Private Credit Risks: Why Smooth Returns Can Mislead

Australia's private credit market is now estimated at more than $220 billion. Many of its funds report steady monthly returns with few negative months. Part of that steadiness comes from how the assets are valued. Investors comparing private credit with listed shares need to understand that before treating a smooth return line as a sign of low risk.

How listed and unlisted assets are priced

A fund that holds ASX-listed shares is valued using market prices. Each holding is marked every day at the price buyers are paying. When sentiment turns, the fall shows up in the unit price straight away, even if the businesses themselves are unchanged.

A private credit fund holds loans that do not trade on an exchange. With no daily market price, the manager estimates a value. A loan is often carried at its face value for as long as the borrower keeps paying interest. Valuations may be updated monthly, quarterly or less often, and in many funds they are done by the manager's own team.

So the reported return moves less than the underlying risk. A loan to a property developer carries the same risk whether or not anyone has revalued it this month. The unit price only changes when the manager recognises a problem.

What could go wrong

Smoothing affects investors in three ways.

It delays bad news. If a borrower runs into trouble, the loss may only reach the unit price when the loan is written down, which can be months after conditions turned. Investors who redeemed in the meantime left at a price that was too high. Investors who stayed absorb the full loss when it arrives.

It makes comparisons misleading. A fund valued infrequently will look less volatile on paper than a listed fund. Risk measures built on volatility, such as the Sharpe ratio, will flatter it.

Liquidity can disappear when it is needed. Many private credit funds offer monthly or quarterly redemptions while holding loans that take years to repay. If too many investors ask for their money at once, the fund can limit or suspend withdrawals.

The mechanism runs in both directions. An infrequently valued fund can also be slow to show a recovery. A listed fund can overstate a fall when selling is driven by sentiment. Market pricing is volatile, and it is also current.

What the regulator found

ASIC has published two reports on the sector. Report 814, an independent review it commissioned, was released in September 2025. It found that valuations were often infrequent, managed internally, or lacked independent oversight. It also noted the sector's heavy concentration in property lending, and that the Australian market had yet to be tested by a downturn.

Report 820, released in November 2025, set out the results of ASIC's own surveillance of 28 retail and wholesale private credit funds, conducted between October 2024 and August 2025. It found poor valuation practices that affected entry and exit prices, reported performance and fees. Some funds had no valuation policy, or an inadequate one. ASIC has since made poor practice in private credit an enforcement priority for 2026, and has called on funds to ensure their 30 June valuations are current and realistic.

What to check before investing

• How often are the assets valued, and by whom? ASIC describes regular, independent valuation as good practice.
• What happens to the unit price when a borrower falls behind? Ask how quickly arrears are reflected.
• Do the redemption terms match the length of the loans? A gap between the two is where liquidity problems start.
• How concentrated is the fund in property lending? A single sector downturn can affect many loans at once.
• How did reported returns behave when listed markets fell sharply? A return line that barely moved through a major sell-off deserves a closer question.

What this means for your portfolio

Visible volatility in a listed fund reflects risk being measured every day. A smooth line in an unlisted fund may reflect risk that has yet to be measured. Neither is automatically better, and private credit done well can play a role in a portfolio. What matters is comparing like with like: judge each investment on what it owns, how often its price is tested, and how easily you can get your money back.

To learn more about how Datt Capital approaches capital preservation and risk, visit our investment philosophy page or contact Daniel Liptak, Head of Distribution, on 0419 004 524 or at daniel@datt.com.au.