A fund manager’s failure to lodge audited accounts on time has triggered questions about how private credit funds value their property loan books, and whether retail investors can trust the numbers they’re shown.
The immediate concern centres on one manager’s real estate debt exposures and whether its internal pricing reflects what those loans would actually fetch if sold. The broader issue runs deeper: most private credit funds hold illiquid property loans that trade rarely or never, so valuations rely on internal models rather than live market prices.
How private credit values property loans
Private credit funds lend against property at rates the major banks won’t touch, typically 8-12% per annum, secured by second mortgages or commercial assets the big four consider too small or complex. Because these loans don’t trade on an exchange, there’s no daily market price to anchor a valuation.
Instead, funds mark positions using a model: discount the expected cash flows (interest payments plus principal at maturity) back to today’s dollars, applying a rate that reflects current credit conditions, borrower quality, and liquidity risk. When credit spreads widen or a borrower’s circumstances deteriorate, the model should markdown the loan’s value, but that markdown is an internal judgement call, not a forced sale price.
Auditors verify that the model follows accounting standards and that inputs are reasonable, but they don’t value the loans themselves. If a fund’s audit is delayed, it usually means auditors need more time to satisfy themselves that the valuations aren’t overstated, or that management is reworking assumptions the auditor challenged.
The catch
- Models assume loans can be held to maturity; in a forced sale, recovery rates may be 20-40% lower
- Auditors rely on management’s judgement about borrower creditworthiness and collateral quality
- Retail investors see a unit price derived from these internal valuations, not live bids
- If multiple funds hold similar loans and one reprices downward, others face pressure to follow
Why this matters for property investors
Private credit funds have grown rapidly as an alternative to bank deposits and listed property trusts, particularly among self-managed super funds chasing yield. The pitch is simple: earn 7-9% with monthly liquidity and loans secured by bricks and mortar.
The risk is asymmetric information. Fund managers see the loan files, borrower financials, and property valuations in real time. Retail investors see a monthly unit price and a one-page fact sheet. When credit conditions tighten, rising rates, falling property prices, stressed borrowers, managers have discretion over when and how much to markdown exposures.
If a fund delays publishing audited accounts, it signals one of three things: the auditor found something that needs rework, management is negotiating over valuation assumptions, or the fund’s systems couldn’t produce clean records on time. None of those scenarios inspire confidence, and all of them raise the same question: what else don’t we know?
Investors in funds with exposure to commercial property debt should check whether underlying loans are current, whether loan-to-value ratios are creeping higher as collateral values fall, and whether the fund has frozen redemptions or gated withdrawals in the past 12 months. Office vacancy rates hide the real story investors need when valuing commercial loan books.
Pressure points across the sector
This isn’t an isolated incident. Private credit as an asset class has expanded faster than the infrastructure to support it, particularly around independent valuation, borrower monitoring, and stress-testing.
Most funds outsource administration and custody but keep credit decisions and loan monitoring in-house. That creates a structural conflict: the same team that originated the loan decides when to markdown its value, and management fees are typically charged on assets under management, so markdowns shrink revenue.
Auditors can push back, but their leverage is limited if the fund can argue that a loan is performing (borrower still paying interest) and collateral hasn’t been revalued recently. Property valuations themselves lag the market by 3-6 months and rely on comparable sales that may not exist for specialised assets.
The result is a system where bad news travels slowly. A loan that should be marked down 15% today might take two quarters to show up in unit prices, by which time early investors have redeemed at the old price and remaining investors bear the loss.
What could shift this
Regulatory pressure is building. APRA has flagged concerns about non-bank lenders’ risk management and governance, though private credit funds fall outside its direct supervision unless they take retail deposits. ING’s liquidity breach shows how long structural issues can persist before regulators act.
ASIC has powers to intervene if funds mislead investors about liquidity or risk, but enforcement is reactive, scandals drive change, not proactive oversight. The industry’s self-regulatory response has been to commission independent valuations more frequently and to disclose loan-level data in annual reports, but adoption is patchy.
The real circuit-breaker would be a wave of redemptions that forces funds to sell loans into a thin market, crystallising losses that models had downplayed. That hasn’t happened yet, but rising interest rates and falling property prices are testing the model’s assumptions in real time.
If you hold private credit
Check your fund’s monthly update for these signals: redemption requests exceeding cash on hand, a shift from monthly to quarterly liquidity, or any mention of “reviewing valuation methodologies.” None of those guarantees trouble, but all of them warrant a closer look at your allocation and whether you need that capital in the next 12 months.
If the fund has delayed audited accounts, contact the manager and ask for a written explanation, specifically, whether the delay relates to loan valuations and whether any positions have been marked down since the last published unit price.
Diversify across managers and loan types. Don’t assume all private credit funds behave the same way under stress, some will markdown early and communicate clearly, others will delay and hope conditions improve.
For income-focused investors, regional lenders’ home loan growth shows alternatives exist outside private credit if yield is the priority and you want more transparency. The trade-off is lower returns, but the risk is also lower and more quantifiable.
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General info, not financial advice.
