Three years of widening spreads has done something useful for Australian private credit: it has separated the funds that price the underlying credit from the funds that price the cycle.
The headline numbers look generous. Headline net yields in first-mortgage funds sit comfortably above the deposit rate, and second-mortgage and mezzanine product trades at a meaningful premium on top. The temptation, as an LP, is to read that as across-the-board strength — to assume that the bid is wide because the asset class is rich. It isn't.
Where the actual risk-adjusted return sits
Strip the headline rate and look at what fills the book. A meaningful share of the Australian private-credit market right now is doing one of three things that don't price the credit: lending too far up the LVR stack on tightening security; bridging files where the exit isn't actually in train; or extending construction without enough buffer for cost overruns the QS hasn't caught yet.
On a 12 to 18-month look-through, those positions don't earn the headline yield. They earn the headline yield minus discharge delay, minus exit-strategy slippage, minus the occasional capital event that impairs the back end of the loan.
The narrow slice that earns the printed number is where the underwriting matched the security at the moment of origination — conservative LVR on a security type with a deep secondary market, a documented exit that is independent of the borrower's discretion, and a sponsor with a reason to honour the schedule even if conditions tighten. That slice is smaller than most published return tables suggest.
What we look for on a file
The same three questions, every file. What is the asset, and how quickly could it be sold to a market participant other than the borrower? What is the exit, and is it in train without our intervention? Who is the sponsor, and what would they lose personally if the file went sideways?
Where all three line up, we hold our published rate-card pricing firmly. Where one is soft, we either pass or take the file to the credit committee with a structuring proposal. We don't price the cycle. We price the credit.
What it means for the LP
The implication for an investor allocating to Australian private credit right now is to look past the headline yield in the fund factsheet. Ask the fund manager which of the three questions above they answer hard, on every file. Ask whether the weighted-average LVR by security type sits inside the envelope they advertise, or whether it has drifted up to make the book grow. Ask what proportion of the portfolio currently sits in soft-exit territory.
The funds that can answer those questions concretely are the funds earning what their factsheets say they earn. That set is narrower than the universe of funds advertising comparable yields.