Investors in Australian private credit are expected to ask much tougher questions of their managers after the collapse of property developer Bathla Group.

The Sydney-based developer fell into administration on 25 August owing around A$3.4bn (£1.8bn) to investors, with about 40 private credit funds having exposure.

While some within the industry suggest benefits might come from the challenges brought on by the company’s collapse, more pain likely awaits the industry before any of the positives are felt.

This week, the Australian alternatives manager Metrics Credit Partners has suspended trading in three of its ASX-listed funds and frozen investor withdrawals from some of its vehicles.

Centuria Bass paused redemptions and applications to two of its credit funds on 14 August, after a rise in redemption requests driven by concerns about Bathla. Meanwhile, ASX-listed MA Financial, which says it has no exposure to the developer, has also capped monthly redemptions from its flagship real estate credit fund, citing broader market conditions.

For Larry Diamond, co-founder of Zip and now head of Australian private credit manager Eldium, the collapse will change the conversation between investors and managers.

“Longer term, that should be healthy for the broader industry,” he said. “Investors are likely to ask more questions about the underlying type of credit, property concentration, valuation methodology and where their capital sits in the structure, rather than focusing principally on headline yield.”

“Greater transparency from fund managers will increasingly be expected,” he stressed.

However, Diamond warned that the road could be bumpy. “There is potential for a much more challenging period for Australia ahead,” he said.

Diamond pointed to elevated costs, higher interest rates, softer property conditions and tighter availability of funding for land and development.

“Managers with significant exposure to property, and particularly property development, will likely face substantial headwinds. For income investors, that makes diversification and understanding the underlying source of risk increasingly important.”

Paul Apáthy, partner at law firm HSF Kramer and based in Sydney, said it “remains to be seen” how far investor confidence and appetite for the sector will be hit.

“Will investors be more selective on private credit fund managers, require higher returns for certain lending segments and/or scrutinise lending standards, loan monitoring and work out practices in more depth?” he asked.

The make-up of the market, with more than half of private credit in real estate lending, creates more risk. “Australia has a higher proportion of private credit funding directed towards real estate as compared to other markets, such as the US, where corporate direct lending plays a larger role,” Apáthy said.

Valuations under the microscope

Valuations are also coming under closer scrutiny. Diamond explained that an incomplete development “can be particularly difficult to value”. Its ultimate worth may depend on additional capital, the availability of a builder, rising costs to complete and the ability to sell the finished product.

“A valuation made under normal market conditions may therefore look very different in a stressed or forced-sale scenario,” he said.

According to Apáthy, a key question for investors is whether valuations are lagging events, “particularly in open-ended funds where investors can request redemptions based on those valuations”.

Still, he stopped short of calling it the start of a wider shakeout. “It should be expected that private credit lending [will] necessarily involve some level of loan default and impairment – that is the nature of lending,” he said.

Whether a shakeout follows, he added, may depend on whether defaults turn out to be significantly higher than investors expected.

This article originally appeared in the Alternative Credit Investor October magazine, click here to view the full edition.