ROADNIGHT MUSING – OCTOBER 2026
BEYOND THE YIELD – ASSESSING PRIVATE CREDIT RISK
Private credit has faced difficult headlines in recent months. The collapse of a large Sydney residential developer, owing around $3 billion to some 40 lenders, was followed by a string of funds restricting or suspending redemptions. Several listed funds have had their net asset values written down after auditors challenged valuation assumptions. The corporate regulator has warned the sector about unrealistic valuations and poor governance and has made clear that enforcement action will follow where standards fall short.
We do not comment on other managers' portfolios. However, we believe investors are right to ask hard questions of every private credit manager—including us. What does the fund lend against? How are its assets valued? Does its liquidity match the assets it holds?
A common thread in much of the recent stress is real estate, particularly development and construction lending. Roadnight Capital has deliberately avoided this segment of the private debt market since the Diversified Income Fund was launched in July 2020 because we did not consider the risk-adjusted returns attractive. This is not to suggest that there were no worthwhile transactions or opportunities; rather, we saw better value elsewhere. We do lend against established property, including agricultural land and property held by a company as part of its broader collateral pool.
In this Musing, we explain the basis for that view, how our credit process works, how we price risk, and how we manage loans that do not go to plan.
WHAT WENT WRONG IN REAL ESTATE PRIVATE DEBT?
Development lending is not inherently problematic; banks have undertaken it for decades. The concern is the volume written in the private market over the past five years and the terms on which it was provided. Five features stand out.
Interest that is not paid in cash. Most construction and land facilities capitalise interest. The borrower generally pays no cash interest until the project is sold or refinanced, so the loan balance grows each month. The fund records that accruing interest as income and may distribute it at the fund level, even though no cash has changed hands. If the development is delayed or the builder becomes insolvent—an all-too-familiar occurrence—the loan balance can grow quickly and erode the equity buffer. The lender also loses a valuable early-warning signal: a missed cash interest payment.
Valuations on an “as-if-complete” basis. In a competitive environment, loan-to-value ratios have sometimes been measured against the expected value of the completed project. That value does not yet exist. If construction stalls, costs increase or apartment prices fall, the lender may be left with a partly completed site worth a fraction of the headline value. An LVR of 65% on an as-if-complete basis can exceed 100% when measured against current value, although lenders generally fund progressively throughout construction.
Sell-down risk without pre-sales. Some lenders committed to large facilities and funded projects without meaningful pre-sale commitments from buyers. When markets turned, both potential exits became constrained: the lender’s ability to raise capital to meet its funding commitments came under pressure, while apartment sales slowed.
Too much capital chasing too few quality projects. Domestic and offshore institutions allocated billions of dollars to Australian real estate private debt. The supply of quality developers and projects did not grow at the same pace. Competition compressed terms and directed some capital towards weaker sponsors, higher leverage and longer-dated projects. Ultimately, too much debt has resulted in gearing that is too aggressive for many projects, particularly relative to the risk profile and the lender’s respective position within the capital stack.
Potential conflicts within the model. Some lenders grew their businesses alongside a small number of repeat developer clients. Establishment fees are earned when a loan is written, and portfolios can become concentrated among a few related borrowers. This may create a reluctance to call a default on a client on whom the business depends. Extensions and variations can then allow a troubled loan to appear current for longer than it otherwise would.
Combine these features with an open-ended fund offering monthly or quarterly liquidity while holding loans that repay only when a building is completed and sold, and the mismatch becomes apparent when redemption requests rise.
WHY WE DIDN’T SEE VALUE IN LENDING TO DEVELOPERS
We have never viewed property as a poor asset. However, we believed that, after allowing for the risks involved, development lending had not offered sufficiently attractive returns in recent years.
A development loan depends on a single project being completed on time and on budget, then sold into a market two or three years in the future. The lender carries construction, builder insolvency, sales and refinancing risks, often without receiving cash income during the project. When we assessed these loans through our internal risk framework, the returns on offer—often in the high single digits to low teens—appeared modest relative to comparable risks elsewhere. The influx of capital into the sector further pressured pricing.
Given the return for the risk, our preference is to lend to businesses that generate cash each month, report to us monthly and repay us from those cashflows. Accordingly, the Fund currently has no exposure to property development or construction lending. However, this could change if the relative risk/return changed.
HOW WE ARE DIFFERENT: WHAT WE LEND AGAINST AND HOW WE DECIDE
The Fund lends predominantly on a senior-secured basis to three broad types of borrowers: established operating businesses, non-bank lenders and asset-backed finance providers, and agricultural enterprises. These are not exclusive categories, and we assess each loan on its merits using our risk-adjusted framework. In each case, interest and principal are generally repaid from business cashflow, receivables, loan books and realisable assets.
Table 1 – Sector Allocation as at 30 September 2026
Every loan follows the same process. The team first screens the opportunity against our mandate and reviews preliminary information in a data room. The team then submits a short-form credit paper to the Investment Committee for approval to issue an indicative term sheet. Only after that approval do we begin full due diligence, including management meetings, financial modelling, stress testing and a review of environmental, social and governance risks. We incorporate the findings into a final credit paper and return it to the Investment Committee for formal approval. We complete long-form documentation and register our security before advancing any funds.
Approval marks the beginning of our work, not the end. Borrowers report to us monthly, and we test covenant compliance, financial performance, and collateral coverage against our underwriting assumptions. Proposed changes to internal risk ratings, deal terms and valuations are considered by the Investment Monitoring Committee and Valuation Committee, then approved by the Investment Committee. Separate Capital Allocation, Portfolio Advisory, and Audit, Risk and Compliance committees oversee portfolio construction, risk limits and controls.
Several structural features also support this process. The largest loan currently represents less than 8.5% of the Fund, and we are working towards reducing that exposure below 5% as the Fund grows. The Fund's trustee, Melbourne Securities Corporation, and its administrator, MSC Abacus, are independent of Roadnight. Our executives invest in the Fund on the same terms and fee basis as other investors. Transaction fees are passed through to the Fund rather than retained by the manager.
HOW WE PRICE FOR RISK
Every loan we assess receives an internal risk rating, broadly equivalent to an S&P or Moody’s credit rating. The rating does not determine whether we lend; it helps us quantify the risk and compare the proposed return with returns available for similar risks in public markets. If we cannot earn a substantial excess return for that level of risk, we do not invest, regardless of how attractive the headline rate may appear.
At 30 September 2026, the weighted average running yield on invested assets was 13%, compared with the Fund’s target return of 30-day BBSW plus 6%—approximately 10.5% net of fees and costs, based on current interest rates.
We also prefer to be paid in cash. At 30 September 2026, 93% of the portfolio was cash-paying, meaning that borrowers serviced interest in cash each month or quarter. One loan facility had a capitalising-interest structure with an IRR above 17% and an LVR < 40%. Where a facility includes a capitalising component, it is sized against the borrower’s operating cashflow and realisable assets and tested monthly. Of the portfolio, 75% was senior-secured debt, 22% was held in cash and 3% was held across two subordinated facilities.
The weighted average term of the loan book is relatively short, at approximately 15 months. A shorter-duration portfolio means loans are repaid sooner, supporting liquidity, reducing credit-migration risk and allowing the manager to reprice facilities if macroeconomic conditions deteriorate.
Table 2 – Portfolio by Security Type as at 30 September 2026
WHEN LOANS DO NOT GO TO PLAN
We are in the business of taking risk. No lender avoids every problem loan and claims to the contrary warrant scepticism. What matters is how quickly we recognise and manage problems, and how transparently we value and report them. The Fund’s returns since inception in June 2020 are net of all write-downs and workout outcomes. Its lowest return in any financial year was 8.26% in FY2025, and it has averaged over 10% for the past three years.
The Fund's unit price is calculated monthly from its net asset value. Each loan is measured at fair value under AASB 9. A performing loan is generally carried at face value plus accrued interest and capitalised fees and is tested each month against the borrower’s reporting and our risk rating. When we identify an impairment, the loan is written down to its estimated recoverable value using discounted cashflow analysis and, where appropriate, independent valuations that we review before adopting. The Investment Committee may commission an external review of any proposed impairment, while the auditor reviews our valuation practices annually.
This process is designed to recognise losses as they arise rather than defer them. The Fund’s return of −2.16% in June 2025 reflected a provision recognised at that time against a specific facility. Our quarterly portfolio report lists every loan, together with its risk rating, LVR and status, including loans in arrears, undergoing restructuring or subject to enforcement. At 30 September 2026, four loans representing 8% of the portfolio were either being restructured or were under enforcement. These comprised three agricultural loans with substantial land security and one facility to a non-bank finance company associated with the June 2025 write-down. All four loans are being actively managed. The three agricultural loans are at advanced stages of the recovery process, and each loan is reflected in the unit price at our current estimate of its recoverable value.
The Fund’s liquidity settings were designed to reflect the nature of its assets. New investors are subject to an 18-month minimum term, while redemptions are available quarterly with 60 days’ notice. Scheduled borrower repayments are the primary source of redemption funding. At 30 September 2026, cash and money-market holdings represented 22% of the portfolio—well above our 5% minimum and providing meaningful flexibility if credit markets reprice.
WHEN LOANS DO NOT GO TO PLAN
Periods of stress distinguish managers through their underwriting, valuation discipline, and transparency. Stress in real estate private debt markets may also reduce risk appetite elsewhere in private debt. As in previous cycles, this could improve lending terms for well-capitalised lenders, and our current pipeline is beginning to reflect that shift. The investment team is assessing more than A$100 million of opportunities across eight prospective borrowers.
If you have any questions about the Fund, our credit process or how we value the portfolio, please contact us at investors@roadnightcapital.com
1 The Roadnight Capital Diversified Income Fund is available to wholesale clients only. This article is general information and does not take into account your objectives, financial situation or needs. Target returns are not guaranteed and past performance is not a reliable indicator of future performance. Total net fund returns are based on units and are calculated after the deduction of all fees and expenses. Individual investor circumstances may vary and as such your fund returns may differ from the net fund returns quoted. Please read the Information Memorandum dated 13 March 2026 before making any investment decision.