Private credit: Going the distance

The growth in private credit as an asset class, particularly amongst retail investors, has sparked the attention of ASIC. Speaking from a managed accounts perspective, Darren Beesley (Evidentia Group), Michael Karagianis (JANA), and Frank Danieli (MA Financial Group) examine where private credit is heading over the next few years.

As an asset class, private credit has grown exponentially over a 25-year period — from about US$50 billion in 2020 to approximately US$3 trillion today, with the potential to expand to US$5 trillion globally by 2028. Essentially, private credit is the lending by non-banks to private public companies (unlisted public companies).

However, it’s not surprising that some have questioned the recent growth of private credit as being a ‘bubble’, particularly with the sector exhibiting increasing signs of strain. They point to years of unchecked inflows that has shifted leverage towards borrowers, eroded investor protections, and left returns increasingly dependent on refinancing conditions, rather than the quality of underlying assets. As volatility rises, the gap between perceived yield and actual risk is widening, with redemption risk a significant concern. 

These developments have raised the attention of the regulator, which has already issued two reports — RP 814 Private Credit in Australia, and RP 820 Private Credit Surveillance Report: Retail and Wholesale Surveillance. RP 814 examined the size of the market and identified a number of shortcomings and positives about private credit. The report states that the local market is estimated to be around $200 billion, with approximately half of that being real estate-focused finance. 

Against this backdrop of growth, defaults, and a flood of ‘evergreen’ products to market, Michael Karagianis — Head of Wealth at JANA — is not surprised at ASIC’s focus on private credit

By Jayson Forrest

Continued.....

Speaking on the topic of private credit at the 2026 IMAP Portfolio Management Conference, Michael believes what is most concerning about private credit is the uptake of this asset by retail investors, and the appropriateness of these investments in a retail portfolio.

He explains: “We’ve seen in the U.S. some of the recent gating (a contractual limit allowing fund managers to restrict investor redemptions, often triggered when withdrawal requests exceed available cash) that has occurred, and which has been associated with retail investors and a mismatch between the underlying nature of these private credit investments, which are illiquid.

“These are investments with a long future date, so investors need to stick with it. Private credit investments are not designed to provide liquidity. However, retail investors don’t always understand that. This is something that both ASIC and JANA are concerned about.”

It’s a view shared by Frank Danieli — Managing Director, Head of Global Credit Solutions at MA Financial Group. He says questions are increasingly being raised, not necessarily about the performance of private credit, but about whether investors actually know what they are exposed to when investing in private credit.

“Lending is a spectrum. There are good loans and there are bad loans,” says Frank. “If you’re investing in a lending asset class, you need to know what underlying investments you’re actually exposed to.”

Frank says when investing in private credit, it’s essential that investors know what they are investing in, so they can clearly understand: where the product sits on the risk spectrum; the kind of returns being generated; and how those returns are generated. This will enable them to acquire a better understanding of whether they have exposure to good or bad loans.

According to Frank, in order to gain this understanding, it is essential that fund managers provide the right type of disclosure and transparency. As part of any manager selection process, Frank says investors should think about disclosure and transparency in three layers:

• Layer 1: Portfolio composition — What is in the portfolio; how diversified is it; what are the loan types and sector exposures; and what are the characteristics and features of the loans?
• Layer 2: Risk-adjusted returns — What type of returns am I getting for the risk I am taking; what are the performance characteristics of the loans; what are the lending metrics; and what are the drivers of return?
• Layer 3: Structural and governance transparency — What is the investment philosophy and approach; what are the risk management frameworks; what are the governance protocols; what are the conflict management protocols; are there independent and external reviews; and is there fee transparency?

“This is the kind of transparency that is needed in order for investors to understand ‘what’s under the hood’ of the fund they’re investing in,” says Frank.

Importantly, he adds the final question investors should ask a private credit manager is: What’s their ‘skin in the game’? “Investors need disclosure of how much the firm and staff have invested in the portfolio. That’s because if they have real investment in the portfolio, then they’re likely to be incredibly focused on it.”

Frank cites a report from BIS (Annual Economic Report, June 2024) which shows that while fund managers often invest their own capital in a vehicle (‘skin in the game’), as many as 40 per cent of private credit fund managers have no ‘skin in the game’. This suggests there is scope for lack of focus and misalignment of objectives in a substantial segment of managers operating in the sector.

When thinking about the three layers of transparency and applying these to the process of investing, Frank offers investors the following checklist:

1. Do I have sufficient visibility into the portfolio to make an independent assessment of my exposure?

2. Am I earning a genuine private markets premium, sufficiently above what liquid markets would offer for equivalent risk?

3. Can I trust the manager to act as an empowered fiduciary aligned with investors in making decisions, generating returns, and protecting capital?

“The disclosure in these three layers is what enables allocators and investors to know exactly what they are investing in. And that’s key when investing in private credit,” says Frank.

Michael agrees that fund manager due diligence is critical in the private credit space. JANA’s due diligence on managers is centred on gaining a thorough understanding of their experience in this asset class, their track record, and the quality of the investment team.

“If you invest in this asset class and you think you’re not going to get defaults in your loan book, then you’re in the wrong asset class. This is an asset class that will have defaults,” says Michael. “So, you need to be asking the manager questions like: how good is the due diligence done by the manager in entering into deals in the first place; do they have access to the right deals; and what is the proportion of defaults?

“Once you do get defaults in this space, does the fund manager have the capability to work it out, because it’s still on their books and they still have to realise value. The ability to actually manage that problem loan through to completion is a fundamental requirement for fund managers and for fund manager selection. However, we don’t believe that all fund managers in this space have that capability.”

Darren Beesley — Chief Investment Officer at Evidentia Group — agrees, adding that manager returns in private markets are more widely dispersed than manager returns in public markets. This emphasises the need for rigorous manager due diligence, as part of the manager selection process, in order to achieve good returns from private markets. 

When considering the role of private credit in a portfolio, Darren says Evidentia does not recommend placing illiquid assets in a managed accounts structure.

“We work closely with our advisers to understand their clients’ liquidity budget. We then separate all the illiquid assets. Wrapped in another wrapper are private market funds (packaged inside a second, more accessible investment vehicle to make them easier for investors to buy, hold, and manage) as a separate allocation. We use this approach because if we put illiquid assets in a ‘one-size-fits-all’ SMA, then you’ve got a scenario where retirees are aggressively drawing down with the same illiquidity as young accumulators.

“However, we do believe private credit serves an excellent role in portfolios, once the illiquidity budget is carved out.”

In relation to retail investors going into illiquid assets, Darren agrees there is considerable misunderstanding, particularly when there are liquid wrappers around illiquid assets or promises of monthly redemption windows. That’s why he believes education is absolutely essential for both advisers and investors when thinking about and/or investing in illiquid assets.

“There’s a huge misunderstanding of what a redemption window means to what the actual look-through lock-up period (where the liquidity of an investor’s capital is directly linked to the maturity or cash flows of the underlying loans held within the fund) could be. That’s why we don’t put private credit in an SMA, because it would break the structure. We believe illiquid assets need to sit outside the SMA,” says Darren.

For retirees seeking income, Michael believes private credit can be an attractive investment within a broader portfolio.

“We don’t view private credit as defensive. Many of these investments are high yield by nature, which means they are likely to have a higher default rate over time. They are illiquid, so don’t expect you’ll get a liquidity buffer out of this investment. This is a long-term investment,” he says.

“Private credit may be appropriate for investors in pension phase, if they still have a long runway. However, they shouldn’t expect it to be part of the portfolio they’re going to be able to drawdown on anytime soon.”

Michael adds if an investor wants to get out of private credit in any volume, they will have to accept substantial discounts on Net Asset Value (NAV). This is something he believes a lot of investors struggle to understand, which means it’s crucial to properly educate investors to make them aware that private credit is not an ideal asset to put into a defensive part of the portfolio.

“Private credit is not homogeneous. It ranges from relatively high quality senior debt, to subordinated debt, through to venture capital and so on. Investors need to understand they are receiving a high yield but there is a reason for that, because of the nature of the underlying investments. So, in private credit, it’s absolutely critical you understand what you’re investing in,” says Michael.

Darren Beesley is Chief Investment Officer at Evidentia Group;

Michael Karagianis is Head of Wealth at JANA; and

Frank Danieli is Managing Director, Head of Global Credit Solutions at MA Financial Group.

They spoke on the topics ‘Opportunities in private credit: Sorting the wheat from the chaff’

(moderated by Nigel Douglas — Chief Executive Officer at Douglas Funds Consulting) and ‘Private credit: What’s under the hood’ at the 2026 IMAP Portfolio Management Conference in Sydney and Melbourne.