Returns today, risk tomorrow. The next shakeout will show who got lending right

Please note, this interview was recorded Tuesday, 24 February 2026

Nothing is ever as good or as bad as it seems. That is usually true in life, in markets, and increasingly in private credit.

The asset class has exploded in popularity over the past decade, attracting capital seeking reliable income. But the speed of that growth has also raised questions about what might happen when the cycle eventually turns.

Some have already sounded the alarm. JPMorgan Chase CEO Jamie Dimon recently warned of the “cockroaches” in private credit, referencing several high-profile lender failures in the United States.

Others see a more nuanced picture. Veteran investor Howard Marks recently offered this assessment:

“There’s not a systemic problem with private credit… but there’s a saying in banking that the worst loans are made in the best of times.”

While Marks was speaking about the US market, the observation applies just as readily in Australia. The asset class itself is not the problem. The real risk lies in how it is executed.

Applying an Aussie-centric lens to unpack how the market is evolving and where the opportunities and risks lie, Ryan Donnar, Managing Partner and Investment Committee member at Privity Credit, joined the Rules of Investing podcast.

In the conversation, Donnar explains why private credit is far from a one-dimensional asset class, where crowding is beginning to emerge, and what investors should examine beneath the surface before allocating capital.

Private credit is not one-dimensional

One of the biggest misconceptions investors make is assuming private credit is a single, homogenous investment. In reality, it spans a wide spectrum of lending types, borrower profiles and risk levels.

“You’re seeing an evolution here in Australia with investors understanding that private credit is not just one asset class,” Donnar says. “It’s important to understand what you’re actually invested in and what the underlying risk is.”

Even within corporate lending alone, the spectrum runs from small business loans through to large-cap financing, with different levels of security along the capital structure. Senior secured loans sit closest to the assets and cash flows, while second lien or mezzanine structures carry higher risk.

Layer on top asset-backed lending, infrastructure finance and property lending, and the term private credit quickly becomes a broad umbrella.

That is why headline yields rarely tell the full story. Structure, security and manager experience matter far more, according to Donnar. 

Why the sector has grown so quickly

The rise of private credit is largely the result of a structural shift in global banking.

Following the Global Financial Crisis, regulators forced banks to hold more capital against riskier loans. In response, many institutions reduced lending to certain parts of the corporate market, particularly smaller or fast-growing companies.

Private lenders stepped in to fill that gap. In Australia, however, the market is still relatively young compared to overseas.

“In offshore markets, private credit accounts for 70-80% of lending,” Donnar says. “In Australia, it’s closer to 15-20%".  

That gap suggests significant room for growth. But it also means more capital is flowing into the sector, and that inevitably raises the risk of crowding.

Where crowding is emerging

Like most asset classes, private credit becomes crowded where deals are easiest to access. In Australia, that has historically meant property lending.

More than half of the private credit exposure available to investors domestically is linked to real estate development or property finance.

“A lot of money has gone into property,” Donnar says. “There has been a huge wave of capital and we’ve seen some structures being tested.”

That does not mean property lending itself is problematic. But it does highlight how quickly risk standards can drift when capital floods into a sector.

For Privity, the focus has instead been on the mid-market corporate lending segment, particularly companies seeking growth capital. 

These businesses often sit in a financing gap. Banks may struggle to move quickly enough to support acquisitions or expansion, while equity financing can be expensive or dilutive. That is where private lenders can step in.

What good private credit looks like

“Private credit done well is lending that supports the underlying Australian economy,” Donnar says.

That can include funding expansion for growing companies, supporting acquisitions or providing capital to businesses banks cannot easily service. Sometimes those loans become stepping stones to more traditional financing.

Donnar points to a recent example involving a payments technology company that Privity financed to support growth. After expanding successfully, the business was ultimately 100% acquired by Commonwealth Bank as part of the bank's evolving ecommerce payments platform. 

In that case, and in many others, private credit effectively bridged the gap between early-stage growth and institutional funding.

Structure matters more than yield

If there is one theme that runs through the conversation with Donnar, it is the importance of deal structure.

“We say structure, structure, structure,” he explains. “That work you do upfront is where things work for investors.”

Unlike public bond markets, private lenders can negotiate loan terms directly with borrowers. Those terms typically include financial covenants that allow lenders to intervene if performance deteriorates.

In some parts of the market, particularly in the United States, lenders have increasingly agreed to covenant-light structures that weaken those protections.

That may not matter when conditions are strong but when markets deteriorate, weak documentation can leave lenders with little ability to act.

According to Donnar, the important lesson for investors is that the real risk in private credit often sits in the loan documentation rather than the borrower itself, hence why choosing an experienced manager can make all the difference between a good outcome and a poor one. 

Defaults are not always disasters

Another common misunderstanding is that any default represents a failure. In reality, defaults are often part of the risk management process.

“If something is structured correctly and a company deviates from its covenants, that creates the ability for lenders to step in and preserve value,” Donnar explains.

That might involve renegotiating terms, adjusting pricing or working with management to stabilise the business. 

Handled well, those situations can actually improve outcomes for investors. Handled poorly, they reveal weaknesses in underwriting.

The questions investors should ask

With regulators such as ASIC increasing their scrutiny of the sector, transparency and governance are becoming more important. Donnar suggests investors focus on a few key questions when assessing managers.

• What are the fund’s valuation policies?
• Are financial statements audited?
• Are external trustees overseeing the mandate?
• Is there independent research coverage?
• How are conflicts managed?

Most importantly, investors should be comfortable asking those questions.

“If anyone pushes back on giving you those responses,” Donnar says, “that should be a red flag.”

Private credit is likely to continue expanding in Australia as banks focus on their core lending markets. For investors seeking income, it offers an alternative to the traditional avenues. 

As Marks warned and Donnar reiterated, however, the real test of the sector will not come in the good years. It will come when conditions tighten and the quality of underwriting is finally revealed.

That is when investors will discover which loans were structured with discipline, and which were simply written during the best of times.

Learn more

Privity Credit is a leading private credit fund manager focused on direct lending to Australian and New Zealand corporates.. Their funds are focused on consistent income and the preservation of investor capital. For more information, please visit their website.