She has $100,000 ready for a private credit fund. A $3.4 billion collapse shows where it sits in the queue

She is 42, partnered, one teenager at home, and sitting on about $100,000 she did not expect to have. A bonus landed in the same year as a small inheritance.

Her adviser put two options in front of her. One was a private credit fund that lends to residential developers and pays a monthly distribution. The other was an off-the-plan apartment in a Sydney growth corridor, built by the kind of developer the fund lends to.

She is a composite illustration, not a real person. The queue she is about to learn about is very real.

The question

"I keep hearing private credit is the safe way to get property returns without buying property. Then a $3.4 billion developer collapses and the lenders are selling the loans. If a fund I'm in lends to a builder that fails, who gets paid first, and where am I?"

The answer: the queue is written down, and you are rarely near the front

On 17 October the ABC reported that lenders to the collapsed Bathla Group, a failure put at $3.4 billion, are selling their exposure to get their money back.

The example it used is worth reading slowly, because it shows the queue in action.

360 Capital bought a senior loan of about $31.2 million over a Bathla project at Marsden Park in Sydney's north-west: 72 apartments, nearing completion. The seller, the ABC understands, was La Trobe Financial, which in August had disclosed $38.1 million in loans to Bathla. By selling, La Trobe recovered all of its outstanding principal, interest and late-payment charges.

That is what first position looks like. The senior lender got out whole.

Now look one rung down. 360 Capital's listed mortgage trust already held an $8.9 million loan on the same project that ranked behind La Trobe. To protect that position it put in another $5.2 million and bought the senior debt as well. In the company's own words, "the step was not taken lightly".

A Morningstar analyst quoted by the ABC put the general rule plainly: first mortgage lenders are in a much stronger position to recover their money, while mezzanine lenders further down the queue risk losing most, if not all, of their investment.

Then there are the buyers. Half of the 72 apartments were pre-sold under contracts worth $25.8 million. A receiver has been appointed with the job of getting occupancy certificates and settling those 36 sales. Those buyers paid deposits on a finished home. They are now waiting on a receiver.

The rule almost nobody priced in

Private credit funds are sold on the yield. The yield is the fee for standing somewhere in that queue. The higher the advertised return, the further back you usually stand.

Most retail investors cannot tell you whether their fund holds first mortgages, second mortgages or mezzanine notes. Many funds hold a mix. The product disclosure statement says which, in language that was never written to be read on a phone.

The yield also rarely tells you this: you may not be able to leave. The ABC reported that Centuria Bass and CVS Lane suspended withdrawals from some funds in August over Bathla exposure. MA Financial and Metrics Credit Partners, which both say they have no Bathla exposure, also limited or suspended withdrawals from some funds as nervous investors tried to get out.

ASIC has warned about questionable asset valuations, opaque fees and inadequate disclosure across the sector. Its commissioner told the ABC the industry was now "beyond warnings".

What it means for you

If someone is offering you a developer-linked product, three questions do most of the work.

1. Where does my money rank if the developer fails? First mortgage, second, or mezzanine?
2. Can I get out, and on what notice? A fund that can freeze withdrawals will freeze withdrawals when you most want out.
3. Who pays the person recommending this to me?

The third one matters more than it sounds. A great deal of off-the-plan and developer stock is recommended by advisers who are paid a commission by the developer. The person selling you the apartment and the person selling you the fund can be sitting on the same side of the table, and neither of them is standing in your spot in the queue.

The Ripehouse reframe

The expensive mistake in this story is treating a yield as if it were an asset.

A monthly distribution from a construction loan is a bet on one project, one builder and one lender's place in line. An established house on a specific street, with a documented rental history and a resale record, is something you own outright, with no queue in front of you.

Two streets in the same suburb can be having completely different outcomes right now. That is where the work is: the right asset on the right street, judged on data rather than on the brochure. Structure, not timing.

Ripehouse Advisory does not sell property and takes no developer kickbacks. Every recommendation is judged on the full-portfolio result, never on the margin from one transaction. That is the whole point of being independent.

Her $100,000 is still hers. The job is to put it somewhere she is not standing behind a bank, a mortgage trust and a receiver.

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