1. Is the fund blended or focused?
Start by understanding whether the fund is blended, meaning it invests across multiple loan types, or non-blended, focusing on a single category of lending. Blended funds may include combinations of first mortgages, second mortgages and corporate loans. While diversification can be beneficial, each of these exposures carries a different level of risk.
2. What is the breakdown of loan types?
If the fund is blended, advisers should ask for a clear breakdown of:
• First mortgage exposure
• Second mortgage exposure
• Corporate loans
• Loan-to-value ratios (LVRs)
• Limits on each category
These details help clarify where the portfolio sits on the risk spectrum.
3. What does the investment mandate allow?
Even if a fund currently focuses on one type of lending, the investment mandate may allow broader investments in the future. For example, a fund focused on first mortgages today may still have the flexibility to allocate capital to second mortgages or corporate loans later. Understanding what the mandate allows is just as important as understanding the current portfolio.
4. Can investors see the loan book?
Transparency is one of the clearest signals of a quality private credit manager. Advisers should ask whether investors can view the underlying loan book, including borrower details, locations, loan size, maturity profile and LVRs. Asset-level reporting allows advisers to properly assess diversification and concentration risk.
5. Is there an independent trustee?
Governance matters in private markets. An external independent trustee provides oversight of how the fund operates and helps represent investor interests. Independent governance structures reduce potential conflicts and strengthen accountability.
6. Does the fund use leverage?
Some private credit funds use external debt or leverage to enhance returns. Advisers should understand whether leverage is currently used and whether the investment mandate allows it to be introduced later. Leverage can improve returns, but it also increases downside risk.
7. Are there loans currently in default?
Defaults are not unusual in lending markets, but transparency around them is critical. Advisers should ask whether the fund currently has any loans in default or receivership, and how those situations are being managed.
8. How are defaults handled?
If a loan has defaulted, advisers should ask follow-up questions. How long has the loan been in default? What recovery process is underway? Is the fund earning default interest? How a manager handles stressed loans often reveals more about their capability than performance during favourable conditions.
9. Are there related-party exposures?
Another important question is whether any loans involve related-party equity interests. These situations can create conflicts if a manager has equity exposure to a borrower or project being financed. Clear disclosure and governance safeguards are essential.
10. Can loans move between funds?
Finally, advisers should ask whether the manager operates multiple funds and whether loans can be transferred between them without investor approval. Asset transfers between funds can raise fairness concerns if they are not tightly governed.
Transparency will define the next phase of private credit
Private credit is likely to remain an important part of the Australian investment landscape. As investor demand increases and more capital flows into private markets, scrutiny from advisers, platforms and regulators will only intensify.
In that environment, transparency, governance and disciplined lending will increasingly separate high-quality managers from the broader market.
For advisers, asking the right questions is the first step. The answers will often reveal far more about a private credit fund than the headline return ever will.
Andrew Torrington, co-founder and CIO at Woodbridge Capital
