Private credit in Australia, for borrowers and investors

A bank loan is underwritten against a product set shaped by prudential capital rules and a credit process built for volume. A private credit loan is underwritten by a single lender or a small club, usually a fund manager, against the specific cash flow and asset profile of one borrower. That difference in underwriting model produces several practical differences. Private lenders can move faster because there is no syndication process and no committee waiting on a standard template. They can lend against situations banks are reluctant to hold on balance sheet: transitional assets, development finance, cash-flow lending without conventional security, or borrowers mid-way through a change of ownership or restructure. In exchange, pricing sits above bank margins, reflecting both the credit risk taken and the illiquidity premium the lender charges for capital that cannot easily be sold down. Private lenders also typically negotiate bespoke, often tighter covenants than a syndicated facility, because with no market to distribute the risk into, the lender who wrote the loan is the lender who lives with it to maturity or exit.

Private credit spans a spectrum from senior secured lending to structures that sit closer to equity. Security is documented through a general security deed registered on the Personal Property Securities Register, giving the lender a perfected interest over present and after-acquired property, supplemented by real property mortgages where land is part of the collateral and guarantees from related entities in the borrower's group. Where more than one layer of debt is involved, an intercreditor deed sets out priority, standstill periods and what each class of lender can and cannot do if the borrower defaults. None of this is boilerplate: the strength of a private credit investment sits as much in how these documents are drafted as in the headline interest rate.

An investor allocating to private credit is not buying a bond with a public rating and a liquid secondary market. The assessment starts with the underlying borrower: the durability of its cash flow, the quality of the security package and the loan-to-value the facility represents against that security. It extends to the manager, because in a private credit fund the manager's origination discipline and workout capability, not just its marketing material, determine what happens when a loan underperforms. Diversification across borrowers, sectors and loan vintages matters more here than in listed credit, given the concentration risk in a smaller portfolio of bilateral loans. Investors also weigh liquidity terms closely: many private credit vehicles carry redemption notice periods, gates or a genuinely closed-end structure, and the return premium the asset class offers exists precisely because that liquidity has been given up. How the vehicle is structured matters too. A private credit fund may be a registered managed investment scheme under Chapter 5C of the Corporations Act 2001 (Cth), open to retail investors and operated by a responsible entity holding an Australian Financial Services Licence, or an unregistered wholesale scheme available only to investors who meet the sophisticated or wholesale investor tests under the Corporations Act. That distinction shapes disclosure obligations, ongoing reporting and who can invest at all.

A borrower approaching private credit for the first time should expect a diligence process that looks more like a corporate transaction than a bank application. Financial diligence goes beyond historical accounts to test the forecast cash flow the loan will be serviced from, and lenders scrutinise the quality of earnings behind those numbers rather than accepting them at face value. The security review checks title, existing encumbrances already registered against the borrower's assets and how a new security interest will rank alongside them. Lenders will also examine the corporate structure itself, including change of control provisions and any existing financing that a new facility needs to sit behind, alongside or refinance. Documentation typically runs to a loan agreement, a general security deed, guarantees from relevant group entities and, where there is more than one lender or tranche, an intercreditor deed, each with its own conditions precedent that must be satisfied before funds are drawn. Ongoing obligations follow financial close: monthly or quarterly reporting, covenant testing against agreed thresholds and, in most facilities, a lender consent right over material corporate actions for the life of the loan. Borrowers who treat this as a formality rather than a genuine diligence process tend to find it the slowest part of the transaction.

Private credit rewards precision on both sides of the table. For a borrower, the value of the asset class is speed, flexibility and a lender willing to underwrite a situation a bank credit process cannot accommodate, but that value is only realised if the documentation, security and covenant package are negotiated properly rather than accepted as presented. For an investor, the return premium is compensation for illiquidity and concentration, and it is only durable if the underlying credit selection, security and manager discipline hold up when a borrower comes under stress. Getting the vehicle structure right, whether that is a registered scheme, a wholesale fund or a bespoke lending arrangement, is what determines whether either side can actually rely on the protections the documents describe. Stone Leaf Capital advises both borrowers structuring private debt facilities and investors assessing access to funds through fund establishment for managers bringing a private credit strategy to market.