Australia's Evolving Private Credit Landscape: Opportunities Amid Regulatory Push for Higher Standards

Australia's private credit market is undergoing a transformation, driven by structural shifts in traditional banking, surging demand for flexible financing, and the allure of risk-adjusted returns. As of 2025, assets under management (AUM) in the sector have reached $188 billion, with private credit accounting for 2.5% of total business debt in the country A Pulse on Private Credit Investment in Australia 2025^[1]. This growth is not merely a function of capital inflows but a reflection of a market recalibrating to fill gaps left by retreating banks and evolving borrower needs. Yet, as the sector expands, regulators and investors alike are grappling with the dual imperatives of harnessing opportunity and enforcing standards to mitigate risks.

The Due Diligence Imperative

Private credit's appeal lies in its ability to offer tailored financing solutions, particularly for mid-market businesses and niche sectors. However, this flexibility comes with inherent risks, including valuation uncertainty, illiquidity, and borrower-specific vulnerabilities. To navigate these challenges, leading private credit providers have adopted rigorous due diligence frameworks. For instance, firms like Zagga and Bowery Capital emphasize granular assessments of sponsors' track records, asset quality, and deal structures, often leveraging structured security packages such as first mortgages and corporate guarantees to safeguard capital Risk and return in private credit: the key questions to …^[2].

According to a 2025 report by the Alternative Credit Council (ACC), robust due diligence has become a cornerstone of risk management in the sector. The report highlights that private credit managers are increasingly deploying data-driven models to evaluate borrower resilience, particularly in sectors like real estate and energy transition, where macroeconomic volatility is a concern ACC Releases Updated Australia Private Credit Guide^[3]. This focus on precision is critical, as even a single poorly underwritten loan can erode returns in a market where margins are tightening due to heightened competition.

Risk-Adjusted Returns: A Competitive Edge

Despite the challenges, Australia's private credit market has demonstrated its value proposition through strong risk-adjusted returns. Data from the 2025 Australian Private Capital Yearbook reveals that Australia-focused private credit funds have maintained a median net internal rate of return (IRR) of 13.8%, outperforming global peers in North America (12.4%) and Europe (12.0%) Australian Private Capital Yearbook is here!^[4]. This performance is attributed to the sector's low correlation with public markets and its ability to generate stable income through tailored lending structures.

Moreover, private credit's role in financing the energy transition presents a compelling opportunity. EY estimates that Australia will require $1.5 trillion in capital by 2030 and up to $9 trillion by 2060 to achieve net-zero emissions, with private credit lenders poised to play a pivotal role in funding infrastructure, technology, and renewable energy projects A review of the Australian private credit market in 2023^[5]. These opportunities, however, demand a nuanced approach to risk management, as lenders navigate uncharted territory in sectors like green hydrogen and carbon capture.

Regulatory Scrutiny and the Path Forward

The rapid growth of private credit has not gone unnoticed by regulators. The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have intensified their oversight, particularly concerning governance, valuation accuracy, and superannuation fund exposures. A 2025 discussion paper by ASIC underscores the need for standardized valuation practices and enhanced transparency, warning that subjective valuations could misprice risks and distort investor perceptions Australia Needs to Boost Private Credit Standards, Says Watchdog^[6].

While some industry leaders argue that current regulations are “fit for purpose,” others advocate for reforms to address gaps in licensing, capital adequacy, and conflict-of-interest management A Pulse on Private Credit Investment in Australia 2025^[7]. The debate is further complicated by the sector's dual role as both an alternative to traditional banking and a complement to it. For instance, private credit now accounts for 22.7% of total commercial real estate lending in Australia, a figure projected to rise to 30% by 2028 Private Credit Australia: Growth, Risks & Opportunities^[8]. This growth necessitates a regulatory framework that balances innovation with stability.

Conclusion: Balancing Ambition and Caution

Australia's private credit market stands at a crossroads. On one hand, it offers a compelling alternative to traditional lending, with the potential to drive economic growth and support the energy transition. On the other, it demands a disciplined approach to due diligence and risk management, particularly as competition intensifies and regulatory expectations evolve. For investors, the key lies in aligning their strategies with the sector's unique dynamics—leveraging its flexibility while adhering to the highest standards of governance.

As the market matures, the interplay between innovation and oversight will define its trajectory. The question is not whether private credit will continue to grow, but how it will adapt to ensure that growth is both sustainable and equitable for all stakeholders.