Private credit | Pilot error or the weather?

When an aircraft goes down, nobody concludes that “aviation” failed. Investigators work through the causes methodically, starting with the weather, the aircraft and the pilot, because the answer determines the fix.

Private credit doesn’t get the same courtesy. A developer collapses or a loan is written down, and the headline writes itself: private credit is in trouble.

Let’s be honest, some of the criticism is deserved. But lumping every loss together makes it harder for investors to understand the risk they actually hold. A better starting point is to ask how a loss, or a challenged loan, came about in the first place.

1. Three risks, not one

On a first principles basis, losses in private credit come from three sources, each with its own driver and its own point of control.

Only one of these, the pilot, sits entirely with the fund manager.

The fund manager’s decisions influence how exposed a portfolio is to the other two, but can’t control them. Getting that distinction right is where any sensible assessment of a loss should begin.

2. Systemic risk | the weather

Systemic risk is the environment every lender flies in.

It is set by monetary and fiscal policy and the vagaries of the broader economy, and in 2026 they have combined into a particularly toxic brew:

• RBA Cash Rate rose four times this year to 4.60%, with underlying inflation still above target
• Budget proposed replacing the 50% CGT discount with indexation and a 30% minimum tax
• Budget proposed restricting negative gearing on established homes

Every lender flies in this weather, though some have copped more turbulence than others.

This year the pressures have converged on property, and construction lenders have felt them most acutely. That’s no criticism of property lenders, just a reflection of where the storm has hit hardest.

Other segments have their own bumpy flights to contend with. Corporate lending, for example, feels a slowing economy through business performance rather than property values.

Every sector and asset class is exposed to systemic risk which is part and parcel of the investment cycle, with listed equities a good example.

Over the 12 months to mid-October 2026, the S&P/ASX 200 fell by c2% before dividends, while many private credit strategies have continued to deliver returns above inflation.

Different asset classes carry different risks, but nobody is suggesting the share market is broken.

3. Credit risk | the aircraft

If systemic risk is the weather, credit risk is the aircraft: the borrower behind the loan.

It is also the main driver for the margin investors earn above the risk-free rate. Some borrowers will not repay, and investors are paid for bearing that risk. A fund manager’s job is to select and price credit risk using expertise and experience, and to minimise it.

You wouldn’t know that from market commentary, where every default is treated as a scandal. Thankfully the regulator is more measured. In a September speech, ASIC Commissioner Simone Constant said: “It will never be risk-free. We don’t expect it to be.”

Practically, credit losses tend to arrive in one of two ways. Either the weather tests the aerodynamic limits of the aircraft, or the aircraft wasn’t sound to begin with.

When the weather tests the aircraft: Bathla

Taking an outsider’s view, Bathla is a case study in systemic pressure turning into a credit event. Higher rates, softer buyer confidence and rising costs put the developer under strain, playing out across its individual loans.

Media reports and industry intelligence suggest lenders to the same developer are facing quite different outcomes.

Some first mortgage lenders are reported to expect a full recovery of capital, while others face varying degrees of capital loss. Same developer, same weather.

What separates them is position in the capital structure, quality of security and pricing, which is exactly why credit risk needs to be assessed loan by loan rather than by pillorying an entire sector.

When the aircraft wasn’t sound: fraud

Fraud is a different animal. It can arise in any weather, and every lender faces the risk. It is unfortunately more prevalent in corporate lending, where much of the information a lender relies on comes from the borrower itself.

Here is the twist: experience of fraud can be an asset. 

A fund manager that has worked through a fraud event emerges with sharper verification systems and processes, tighter covenants and reporting controls, and a due diligence culture that has moved from conservative to paranoid. Investors already look for fund managers who have lent through an economic cycle. They may do well to look for those who have been through a fraud event as well, and ask what changed as a result.

Either way, defaults will happen. The question to ask is whether the loss fell within what the security, structure and pricing allowed for.

4. Manager risk | the pilot

The weather and the aircraft set the conditions. 

The pilot makes the decisions, and this is the one category that sits squarely with the fund manager. Rather than reel off a list of failings, it is more useful to ask where a fund manager stands:

The first four rows go to competence; many would argue the last four go to integrity.

Manager risk is where regulation and investor due diligence matter most. It is also where the weather gets used as an excuse.

A storm doesn’t excuse a pilot who took off in an overloaded aircraft, or one who reported a smooth flight after landing on one engine.

In practice the three risks interact, and the current weather is testing the mettle of every pilot.

Conclusion

When the next loss hits the headlines, investors should ask the questions a crash investigator would:

• Was it the weather – interest rates, policy or the economic cycle?
• Was it the aircraft – a loss beyond the risk-return framework?
• Was it the pilot - acting in good faith, or otherwise?

“Private credit” describes an asset class, and concluding the “private credit" sector is in trouble following a loan default carries an awkward implication: that private credit fund managers should deliver a credit risk premium with no risk of credit loss.

No asset class works that way.

The role of a fund manager is to maximise risk-adjusted returns, and we continue to believe that Australian private credit continues to offer investors a compelling proposition.