Private Credit Explained

You invest in a fund that lends money to businesses. Income payments arrive regularly, and your statements show the value of your holding.

Then you decide to withdraw some money. Perhaps you need it for a property purchase, school fees or your own business.

The fund tells you that withdrawals have been suspended.

Your immediate question is understandable: has my money disappeared?

A suspension alone cannot answer that. It tells you that access to your money has changed. Understanding what happens next requires a closer look at the loans, the fund’s available cash and the rules governing withdrawals.

Why this question matters today

On 30 September, Reuters reported that Australia’s Metrics Credit Partners had temporarily suspended redemptions from some unlisted underlying funds and delayed financial reports. Three of its listed funds had already been suspended from exchange trading following asset write-downs. The reporting also described disagreements with the auditor over valuation assumptions, including those for unlisted commercial property equity investments. The affected portfolios should therefore not be assumed to contain only loans.

These developments raise separate questions about asset values, financial reporting and access to money. They do not establish that every private credit fund faces the same problems.

To understand the situation, it helps to start with what investors actually own.

What is private credit?

Private credit generally involves lending arranged outside public debt markets, often through non-bank investment managers. Borrowers can include established companies, property developers and businesses seeking finance for expansion or acquisitions.

When you invest through a fund, you usually own units or shares in that fund. The fund invests in loans, sometimes through other entities. Your ability to withdraw depends on the fund’s structure and terms.

The appeal is often regular income. Borrowers pay interest, and the fund can distribute income after costs. But borrowers can miss payments, collateral can lose value, and loans can be difficult to sell.

A private credit investment also differs from a bank deposit. In Australia, it is not covered by the government’s Financial Claims Scheme for eligible deposits.

The investment therefore needs to be assessed on three dimensions: what it may earn, what you could lose and when you can get your money back.

Interest payments and withdrawals need different amounts of cash

Imagine a fictional private credit fund with $100 million of assets and no borrowing. All figures in this example are in US dollars.

Assume the loans pay 10% annual cash interest, with principal repayments scheduled over the next three years. For simplicity, ignore fees and defaults.

At the current $95 million loan balance, that is an annualised interest amount of $9.5 million, equivalent to about $792,000 a month. Actual receipts depend on payment dates and how much principal remains outstanding. Those receipts could support regular income payments.

Now imagine investors request $15 million at the next withdrawal opportunity. To see the cash needed to meet those requests in full, assume no principal repayments, new investor subscriptions or additional borrowing arrive before payment would be due. Whether the requests must be met in full depends on the fund’s terms and applicable rules.

The fund has only $5 million in immediately available cash. Even if it used all that cash, it would face a $10 million shortfall before allowing for interest receipts and operating needs.

The borrowers might still be paying exactly as agreed. Their contracts do not necessarily require them to repay early because fund investors want to leave.

This is a liquidity mismatch: investors want cash sooner than the investments naturally produce it.

The example illustrates a general cash-flow risk, not the cause of the Metrics suspensions. It shows why receiving monthly income does not establish that your full investment can be returned at short notice.

Why would a manager pause withdrawals?

A fund may need time to collect loan repayments or sell assets. A pause may also arise when asset values are uncertain and the manager cannot confidently determine a fair withdrawal price.

Consider another hypothetical example. A fund reports a unit value of $1, but emerging information suggests the underlying assets may be worth less. Paying departing investors $1 could leave those who remain carrying a disproportionate share of the eventual adjustment.

Continuing withdrawals is therefore not automatically the fairest outcome. Equally, describing a suspension as protective does not establish that the assets are sound or the valuation process was adequate.

ASIC has highlighted weaknesses in parts of Australia’s private credit sector involving valuations, governance, disclosure and liquidity management. These are practical issues: investors need reliable information about both the investments and the process used to value them.

The useful questions are what caused the pause, what must happen before it ends and who is independently reviewing the information.

Does a freeze mean investors will lose money?

A freeze does not, by itself, determine the eventual recovery.

Two different problems can exist, separately or together:

• Liquidity risk: the fund cannot turn assets into cash quickly enough to meet withdrawals.
• Credit risk: borrowers may fail to pay interest or repay principal in full.

Return to our fictional fund. If its loans are repaid as scheduled, more cash becomes available over time. If borrowers default, the fund may recover less than expected. If it sells loans urgently at reduced prices, the sale can crystallise a loss even before those loans mature.

A loan’s reported value, its eventual repayment and its price in a hurried sale can all differ.

The word “secured” also needs context. It means a lender has rights over specified collateral, subject to the lending arrangement and applicable law. The amount ultimately recovered still depends on matters such as the collateral’s value, enforcement costs and other creditors’ priority.

For investors, the critical uncertainty is often both how much will come back and how long it will take.

What can happen while withdrawals are paused?

Depending on the circumstances and its permissions, a fund may collect repayments, sell loans, negotiate with troubled borrowers or use an available credit facility. Each approach has limits. Selling may require a discount; borrowing adds costs and obligations; restructuring a loan can extend the wait.

Income distributions and redemptions are separate decisions. A fund might continue paying income while restricting withdrawals, or it might reduce or suspend distributions too. The announcement should explain which payments are affected.

A regular payment also deserves examination. Investors should ask how much of the distribution comes from cash income earned on investments and how much comes from other sources. A payment arriving in your account does not reveal that breakdown by itself.

Reopening withdrawals may happen gradually. Without a firm and credible timetable, investors should not assume that “temporary” means a particular number of days or weeks.

What should an investor check?

Start with the documents for the exact product you own. A manager may operate several funds with different assets, borrowing arrangements and withdrawal rights. An announcement about one fund does not automatically apply to every fund carrying the same brand.

Read the latest notice alongside the product disclosure statement, prospectus or relevant offering documents. Useful questions include:

• Is the restriction a withdrawal cap, a full suspension or an exchange trading suspension?
• Are pending requests still valid, and must they be resubmitted?
• What determines the price when withdrawals are eventually processed?
• Are income payments and fees continuing?
• What conditions must be met before access resumes?
• When is the next update, and where will it be published?

If the delay affects essential spending, ask whether the fund offers any hardship arrangements. Availability and eligibility vary; an exception should never be assumed.

The question to ask before investing

For an investor in Malaysia, Singapore or elsewhere in Asia, an overseas fund’s withdrawal terms deserve as much attention as its advertised income. Access through a platform or another fund can add a further layer of conditions. Currency movements can also change the value of the eventual proceeds in your home currency.

Imagine needing the money on a specific date. Would the investment still fit your plans if repayment were delayed or only part of your request were met?

That question makes liquidity tangible. A business loan can finance useful activity and offer an attractive potential return while remaining difficult to sell quickly. The fund’s withdrawal arrangements need to reflect that reality and your own spending plans need to allow for it.

Before committing money, make sure you can explain how it is expected to come back, what could interrupt that process and how long you could manage without it.