Private Credit Investments in Australia: Returns, Risks and Security Explained

Private credit investments involve providing capital through privately negotiated lending arrangements, generally in return for interest income and repayment of the original capital under agreed terms. In Australia, private credit can include property-backed lending, business lending, first mortgage finance, mezzanine finance, construction finance and other specialised lending structures.

For investors looking beyond traditional investment markets, private credit has become an increasingly relevant part of the private capital landscape.

Unlike listed shares or publicly traded bonds, private credit investments are generally based on individual lending transactions or privately managed portfolios of loans.

The structure of each opportunity can be different. Some loans may be secured against property, while others may involve business assets or other forms of security.

This means investors need to look beyond the potential return and understand how the investment is structured, what security supports it, who the borrower is and how the capital is expected to be repaid.

Royce Stone Capital, based in Melbourne, provides private lending, investor services and advisory solutions. The firm is led by Tarek Omar, CEO and Partner, and works with private capital opportunities involving eligible investors.

What Are Private Credit Investments?

Private credit investments are investments in privately arranged loans where capital is provided to a borrower in exchange for agreed interest and repayment terms.

The borrower could be a property developer, business, company or another eligible entity requiring capital.

Rather than obtaining finance entirely through a traditional bank, a borrower may seek private lending when it requires a different structure, timing or level of flexibility.

For the investor, the investment is based on the terms of the loan.

Those terms can include:

• The amount being invested
• Interest arrangements
• Loan duration
• Security
• Loan-to-value ratio
• Repayment structure
• Borrower obligations
• Default provisions
• Reporting requirements

Private credit investments can therefore vary significantly from one transaction to another.
The underlying loan should always be assessed on its own characteristics rather than assuming that all private credit opportunities carry the same level of risk or return.

How Do Private Credit Investments Generate Income?

Private credit investments generally generate income through interest paid by borrowers.
When a lender provides capital, the borrower agrees to repay that capital according to the loan agreement, together with interest or other applicable charges.

For example, a property business may require capital to refinance an existing facility or complete a development project. A private lender may provide the required funding against agreed security.

The investor's return is then connected to the interest generated by that lending arrangement.
However, an important distinction needs to be made between contractual interest and guaranteed investment returns.

Private credit carries risk. A borrower may experience financial difficulties, a security asset may decline in value, or repayment may take longer than expected.

For this reason, investors should assess the underlying transaction before focusing on the headline interest rate.

Why Security Matters in Private Credit

Security is one of the most important factors when evaluating private credit investments.
A secured loan is supported by an asset or other security arrangement that can provide protection for the lender if the borrower fails to meet its obligations.

Property is one common form of security in private lending.

Depending on the transaction, a loan may be secured against:

• Residential property
• Commercial property
• Development property
• Business assets
• Other eligible assets

The type and priority of security matter.

A first-ranking mortgage, for example, generally has a different position from a second-ranking mortgage within the capital structure.

But security alone does not remove risk.

Investors should also consider the quality and value of the underlying asset, the legal structure, the LVR, the ability to realise the asset and the costs associated with enforcement.

Secured vs Unsecured Private Credit

Private credit can be secured or unsecured.

Secured private credit involves specific security supporting the loan. If the borrower defaults, the lender may have rights over that security according to the relevant legal documents.

Unsecured private credit does not have the same specific asset backing the loan.

This distinction is important because the recovery position can be very different if a borrower encounters financial difficulties.

For investors assessing a secured private credit opportunity, the key question is not simply whether security exists.

It is:
What is the security, how strong is it, where does the lender rank, and what is the realistic value of that security?

These questions form an important part of private credit due diligence.

First Mortgage Direct Lending Explained

First mortgage direct lending is one structure used within private credit.

In a first mortgage transaction, capital is provided directly to a borrower and the loan is secured by a first-ranking mortgage over the relevant property, subject to the legal structure of the transaction.

This type of lending can be used for various purposes, including property acquisition, refinancing, development and other funding requirements.

One potential benefit of direct lending is the ability to understand the individual transaction more closely.

An investor may be able to assess:

• The borrower
• The property
• The purpose of the loan
• The amount being borrowed
• The LVR
• The security position
• The expected repayment strategy
• The loan term

For eligible investors, this level of transaction-specific information can be an important part of understanding the investment.

Royce Stone Capital provides investor services and private lending solutions for eligible investors.

More information about its services is available through Royce Stone Capital.

What Is a Private Credit Fund?

A private credit fund pools capital from multiple investors and uses that capital to invest in a portfolio of private loans.

Instead of an investor selecting and funding one specific loan, the fund manager makes investment decisions according to the fund's investment strategy.

A private credit fund may invest across different borrowers, properties, businesses or lending structures.

This can potentially provide diversification compared with investing in a single private loan, although diversification depends entirely on the fund's actual portfolio.

Before investing in a private credit fund, investors should understand:

• What types of loans the fund provides
• Where the loans are located
• What security is used
• How much leverage is permitted
• The fund's investment strategy
• Fees and costs
• Investment term
• Liquidity arrangements
• Reporting requirements
• Investor eligibility
• Key risks

A private credit fund does not eliminate the risks associated with private lending.
The performance of the fund ultimately depends on the underlying loans and how those loans perform.

Private Credit Investments: Returns and Risk

One of the reasons investors consider private credit is the potential for regular income.

However, potential return should always be considered alongside risk.

A private credit investment offering a higher potential return may involve a higher level of risk, a more complex transaction, lower liquidity or a different position within the capital structure.

This is why investors should avoid judging an opportunity based solely on its advertised interest rate.

Instead, the investor should consider the complete picture.

Borrower + Security + LVR + Structure + Repayment Strategy + Liquidity + Risk
A strong investment assessment looks at all of these factors together.

The quality of the borrower matters.

The quality and value of the security matter.

The lender's position within the capital structure matters.

The expected repayment source matters.

And the ability to realise security if something goes wrong matters.

Understanding Loan-to-Value Ratio

Loan-to-value ratio, commonly known as LVR, is an important metric in property-backed private credit.

It compares the amount of the loan against the value of the underlying property.

For example, if a property is valued at AUD 1 million and the loan is AUD 600,000, the LVR would be 60%.

A lower LVR can provide a larger buffer between the loan amount and the property's stated value.

However, LVR should never be viewed as the only measure of risk.

Property valuations can change.
Markets can become less liquid.
A property can take longer to sell than expected.

And the costs associated with selling or enforcing security can affect the final recovery amount.

This is why investors should consider the quality of the asset as well as the LVR.

Key Risks of Private Credit Investments

Private credit investments can offer potential income, but they also carry several risks.

Borrower Default

The borrower may fail to make interest payments or repay the principal on time.
The impact of a default depends on the loan structure, borrower circumstances, available security and legal position of the lender.

Security Risk

Even when a loan is secured, the value of the security can change.
A property or business asset may be worth less than expected when it needs to be realised.

Liquidity Risk

Private credit is generally less liquid than listed investments.
Investors may not be able to exit an investment immediately or at the time they would prefer.

Concentration Risk

An investment concentrated in one borrower, property or industry can be more exposed to problems affecting that particular borrower or market.

Property Market Risk

Property-backed lending can be affected by changes in property values, demand, interest rates and broader economic conditions.

Construction Risk

Development and construction loans can face delays, cost increases, contractor problems and changes in market conditions.

Structural Risk

The position of the lender within the capital structure can materially affect risk.
First mortgage lending, senior debt, mezzanine finance and equity do not have the same level of priority.

Why Due Diligence Is Important

Due diligence is the process of examining the borrower, transaction, security, financial position and repayment strategy before committing capital.

For private credit investments, due diligence can include reviewing:

• Borrower financial information
• Property valuations
• Existing debt
• Security documentation
• LVR
• Loan purpose
• Repayment strategy
• Market conditions
• Legal structure
• Relevant counterparties

The objective is to understand what is actually supporting the investment.

An attractive interest rate is not enough on its own.

Investors need to understand what could happen if the borrower performs as expected, but also what could happen if the borrower does not.

Seven Questions to Ask Before Investing in Private Credit

Before considering a private credit opportunity, investors can ask several practical questions.

1. Who is the borrower?

Understand the borrower's financial position, experience and purpose for obtaining the capital.

2. What will the money be used for?

The purpose of the loan can significantly influence its risk profile.

3. What security supports the investment?

Identify the underlying asset and understand its value and legal position.

4. What is the LVR?

Understand the loan amount compared with the value of the underlying security.

5. Where does the lender rank?

A first-ranking lender and a subordinate lender can have very different recovery positions.

6. How will the borrower repay the loan?

The repayment strategy should be clearly understood before capital is committed.

7. What happens if the borrower defaults?

Investors should understand the relevant security, enforcement and recovery arrangements.
These questions do not remove investment risk, but they can help an investor understand the structure before making a decision.

Private Credit for Family Offices and Wholesale Investors

Family offices and wholesale investors may consider private credit as part of a broader private capital strategy.

Their objectives can vary.

Some may seek income-producing investments, while others may focus on diversification, capital preservation or direct exposure to private lending opportunities.

The appropriate structure can therefore differ from one investor to another.

Some investors may prefer direct lending because they want greater visibility over individual transactions.

Others may prefer a private credit fund because they want exposure to a broader portfolio managed according to a defined mandate.

The investor's circumstances, eligibility, risk tolerance, liquidity requirements and investment objectives should all be considered.

Direct Lending vs a Private Credit Fund

Direct lending and private credit funds provide different ways to access private credit.

With direct lending, an investor may have greater visibility over a particular transaction.

The investor can potentially assess the individual borrower, property, security, LVR and repayment strategy.

With a private credit fund, the manager generally selects and manages multiple loans according to the fund's investment strategy.

This can provide portfolio diversification, but it also means investors rely on the manager's investment selection, risk management and reporting processes.

Neither structure removes the underlying risks of private lending.

The key is understanding what you are investing in and how the structure works.

Private Credit and Property Lending in Australia

Property remains an important area of private lending in Australia.

Borrowers may seek private credit for property acquisition, refinancing, development or other transactions where traditional lending does not provide the required structure.

Private lenders can assess transactions based on factors such as:

• Property type
• Location
• Valuation
• LVR
• Borrower experience
• Existing debt
• Loan purpose
• Repayment strategy

For investors, the property itself is only one part of the assessment.
The broader transaction and the borrower's ability to repay remain important.

Private Credit and Business Lending

Private credit can also support businesses requiring capital.

A company may require finance for working capital, expansion, refinancing, acquisition or another business purpose.

Business lending has a different risk profile from property lending because repayment may depend heavily on the company's financial performance and cash flow.

For that reason, investors should understand the business behind the loan.

Important considerations can include:

• Revenue
• Profitability
• Cash flow
• Existing debt
• Business model
• Management experience
• Purpose of funding
• Repayment source

The strength of the borrower remains central to the investment assessment.

Tarek Omar and Private Credit in Australia

Tarek Omar is the CEO and Partner of Royce Stone Capital, a Melbourne-based firm focused on private lending, investor services and advisory.

For people searching for Tarek Omar Australia's expert in private credit, the phrase should be understood as a positioning description rather than an independently established professional title. The client's content plan specifically notes that the "Australia's expert" claim should be confirmed by the client or replaced with safer wording such as "recognised for expertise".

Tarek Omar's published LinkedIn article focuses on the relationship between property, private credit and family offices.

Read the LinkedIn Article

For readers interested in the connection between property, family offices and private credit, the original LinkedIn article can be read here: Private Credit in Australia: What It Is, How It Works & Who It Suits

The LinkedIn article should be treated as complementary reading alongside this broader guide to private credit investments.

Why Private Credit Requires a Complete View

Private credit investments should not be evaluated using a single number.

An interest rate may look attractive, but the investor also needs to understand:

Who is borrowing?
What is the money being used for?
What security supports the loan?
What is the LVR?
What is the lender's position?
How will the borrower repay?
What happens if the transaction does not perform as expected?

These questions help create a more complete picture of the opportunity.

The same principle applies when comparing direct lending with a private credit fund.

The structure may be different, but the fundamental requirement remains the same: understand where the capital is going and what risks are attached to it.

Private Credit Investments: A Practical Approach

For eligible investors considering private credit, a practical assessment can begin with five areas.

First, understand the borrower.

Look at the financial position, experience and reason for seeking capital.

Second, understand the security.

Know what asset supports the loan, its value and the lender's legal position.

Third, understand the structure.

Review the loan term, LVR, repayment arrangements and position within the capital structure.
Fourth, understand liquidity.

Private credit investments may not be easily sold or exited before maturity.

Finally, understand the risks.

Consider what could happen if the borrower defaults, asset values fall or market conditions change.

This approach can help investors assess private credit based on the complete transaction rather than focusing only on potential income.

Explore Private Credit With Royce Stone Capital

Private credit investments can provide eligible investors with exposure to privately negotiated lending opportunities across property and business finance.

However, every investment is different.

The borrower, security, LVR, loan structure, repayment strategy, liquidity and wider market conditions all need to be considered before capital is committed.

Royce Stone Capital provides private lending, investor services and advisory solutions from Melbourne, Australia.

Learn more about the firm and its services:

Website: www.roycestonecapital.com.au

LinkedIn Article: Catch 22: Property, Private Credit & Family Offices — Tarek Omar

For investors interested in understanding private credit, the firm's Investor Services and Private Lending pages can provide further information.

General information only, not financial advice. Private credit carries risk and returns are not guaranteed.