Metrics Credit Partners’ recent redemption suspensions and the collapse of property developer Bathla – which sourced much of its $3 billion in debt from private credit funds – are reminders that private credit’s rapid growth has been accompanied by risks many investors have yet to confront.

It follows years of extraordinary growth for local private credit. To say the asset class has gained traction with investors would be an understatement; it’s been a gold rush.

Morningstar Australia’s data reveals that, as a category, private credit topped asset class flows over the past financial year, with net inflows of over $5 billion; by contrast, listed equities recorded significant net outflows.

The numbers only tell part of the story.

Today, commuters on the northern side of the Sydney Harbour Bridge no longer glimpse the signage of former equity powerhouse Platinum atop a residential tower; instead, the logo of fast-growing local private credit manager Metrics vies for their attention nearby.

It is, quite literally, a sign of the times. That Metrics has recently taken up residence in Martin Place – the spiritual heart of Australia’s finance sector – is a testament to the local sector’s lofty ambitions and rapid growth.

The case for the asset class may be ostensibly compelling – much of the opportunity arises from structural disintermediation wrought by regulatory changes for banks, leaving a gap for skilled managers to plug.

But while it’s become mainstream, in some ways Australian private credit remains nascent – especially at such scale and for a retail investor audience.

And, as with any adolescent, growing pains are all part of the journey.

This is especially pertinent because, for the most part, the local sector has yet to be put through a sustained market downturn at such scale.

The recent collapse of Bathla – an exemplar of local private credit’s heavy exposure to the weakening real estate sector – suggests that private credit is facing its most serious test yet.

Increased accessibility for retail investors has helped put the wind in private credit’s sails; it’s no longer the preserve of sophisticated investors. In asset management circles, you’ll often hear this referred to as “democratisation” (in fact, by now you’ll probably be sick of hearing it).

But our relatively laissez-faire approach to offering investor access to private credit contrasts with a number of jurisdictions in the region where access is more restricted.

We shouldn’t rest on our laurels and assume that our way of approaching access to the asset class is the right one; rather, we should be asking: has Australia struck the right balance between investor accessibility and private credit’s inherent complexity?

Private credit and liquidity – uneasy bedfellows?

In considering this private credit balancing act, liquidity is key. It sits at the crossroads of investor appetite and practical reality.

After decades of investing in public asset classes, retail investors havedeveloped a taste for immediacy. Is it appropriate to permit redemptions quarterly for a loan portfolio consisting of highly illiquid assets? With an appropriately lengthy notice period – yes, perhaps.

Indeed, this approach is the norm for institutional strategies. But what about offering monthly redemptions and several days’ notice for a broadly similar portfolio? In assuaging concerns, managers will point to a surprisingly diverse arsenal of liquidity levers at their disposal.

They will offset redemption requests against new applications. They can rely on the on-time interest and principal payments of diligent borrowers.

They may have a panel of willing buyers of their loan book. In sanguine markets, these options are unlikely to face issues.

But during market ructions, it’d be foolhardy to assume they’ll be as readily available – precisely when most needed.

There is one additional liquidity lever that is often overlooked – the credit facility.

Here, managers may have a panel of willing lenders happy to help. These may help bridge financing gaps, such as unfunded capital commitments.

They may also offer a pragmatic solution for a manager caught out by a redemption surge, averting the need for a fire sale of portfolio assets to raise cash – undoubtedly a win for investors who would otherwise have to wear big haircuts as losses are crystallised.

But what if the facility provider decides they don’t feel the reward is worth the risk? As these facilities tend to have short tenures – typically a year or so – it’s a question such lenders have to ask themselves often.

For one bank, HSBC, the answer a few months ago was “no”; it informed some of its riskier private credit fund clients globally that their facilities would no longer be renewed.

In a credit crisis, it’s hard not to see other lenders following suit.

Of course, liquidity isn’t alone among important consideration for investors in private credit. Valuations are less frequent and can take months (if not years) to percolate through private loan portfolios, meaning the underlying risks may not be fully reflected in the entry prices investors pay.

The same goes with related party transactions, which can be many and varied, yet poorly disclosed to investors.

Opacity around fee structures is another pain point that has attracted regulatory attention.

Private credit has come a long way in a short time, requiring the burgeoning number of investors to swiftly get up to speed.

Investors should not only be aware of the benefits but also of new, unfamiliarrisks. After all, not all gold rushes will make prospectors rich.