Borrower risks
Exit failure is the dominant one: the sale does not settle, the refinance is declined, the project runs late. The consequences are default interest at a materially higher rate, extension fees, and ultimately enforcement — the lender exercising power of sale over the security. Where guarantees are given, personal exposure extends beyond the property.
Secondary risks include cost creep from repeated extensions, cross-collateralised security tying up more assets than expected, and structures where the loan balance grows faster than the asset's value.
Investor risks
Borrower default, requiring recovery that takes months and costs money. Falling property values eroding the equity buffer that protects the loan. Illiquidity — capital is committed for the term, with no secondary market. Construction and completion risk, where a partially built project is worth far less than a finished one. Concentration risk if too much capital sits in one loan, borrower or asset class. Valuation risk if the security was assessed optimistically. And manager risk — the quality of the underwriting and administration behind the loan.
How the risks are managed
On the credit side: conservative LVRs with headroom for a soft market, independent panel valuations, registered first-ranking security wherever possible, evidenced exits, sponsor track record, guarantees, and active monitoring during the term with progressive drawdowns and quantity surveyor sign-off on construction.
On the portfolio side: diversifying across borrowers, locations, asset types and maturities, and staggering terms so capital returns progressively.
None of this eliminates risk. Losses occur in private credit, and past performance is not a reliable indicator of future returns.
Key points
- Borrowers: exit failure leads to default interest and enforcement.
- Investors: default, value falls, illiquidity, construction and concentration risk.
- Conservative LVRs, independent valuations and evidenced exits are the main controls.
- Private credit is secured but not guaranteed; capital can be lost.
Frequently asked questions
Can I lose money investing in private credit?
Yes. There is no government guarantee. If a borrower defaults and the security realises less than the debt, investors can lose income and capital.
What happens if a borrower defaults?
Default interest applies and the lender works through remediation — extension, refinance or sale — and if necessary exercises its power of sale under the mortgage.
Is a first mortgage safer than a second?
Materially, yes. A first mortgagee is repaid before a second and controls enforcement, which is why it is priced lower.