The Truth About Private Credit and Valuations

The AFR ran a piece last week on the MA Financial Secured Property Fund. The headline question: how can a fund with 27% of its loans on a watch list still be sitting at $1 per unit?

It's a fair question. But the answer reveals something important about how private credit actually works — and what investors need to understand before they draw the wrong conclusions.

Let's break it down.

Valuations move. That's not the problem.

Here's the thing most investors miss. Valuations in private real estate credit should move. The underlying asset, the asset type, the stage of the project — all of it matters. A development loan mid-construction carries a different risk profile to a stabilised commercial property. They are not the same thing, and they should not be valued the same way.

What private credit is not is the stock market. We are not repricing every second of the day based on sentiment, fear, and the latest macro headline. That is not the game. The illiquidity premium you earn in private credit exists precisely because you are not subject to that noise. These are negotiated, structured loans with defined covenants, defined security, and defined loan-to-value ratios.

MA's weighted average LVR sits at 56%. That means the underlying assets would need to fall more than 40% in value before income is at risk. And the largest average peak-to-trough decline across Australian capital city residential markets over the past 40 years? 15%. On paper, that sounds like a very comfortable buffer.

But here's the qualifier that matters. That 15% figure is an average across a diversified basket of capital city residential markets. It is not a guarantee that any individual asset, or any concentrated portfolio of assets, will behave the same way. Development sites. Secondary locations. Niche property types. Specialised commercial assets. These can and do fall further. We have seen it. Individual assets in concentrated credit portfolios have experienced declines well in excess of 40%. Not as a theoretical tail risk. As a real outcome.

This is precisely why diversification inside a private credit portfolio matters just as much as the headline LVR. A low weighted average LVR across a well-diversified pool of assets is a genuine buffer. A low weighted average LVR concentrated in a handful of assets in the same location or sector is a different proposition entirely. The number can look the same. The risk is not.

But — and this is important — that doesn't mean valuations should never move. They should. And when the market matures, they will move more dynamically. That is not a weakness. That is integrity.

Single manager risk is real. Always has been.

Every private credit fund is a reflection of its manager. Their origination process. Their investment committee. Their credit policy. Their area of specialisation. Their appetite for risk at any given point in the cycle.

That's not a criticism of any one manager. It's just the reality of the asset class. One manager's watch list criteria might be tighter than another's — which can paradoxically make them look riskier on paper, even when their portfolio is cleaner. The AFR piece makes exactly this point.

This is why the ASIC push for standardised reporting matters. Without consistent definitions, you cannot compare funds on a like-for-like basis. And without that, investors are flying blind.

But here's what we cannot do.

We cannot run from risk. And we cannot pretend it doesn't exist.

Private credit carries risk. Real estate credit carries risk. That is why the return exists. If there were no risk, the return would look a lot more like your savings account.

The investors who win over the long run are not the ones who exit at the first sign of difficulty. We know this story. In 2008, one credit fund fell 60% based on more dynamic public valuations. Investors switched to another fund that looked like it was performing better. A year later, the first fund had recovered. The second fund wrote down 20%. The investors who switched were 60% worse off.

Sound familiar? It should. We see the same pattern in equity markets. The real money — the patient money — buys when valuations fall. It does not sell after the fact.

So what should investors actually do?

Diversify. It is the oldest, cheapest, and most effective risk management tool available.

Across managers. Across asset types. Across geographies. Across loan structures and durations. A portfolio weighted toward shorter-duration loans with a measured allocation to longer-duration, higher-returning opportunities — sized appropriately for the risk — is a rational, resilient approach.

This is not about abandoning private credit because the AFR ran a difficult headline. This is about building a portfolio that can absorb complexity without panicking.

Revaluations are not the enemy. They are the market growing up. Investors who learn to work with them — who understand what they mean and what they don't — will be better placed than those who throw the baby out with the bathwater.

Risk exists in every asset class. The question is never whether to accept risk. It is whether you are being compensated fairly for it — and whether you have structured your portfolio intelligently enough to survive the moments when it shows up.

And investors need someone in their corner.

Numbers on a page don't interpret themselves. A watch list percentage, an LVR ratio, a NAV sitting at par — these are starting points, not conclusions. Without the expertise to interrogate what's underneath, investors are left reading headlines and drawing the wrong lessons.

This is where expertise matters. Not someone simply raising capital for a loan they just originated.

Advisers who sit on the investor's side of the table. People whose job is to ask the harder questions — about origination standards, credit policy, concentration risk, covenant quality, and what that watch list is actually telling you versus what it looks like on the surface.

The AFR piece is a perfect example. A 27% watch list sounds alarming. But whether it actually is alarming depends entirely on what sits underneath it. The LVR buffer, the covenant triggers, the independent valuation process, the nature of the underlying loans, the quality of the security — these are the things that determine whether 27% is manageable or material. Without that understanding, the number tells you almost nothing. With it, you either find comfort or you find cause for concern. Both are valid outcomes. The point is you cannot know which without doing the work.

Investors who go it alone, or who rely on surface-level numbers without that interpretive layer, are exposed. Not because private credit is broken. But because complexity without expertise is where mistakes get made.

Take the long view.