Half of Australia’s $250 billion private credit market runs on property

Every private credit update an adviser reads carries a default rate, and the number almost always looks calm. For advisers assessing private credit risk in Australia, new analysis from PitchBook suggests part of that calm comes from the way the counting works.

PitchBook examined the 10 largest publicly traded business development companies in the United States, the listed vehicles that lend directly to mid-sized American businesses.

At the end of the first quarter, 3.95 per cent of their loans were on non-accrual, which means the borrower had stopped paying interest.

Widen the measure to include every dollar owed by a borrower that has defaulted on at least one facility, and stressed exposure rises to 5.95 per cent of total investments. That is roughly 50 per cent above the reported rate.

One borrower, several loans, one label

The difference comes from structure rather than accounting mischief. A single borrower usually runs more than one facility: a term loan, a revolving credit line, sometimes a second-lien tranche behind both.

When the borrower stops paying on one of them, the manager marks that facility as non-accrual and the remaining facilities keep performing on paper. The same company stands behind all of them.

For advisers, the report shows one troubled loan in an otherwise orderly book. A credit officer looking at the same file sees a business under pressure across its whole capital structure. Both are reading accurate numbers. Only one of them describes the borrower.

Scale gives the point weight. BDCs now manage around US$500 billion, much of it lent to lower-rated, heavily geared companies, and defaults have climbed since January.

PitchBook’s more pointed finding concerns direction, with non-accrual loans growing considerably faster than new BDC investments, which could weaken future earnings, distributions and net asset values.

Australia’s version runs through property

The local market is smaller and its concentration is easier to name. Australia’s private credit sector holds roughly $250 billion, and ASIC estimates about half of it carries exposure to real estate.

Morgan Stanley warns the three RBA increases delivered this year have sharpened private credit risk in Australia, with financing and construction costs both rising and developer margins compressing between them. It also names limited transparency and inconsistent data across private credit portfolios as amplifiers.

Falling collateral values do the rest of the work. ANZ expects national house prices to decline 4.3 per cent in 2026 and a further 3.4 per cent in 2027, including a 14.5 per cent decline in Sydney and 12.8 per cent in Melbourne.

Development lending rests on an assumed end sale price. Move that assumption against the borrower and project feasibility goes first, with debt servicing close behind.

Two names already give the theme a face. The report points to stress at the Bathla Group, which owes more than $3 billion and is heavily financed by private credit, and notes that concerns about Centuria Bass have raised the prospect of investor redemptions.

The RBA is calm about the system, not the fund

The Reserve Bank has been preparing for higher private credit defaults, and it names property price declines and sustained construction cost inflation as the vulnerabilities it watches.

RBA governor Michele Bullock regards Australian systemic risk as relatively contained, on the reasoning that private credit remains small next to bank lending.

That judgement describes the banking system. It says very little about the outcome for investors inside any one fund. A sector too small to threaten financial stability can still hand a client a permanent capital loss, and advisers answer the second question for a living.

What the risk pays right now

The comparison worth running is an unglamorous one. One-year term deposits topped out at 5.35 per cent in the week to 21 August, from AMP Bank, ME Bank, RACQ Bank, Suncorp Bank and Judo Bank, on the report data. Australian 10-year government bonds closed that same week at 5.03 per cent, five basis points higher.

Listed hybrids, the closest exchange-traded comparison, carried a median trading margin of 1.61 per cent over three-month BBSW at 21 August, drifting up off recent lows rather than compressing further.

Against that backdrop, private credit risk in Australia asks a client to accept illiquidity, valuation lag and property concentration for a premium that keeps narrowing as defensive alternatives reprice higher.

The cash rate has been at 4.35 per cent since the August meeting, where the board held but disclosed that a hike had been actively discussed. The board next meets on 29 September, and at 21 August markets assigned around a 60 per cent probability of an increase to 4.60 per cent by December. Every basis point of that repricing lifts the bar the private credit premium has to clear.

Four questions that surface borrower-level stress

The asset class has earned its place in client portfolios, and the case for it survives this analysis. The reporting convention around it deserves harder questions.

Ask how many borrowers, rather than how many facilities, are behind on any obligation. Find out when the underlying security was last valued and by whom. Check what share of the book funds development rather than completed, income-producing assets. And establish how borrower-level gearing has moved over the past twelve months.

A manager who answers those four quickly is running the surveillance this environment calls for. One who reaches for the headline non-accrual rate is describing the smallest number available. The next round of fund reports lands into falling collateral values and a cash rate the market prices higher by December.

The headline default figure will probably hold up well but the borrower list underneath it is where the strain shows first.