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'The workouts are brutal': What happens when a private credit deal turns sour

Global investment giant Mercer tried to redeem funds from a private credit investment that went south in 2017. It's still waiting to get its money back.

Jassmyn Goh
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Mercer global private markets CIO Mike Forestner says investors could run into trouble if they're desensitised to volatility and end up going out on the risk curve when investing in private credit. Shutterstock/Andrii Yalanskyi.

While private credit is attracting growing regulatory scrutiny in Australia, there have been relatively few blow-ups in the sector since the post-COVID boom began, with many funds in the space yet to operate through a full market cycle.

But according to asset consulting giant Mercer's global chief investment officer for private markets Mike Forestner, that could breed dangerous levels of complacency. Because when things go bad in the asset class, they go really bad.

“Some of those really aggressive lending strategies — I don't care what the collateral is — when those start to have trouble the workouts are brutal," Forestner tells Capital Brief. "You end up with duration extension, you end up with default risks, and you have remaining assets that often take a lot longer to work out than you think,” he said.

Forestner pointed to an evergreen fund that Mercer submitted a redemption for in 2017 when one of the general partners (GPs) left. Some eight years on, it still waiting for the funds to be paid.