Rising rates, falling property values and rush for exits exposes private credit risks regulators warned about

For years, private credit was sold to Australian investors as a smart new way to earn high income without taking the risk of capital losses in the share market.

The investment pitch was to lend money to property developers and businesses, collect interest rates of 8 to 9 per cent - well above those available from savings accounts, shares or bonds, and let professional fund managers handle the risk.

The boom in Australia’s private credit sector made its investment managers rich, very rich, as they amassed $200 billion in funds under management.

But now soaring interest rates and falling property valuations threaten to sink a sector so divisive that even the corporate regulator ASIC repeatedly warned about it over the past 12 months.

This week, the sector’s cracks widened as $35 billion private credit manager Metrics Credit Partners froze redemptions from underlying funds, suspended new lending and marked down the value of several ASX-listed funds. Its auditor, KPMG, has so far refused to sign off on some of the funds’ accounts.

Other private credit lenders have also halted or restricted the rights of investors to withdraw their funds.

While the collapse of property developer Bathla Group has exposed the scale of the sector’s lending to troubled borrowers.

Bathla entered administration owing about $3.4 billion to roughly 40 non-bank lenders, many of them private credit funds, including some listed on the ASX by Centuria Capital.

Risk in private credit

Investors are nervous that the value of more funds could plunge if borrowers are unable to repay their debts as interest rates rise and the local economy slows.

The parallels to the Global Financial Crisis (GFC) of 2008 are obvious. Then, as now, a huge expansion of unregulated lending to the property sector outside the traditional banking system threatens to inflict huge losses on investors as interest rates return to highs last seen in the GFC’s aftermath in 2011.

The structures of private credit funds are typically complex and hard for mum-and-dad, or even sophisticated investors to understand.

This means the investors must take a leap of faith and trust the managers not to lend their funds to the wrong counterparties.

Often these investors are wealthy Baby Boomers in search of retirement income and will take professional financial advice, or place some reliance on independent ratings agencies such as Zenith or Lonsec.

The loans the private credit managers are making to property developers or businesses are often considered to at risk of default for traditional banks like CBA, NAB or ANZ to make.

These traditional banks will lend to a variety of business sectors including farming, healthcare, construction, tech, and manufacturers.

This business model relies on the theory that if any single sector or loan turns sour, the profits from the other loans should be sufficient to cover the bad debt as the bank has spread the risk.

Australian private credit lenders though tend to focus largely on residential, commercial, and industrial property development.

When the economy turns sharply, as it has in 2026, the fortunes of different borrowers can move together.

After four interest rate hikes in 2026 many of the private credit sector’s borrowers may be struggling to meet rising repayments and finding it harder to sell the properties they’re building.

If the properties cannot be completed or sold, there may be insufficient cashflow to repay lenders.

As interest rates rose around the world in 2026 private credit investors have been racing to beat the crowd and withdraw their funds in anticipation of more problems and interest rate increases ahead.

That rush creates another problem for private credit managers. Their business model relies in part on the assumption that investors will not all seek to withdraw their money at the same time.

Typically, the collective investment schemes are structured so no more than 5 per cent of funds can be withdrawn over any single three month period.

If investors collectively demand more than 5 per cent it creates problems for the managers as they must find the cash to meet the withdrawal requests, even though the property assets they’ve invested in cannot be easily sold.

Many global private credit funds including the parent of BetaShares’ Cliffwater Fund have been forced to limit withdrawal requests for the past nine months as rising interest rates prompted investors to reshuffle their portfolios.

The surge in global bond yields that has taken the risk free benchmark - the US 10-year government bond - to more than 5 per cent has also stoked the year-long demand to exit private credit.

This is because if an investor can suddenly earn 5 per cent for 10 years risk free on a government bond, it makes less sense to risk capital in a private credit fund that only offers a yield slightly higher at 8 or 9 per cent and lends to at risk property developers.

No need to panic

For its part, the private credit industry insists investors shouldn’t jump at shadows just because global interest rates are climbing.

It argues the suspensions or limits on withdrawals exist to protect all investors.

The investments are sold as long-term in nature and unsuitable for anyone easily spooked by periodically scary headlines or interest rate cycles that eventually turn.

ASX-listed financial services group Pinnacle Investment Management owns 35 per cent of Metrics Credit Partners and said it believes Metrics will ride out the storm to deliver strong returns.

“Pinnacle believes private credit, delivered by experienced, large-scale managers, plays an important role for investors, providing regular income and portfolio diversification,” it said. “The asset class also remains a critical source of funding for Australia’s real economy – including construction and housing supply, commercial property, and the mid-market and small businesses that banks are increasingly less able to serve.”

Metrics declined to comment on its mounting problems, although is now being peppered with serious questions by regulators, reporters, auditors, and increasingly worried investors.

If Australia’s Reserve Bank continues to tighten the screws on borrowers with more rate increases the faith in the $200 billion sector will be increasingly tested.