Private Credit Is Not One Market: Looking Beyond the Label

Recent events have placed Australian private credit under an increasingly bright spotlight. As instances of borrower stress attract attention and regulators intensify their scrutiny, it is tempting to discuss “private credit” as though it were a single, homogeneous asset class.

It is not.

Private credit encompasses a broad range of lending strategies, including property development finance, commercial real estate loans, asset-backed lending, infrastructure debt, venture debt, special situations and corporate direct lending. These strategies may all involve privately negotiated loans, but their underlying risks, sources of repayment and expected recovery outcomes can be markedly different.

For investors, the distinction matters because the description “senior secured” does not, by itself, provide a complete picture of risk.

Start with the source of repayment

The most important question in any credit investment is straightforward: how will the lender be repaid?

In property development finance, repayment may depend heavily on completing a project, achieving anticipated sales prices and settling those sales within a particular timeframe. Construction costs, planning delays, presales, builder performance and movements in property values can therefore have a significant effect on the outcome.

By contrast, corporate direct lending generally relies on the recurring earnings and cash flows of an established operating business. The primary repayment source is the company’s capacity to generate cash over time, while security and enterprise value provide additional protection if performance deteriorates.

Neither model is inherently good or bad. They simply involve different risks and require different underwriting expertise. Problems arise when those differences are obscured by a common private-credit label or by an excessive focus on the existence of security.

Security is only as valuable as the asset beneath it

“Senior secured” describes a lender’s legal position in the capital structure. It does not establish how much value will be available in a downside scenario, how quickly that value can be realised or what costs may be incurred in enforcing the security.

A lender secured against a specialised, unfinished or illiquid asset may face a very different recovery process from one lending to a large operating business with diversified customers, established earnings and assets capable of being sold or refinanced.

This is why enterprise value is important in corporate lending. Larger businesses typically have deeper management teams, more diversified revenue, greater access to capital and a broader range of strategic buyers. Their assets, business divisions and contractual cash flows may also provide several potential pathways to repayment.

The strength of a security package still matters, but it should complement — not substitute — the borrower’s ability to service and repay its debt.

Structure matters alongside borrower quality

Strong underwriting is not limited to selecting companies that are expected to perform well. It also involves constructing a loan that remains resilient when events do not unfold as forecast.

Leverage at entry, interest coverage, covenant headroom, amortisation, restrictions on additional debt and distributions, reporting requirements and lender control rights all affect the level of protection available.

A conservatively leveraged loan to a durable business can provide the borrower with room to navigate temporary setbacks. Conversely, an apparently attractive yield may offer limited compensation if it is accompanied by aggressive leverage, weak documentation or an overreliance on future earnings growth.

For this reason, headline yield should always be considered alongside the amount of risk required to generate it.

A more discriminating phase for private credit

Warren Buffett famously observed that ‘you only find out who is swimming naked when the tide goes out.’ Periods of stress test both borrowers and investment processes. They expose high leverage, unrealistic valuations, weak structures and liquidity mismatches that may be less visible in benign markets.

That does not invalidate private credit as an asset class. Instead, it reinforces the need to look beyond broad labels and assess where returns are coming from, how risks are controlled and whether the manager has the capability to navigate difficult situations. For a private-credit lender, this means selecting resilient businesses, lending at sensible leverage, negotiating meaningful protections and maintaining the capability to act early when performance starts to weaken.

amicaa’s investment positioning

At amicaa, our focus is corporate lending to large-enterprise-value Australian and New Zealand businesses. We look for established earnings, resilient market positions, conservative capital structures and multiple avenues of repayment. We also seek to pair that borrower quality with meaningful covenant protection and active portfolio monitoring.

As the Australian market matures, investors are likely to become increasingly discerning about the differences between strategies and managers. That should ultimately be positive for the asset class.

Private credit can offer attractive income, diversification and downside protection. But those outcomes do not arise simply because a loan is private or described as senior secured. They depend on the quality of the borrower, the structure of the transaction, the liquidity of the underlying assets and, above all, the discipline of the lender.

DISCLAIMER

Issued by amicaa Investments Pty Ltd (ACN 637 638 530, AFSL 520270), investment manager of the amicaa Direct Lending Fund (the Fund). Evolution Trustees Limited (ACN 611 839 519, AFSL 486217) is the trustee of the Fund. This article is general information only and does not take into account your objectives, financial situation or needs. It is not an offer or recommendation in relation to any financial product. Opinions and forward-looking statements reflect our views at the date of publication and may change. All investments carry risk. The Fund is available to wholesale clients only; investors should consider the Information Memorandum and seek professional advice before investing.

The recent Federal Budget and accompanying changes to Australia’s capital gains tax regime have generated plenty of
commentary, much of it focused on who wins, who loses and what it all means for entrepreneurship, housing and economic
growth. Those debates will continue. But for investors, a more practical question emerges. When the rules of the game
change, where does capital go?

The answer may not be where most people are looking. For years, the Australian investment landscape has gently nudged
investors toward assets where a significant portion of returns arrive in the form of capital gains. Listed equities, private equity
and venture capital have all benefited from a system that rewarded patient holders of appreciating assets. Private debt,
meanwhile, has always been something of a different beast. It is less interested in dreams and more interested in cash flow.
Less concerned with what an asset might be worth in five years and more focused on what it can pay today. It is, in many
respects, the tortoise in a market that often celebrates hares. And as the old Aesop fable reminds us, the tortoise occasionally
has his day.

Warren Buffett once observed that “only when the tide goes out do you discover who’s been swimming naked.”
For much of the past decade, abundant liquidity and favourable tax treatment allowed investors to focus overwhelmingly on
growth. Future valuations mattered more than current income. The promise of tomorrow often outweighed the cash flow of
today. The Budget changes subtly alter that balance. Not dramatically. Not overnight. But enough to matter.

When the after-tax value of capital appreciation declines, the relative attractiveness of contractual income inevitably rises.
Investors do not need to change their return objectives; they simply need to look at them through a different lens. A dollar is
still a dollar. The path it takes to reach an investor’s pocket, however, has become more important. This is where private debt
begins to look particularly interesting.

Unlike private equity or venture capital, private debt does not require a favourable exit market. It does not need valuation
multiples to expand. It does not depend on the next funding round occurring at twice the previous valuation. Its returns are
largely earned along the way. Interest payments arrive monthly or quarterly. Fees are contractual. Security packages are
negotiated upfront. The investment thesis is often built around cash generation rather than future optimism. There is
something reassuringly old-fashioned about the model.

For much of the post-GFC era, income was scarce. Investors searching for yield were pushed further and further out along the
risk spectrum. Today, however, higher interest rates have restored the value of contractual cash flows. The tax changes simply
reinforce a trend that was already underway. As a result, we believe private debt now finds itself benefiting from two powerful
currents at once. The first is economic. Higher base rates have increased income generation across many lending strategies.
The second is behavioural. Investors increasingly recognise that a return earned today is often more certain than a gain hoped
for tomorrow.

That does not mean private debt replaces equities, private equity or venture capital. Far from it. The world still needs
entrepreneurs. Businesses still need growth capital. Equities will remain one of the most effective long-term wealth creation
tools. But investing has always been a game of relative attractiveness rather than absolutes. One of the oldest ideas in
modern investing has been that capital appreciation should sit at the centre of every portfolio discussion. The Budget changes
encourage investors to revisit that assumption. Not abandon it. Simply question it.

In doing so, many investors may rediscover an asset class that has spent years quietly compounding returns in the
background. Private debt has never been the loudest voice in the room. It does not produce the spectacular success stories of
venture capital. It rarely generates the headlines of listed equities. It seldom captures the imagination in quite the same way.
Yet in a world where tax policy increasingly favours certainty over speculation, income over appreciation, and cash flow over
promises, its virtues are becoming harder to ignore.

Over the past six months, the divergence between the US Business Development Company (BDC) sector and the Australianprivate credit market has become increasingly pronounced. While both markets operate within the broader private lendingecosystem, structural differences, regulatory settings, and recent market dynamics have highlighted why we believe Australianprivate credit remains an attractive asset class.

In the United States, BDCs have faced a more challenging environment. Rising interest rates initially supported the sector through higher floating-rate loan yields, however this tailwind is now moderating as credit stress begins to emerge across borrower cohorts. A number of BDCs have reported an uptick in non-accrual loans, particularly in sectors exposed to consumer weakness or cyclical demand and this has been further compounded by narrowing net interest margins as funding costs rise and competitive pressures increase.

Additionally, valuation volatility has become a key concern. Many BDCs are publicly listed and therefore subject to daily market pricing, which can deviate materially from underlying net asset values (NAVs). Over recent months, several BDCs have traded at persistent discounts to NAV, reflecting investor concerns about asset quality, future earnings sustainability, and broader credit cycle risks. This mark-to-market dynamic has introduced an additional layer of volatility that is often disconnected from the actual performance of underlying loan portfolios.

Leverage is another structural consideration with BDCs typically employing higher levels of leverage compared to Australian private credit vehicles. While this can enhance returns in benign environments, it also amplifies downside risk during periods of credit deterioration. Combined with exposure to more aggressive lending segments—such as covenant-lite loans and sponsor-backed transactions at higher leverage multiples—the US BDC sector is arguably more vulnerable late in the credit cycle.

A further issue has emerged within non-listed US BDCs around liquidity alignment. Many of these vehicles offer periodic or semi-liquid redemption features while investing in inherently illiquid private loans. Over the past six months, some funds have introduced redemption gates or limited investor withdrawals in response to elevated demand for liquidity. This mismatch between investor expectations and underlying asset liquidity has drawn increased scrutiny, highlighting the importance of structural alignment between fund terms and portfolio characteristics.

In contrast, the Australian private credit market presents a more defensive and stable proposition. The market is characterised by lower leverage, more conservative underwriting standards, and a focus on asset-backed or cash flow-secured lending. Australian lenders have generally avoided the more aggressive end of the capital structure, instead prioritising senior secured positions with strong covenant protections.

With most Australian private credit investments unlisted, and with valuations based on underlying loan performance rather than market sentiment, volatility is reduced. This results in smoother return profiles and minimises the behavioural risks associated with short-term market movements.

Furthermore, supply-demand dynamics in Australia are highly favourable. Traditional bank lending has retrenched significantly due to regulatory capital constraints, creating a structural funding gap for mid-market borrowers. Private credit providers have stepped in to fill this gap, often with strong pricing power and the ability to negotiate lender-friendly terms. Our observation of this dynamic supports the attractive risk-adjusted returns, typically in the high single-digit to low double-digit range.

Importantly, credit performance in Australia has also remained relatively resilient. While there are pockets of stress, particularly in construction and discretionary retail, overall default rates have remained contained. Lenders have benefited from proactive portfolio management, strong borrower engagement, and conservative loan-to-value ratios.

So while the US BDC market continues to offer opportunities, it is currently navigating a more complex and volatile phase of the credit cycle. By contrast, Australian private credit continues to stand out for its structural defensiveness, attractive supply-demand imbalance, and more stable return profile. For investors seeking income with lower volatility and stronger downside protections, the Australian market remains a compelling alternative at this stage of the cycle.

A lot has been written of late on the state of the Australian Private Credit market. From regulators releasing their long-awaited findings into the sector, to market commentators and participants alike, each espousing their views as to what the future holds, what challenges the sector must overcome and who will emerge as the dominant players.

The question that must be asked is why the increase in attention on the sector in the first place. The answer is relatively simple – the Australian Private Credit market is no longer in its infancy but is growing up and like any maturing sector this naturally attracts increased media and regulatory attention.

Private credit has now moved from the periphery of Australia’s lending landscape to become a meaningful and fast-growing source of capital for businesses. Once viewed as a specialised alternative sitting outside the realms of traditional bank financing, the asset class is now gaining institutional traction as companies look for funding options that offer reliability, customisation and speed of execution.

Australia remains a market where banks dominate corporate lending, yet several forces are reshaping the status quo. Regulatory settings, a concentrated banking sector and evolving borrower needs have created space for non-bank lenders to step in with solutions that the major banks are often less able to provide. As a result, private credit is moving from a complementary role to an increasingly central one.

The domestic market, estimated at roughly A$225 billion, is drawing significant attention from both local superannuation funds and offshore investors seeking stable income streams and exposure to Australia’s resilient economy. With more capital entering the space, activity is broadening—from standard mid-market loans to more complex structures that require specialist underwriting and deep engagement with management teams.

In this expanding environment, the lenders most likely to shape the next phase of growth will be those able to pair meaningful scale with strong local insight. The ability to source transactions early, navigate sector-specific nuances and deliver tailored structures has become a key competitive advantage as borrowers seek more sophisticated funding partners.

Importantly, the market is at a stage where flexibility matters. Companies increasingly value lenders that can support them through different phases of their development—whether that involves senior secured loans, hybrid structures, or loans that facilitate the transitioning into syndicated markets when conditions allow. Australia’s still-maturing private credit ecosystem makes this adaptability especially valuable, as businesses often prefer to stay with a single, trusted provider over multiple financing cycles.

Australian deals typically benefit from the market’s relationship-driven nature and relatively limited syndication channels, often resulting in attractive documentation terms and lender protections. These characteristics, combined with the country’s strong legal framework, continue to draw interest from global credit managers and investors alike.

Looking ahead, disciplined underwriting and thoughtful portfolio construction will be essential. The industry has already seen a handful of challenged credits attract media attention, underscoring the importance of rigorous due diligence as the market expands. Growth is likely to remain strong, but avoiding complacency and maintaining a fundamentals-driven approach will be critical as more capital flows into the asset class.

And this is where amicaa is particularly well positioned.

Backed by an international institutional partner, being The Carlyle Group’s US$208bn Global Credit platform¹, amicaa benefits from access to global expertise, sophisticated risk-management practices and established governance frameworks that have been tested across multiple markets and cycles. When applied locally, these capabilities strengthen amicaa’s ability to execute diligently, structure thoughtfully and maintain a disciplined approach as the Australian private credit market scales.

For borrowers and investors, this combination of local presence and global institutional backing offers a compelling proposition: a partner with deep Australian insight, supported by the experience and oversight of a global credit platform¹.

¹Source: Carlyle Credit Income Fund (“CCIF”), Q4 2025 Quarterly Earnings Presentation.