best managers in Australian real estate credit are disciplined underwriters with genuine local market intelligence and active asset management processes — they work with borrowers early when problems emerge rather than discovering them at maturity. The weaker managers are running on marketing track records built during favourable conditions, without the infrastructure to manage through a more challenging cycle.
As always, the most important conversation is about your specific situation — your existing property exposure, your income needs, your time horizon, and how this fits within your overall portfolio construction. If any of this has prompted questions about your current allocation, please reach out directly and we can work through it together.
Thank you for taking the time to read this. I know the volume of financial news right now can feel overwhelming, and I hope this helped cut through some of the noise. As always, the most important question isn’t what private credit is doing in aggregate — it’s what your portfolio is doing, and whether it still reflects your goals, your time horizon, and your comfort with risk.
If you’d like to talk through any of this in the context of your own situation, please don’t hesitate to get in touch.
Nilar Alom Ispahany
Family Wealth Advisor & Principal — Zeteo Wealth Partners
E: nilar@zeteowealth.com
M: 0432 231 282
31 March 2026