What an IM is, and what it is not

A Product Disclosure Statement is a creature of statute. The Corporations Act prescribes what it must contain, ASIC can stop-order it, and a retail investor who is misled by one has a clear path to a remedy. An Information Memorandum has none of that scaffolding. It is simply the document a manager chooses to give wholesale investors to describe an offer that is exempt from the disclosure rules.

That does not make an IM lawless. The general prohibitions on misleading or deceptive conduct in the Corporations Act and the ASIC Act apply to every word of it, and a manager who overstates returns or understates risk in an IM is exposed to the same liability as anyone else. But the burden of asking the right questions shifts from the regulator to you.

A good IM will cover the fund’s structure and the parties involved; the investment strategy and the kinds of loans the fund will and will not make; the unit classes on offer and how they rank; how income is earned and distributed; the liquidity terms in full; every fee and who receives it; the material risks, specifically rather than generically; the manager’s track record, with the losses as well as the wins; and the process for applying, qualifying as wholesale and redeeming.

A poor IM is easy to spot. It is heavy on photographs of buildings and light on definitions. It describes risks in a paragraph that could apply to any fund in the country. It quotes a return without saying whether it is a target, a forecast or a history. And it is vague about exactly which entity holds your money.

One practical tip: read the glossary and the risk section first. The glossary tells you how the manager has defined the terms that matter, including what counts as a “default” and when a loan is “impaired”. The risk section, if it is honest, tells you what the manager is actually worried about.

The structure: who you are actually trusting

Most Australian wholesale private credit funds are unregistered unit trusts. You subscribe for units, the trust pools the money and makes loans, and the loans generate income that flows back to unitholders. Simple enough, until you ask who sits where.

The trustee is the legal owner of the fund’s assets and the party that owes you fiduciary duties. In a wholesale fund the trustee is often a company related to the manager, which keeps costs down but means the person investing your money and the person supervising them are the same. Some funds appoint an independent professional trustee instead. Neither is wrong, but you should know which you have and what it means for oversight.

The investment manager makes the lending decisions. This is the party whose credit skill you are paying for, and whose track record is the one that matters. Check that the manager holds an Australian financial services licence, or is an authorised representative of one, with authorisations that cover what it is actually doing. A lender’s licence under the National Credit Code is a different thing and does not cover running a fund.

The custodian, if there is one, holds the fund’s assets and title documents separately from the manager. For a mortgage fund this means the registered mortgages sit in the custodian’s name, not the manager’s, so a problem at the manager does not put the security at risk. Not every wholesale fund has one. If yours does not, ask what protects the assets if the manager fails.

The administrator and auditor keep the register, strike the unit price and audit the accounts. An external administrator and an annual audit by a recognised firm are basic hygiene for a fund taking outside capital.

The question to hold in your mind through all of this is: if the manager disappeared tomorrow, who holds my security, who holds my money, and who could step in? If the IM does not let you answer that in two sentences, ask until it does.

Unit classes and the capital stack inside a fund

Many private credit funds offer more than one class of unit, each with a different target return. Investors sometimes read this as a menu of risk appetites. It is more accurate to read it as a capital stack, the same idea as the first and second mortgage from the previous article, applied inside the fund.

In a typical structure, the senior class ranks first. It is paid its distribution before any other class, and in a loss it is the last class to absorb it. A subordinated class sits beneath it, accepting that it is paid after the senior class and takes losses before it, in exchange for a higher target return. Some funds add a third, most junior class, often held partly by the manager itself, which absorbs the first losses of all.

The arithmetic is worth understanding. If a fund has $100 million in loans and takes a $3 million loss, and the junior classes together make up $10 million of the capital, the senior class is untouched. If the loss is $12 million, the junior classes are wiped out and the senior class loses $2 million. The protection a senior class enjoys is exactly the thickness of what sits beneath it, and that thickness should be stated in the IM as a number, not an adjective.

Three questions follow. First, how much capital sits in each class today, not at launch? A subordinated class that was meant to be 15 per cent of the fund and has shrunk to 4 per cent is offering a lot less protection than the IM implies. Second, does the manager or its principals hold any of the junior class? Capital in the first-loss position is the most credible alignment a manager can offer. Third, can the manager change the class structure, or issue a new class ranking ahead of yours, without unitholder consent? The trust deed will say, and the answer matters.

A class structure is not a gimmick. It is a sensible way of matching different investors to different risk positions within one pool of loans. But it only works if you know which position you hold and what sits below you.

Distributions and what “target return” actually means

Income in a private credit fund comes from one place: interest and fees paid by borrowers. After the fund’s costs and the manager’s fees, what remains is distributed to unitholders, usually monthly or quarterly, in order of class priority. That is the whole machine. If the distribution you receive cannot be traced back to borrower payments, you should want to know where it is coming from.

The word “target” carries a lot of weight in this sector and it is worth being precise about it. A target return is the manager’s stated objective, not a promise and not a forecast. It is what the fund aims to pay if loans perform as underwritten. It can be missed if borrowers default, if cash sits uninvested between loans, or if costs rise. A manager who presents a target as though it were a fixed rate, or who uses words like “secure” or “guaranteed” alongside it, is either careless or misleading you, and ASIC’s guidance on advertising financial products is explicit on this point.

Three features of distributions deserve a close look. The first is capitalised interest. In some loans, particularly construction facilities, the borrower does not pay interest monthly; it accrues and is paid at the end from the exit. A fund holding many such loans can show strong accrued income while receiving little cash, and the distribution may be funded from new investor money or a facility rather than from borrowers. That is not necessarily improper, but it must be disclosed and understood.

The second is the treatment of arrears. If a borrower stops paying, does the fund keep accruing the income and distributing it, or does it stop? A conservative manager stops recognising income on a loan that is in material arrears. A less conservative one keeps the distribution looking smooth until the loss arrives all at once.

The third is the unit price. In most mortgage funds the unit price is held at a fixed figure and losses are taken through the distribution or through a write-down when they crystallise. Ask how and when the manager marks a loan down, who decides, and whether the auditor reviews it. A fund whose unit price has never moved is either very well run or not being marked honestly, and you want to know which.

Finally, understand the tax character of what you receive. Distributions from a unit trust carry through the character of the underlying income, which for a lending fund is generally interest. Your adviser should confirm how that is treated for your particular structure, especially for superannuation funds and family trusts.

Liquidity: the pages that matter most

Here is the structural fact that every private credit investor needs to sit with. The fund’s assets are loans with fixed terms, typically six to twenty-four months, that cannot be sold on an exchange. The fund’s liabilities are units held by investors who may want their money back at any time. Those two things do not match, and every liquidity term in the IM is an attempt to manage the gap.

A well-designed fund is honest about the mismatch. It will have some combination of an initial lock-up during which no redemptions are permitted; fixed redemption windows, often quarterly or six-monthly; a notice period, commonly 30 to 90 days; and a gate, which caps total redemptions in any window at a percentage of the fund and scales back requests pro rata if they exceed it. Many deeds also allow the trustee to suspend redemptions altogether in stressed conditions. All of these are reasonable. None of them should be a surprise.

What you are looking for is not the absence of restrictions but the match between the restrictions and the assets. A fund of twelve-month loans offering monthly redemptions with no gate is promising something it cannot deliver without holding a lot of cash, which drags on returns, or without funding redemptions from new applications, which works right up until it does not. A fund with a two-year lock-up and quarterly windows thereafter is less convenient and far more honest.

The gate deserves special attention because it is the mechanism most likely to affect you. Ask: at what percentage does it trigger, is it measured per window or cumulatively, and has it ever been applied? Then ask the harder question: if a third of investors asked for their money in the same quarter, how would the manager actually fund it? The answer should involve loan maturities and a cash buffer, not a shrug.

Suspension powers are the last line. They exist so a trustee is not forced to sell loans at a discount to meet redemptions, which would hurt the investors who stayed. Used properly they protect you. Used to paper over a book that is not performing, they trap you. The difference is disclosure: a manager who tells you clearly when and why they would suspend is one you can plan around.

All of this is why I say liquidity terms deserve more attention than the headline return. A target return is what you might earn. The liquidity terms are what decides whether that money is available when your circumstances change. Decide how much of your capital you can commit for the full term before you look at the number on the front page.

Fees, alignment and the fine print

The fee table in a private credit IM is rarely where the real cost sits. The management fee, usually a percentage of funds under management, is visible and comparable. The money that moves behind it is not.

The first place to look is borrower fees. Lenders charge establishment fees, line fees, extension fees and discharge fees to borrowers. In some funds those flow to the trust and therefore to you. In others they are retained by the manager or a related originator. There is nothing wrong with the second model, provided it is disclosed, but it changes the economics materially: a manager who keeps borrower fees earns more from writing loans and extending them than from the loans performing, and that incentive is worth knowing about.

The second is the net interest margin. Some funds pay investors a stated rate and the manager keeps whatever the borrower pays above it. This is common in the sector and gives the manager a strong incentive to price loans high, which can mean lending to riskier borrowers. Ask what the average borrower rate is and compare it with your target return. The gap is what the manager earns, and it should be reasonable for the work being done.

The third is related-party dealing. Does the fund lend to entities connected with the manager or its principals? Does it buy loans from a related originator, and at what price? Does the trustee pay fees to a related administrator? Each of these can be legitimate; each is also where investor money quietly leaks if nobody is watching. The IM should disclose them, and the trust deed should require independent sign-off on any of them.

Against all of that, the strongest signal of alignment is the simplest: does the manager and its principals have their own capital in the fund, in a position that loses before yours does? A manager with meaningful money in the junior class has already answered most of the questions above in your favour.

Last, read the amendment and termination clauses. Who can change the trust deed, and does any change to fees, liquidity or class ranking need unitholder approval? Who can wind the fund up, and what happens to loans still on foot when they do? These are not hypotheticals. They are the clauses that govern the moments when your interests and the manager’s might diverge.

How Renown Wealth approaches this

I have written this article as a reader’s guide rather than a pitch, and I am going to keep it that way. But it would be odd to set out a list of questions and not say how we answer them.

Renown Wealth is structured with distinct unit classes that rank in order, so that an investor who wants the senior position can have it and an investor who wants more return for more risk can take that position knowingly. The ranking, the thickness of each class and what sits beneath the senior units are set out in the Information Memorandum as figures, and we will walk any prospective investor through them line by line.

Our income comes from the loans Renown Lending writes, and our distributions reflect what borrowers actually pay. We do not describe our target returns as fixed or secure, because they are neither. They are what we aim to deliver if the book performs, and the IM says so.

On liquidity, we have tried to match the terms to the assets rather than to what sells. The loans we write are short-dated, which helps, but they are still illiquid, and our redemption terms reflect that. Anyone who needs their capital on demand should not be in private credit, ours or anyone else’s, and we would rather say that at the first meeting than at the first redemption request.

And we invest alongside our investors. Renown Group’s principals have their own capital in the structure, which is the simplest way I know to show that the questions in this article are ones we have asked ourselves.

If you are a wholesale investor or adviser and would like to read the Information Memorandum, the team can provide it once your wholesale status is confirmed. Bring the questions in this article with you. We would rather spend an hour on them than have you invest without asking.

Editor’s note for Kalpi: the claims in this section (class structure disclosed in figures, distributions sourced from borrower payments, principals’ co-investment, redemption terms matched to loan tenor) need to be true of the current IM before publishing. Adjust or remove any that are not, and consider stating the actual lock-up and redemption window if you are comfortable doing so publicly.

Disclaimer

This article is general information only and does not take into account your objectives, financial situation or needs. It is not financial product advice and is not an offer or invitation to invest. The structures and figures described are illustrative and do not describe any particular fund. Renown Wealth products are available only to wholesale clients as defined in the Corporations Act 2001 (Cth). Any target return is an objective, not a forecast or guarantee, and may not be achieved. Investing in private credit involves risk, including the possible loss of capital and illiquidity. Before making any investment decision you should obtain independent professional advice and read the relevant Information Memorandum and trust deed in full.

Sources

• Corporations Act 2001 (Cth), Chapters 5C and 7, including ss 708, 761G and 1041H — Federal Register of Legislation
• Australian Securities and Investments Commission Act 2001 (Cth), s 12DA — Federal Register of Legislation
• ASIC, Regulatory Guide 234: Advertising financial products and services (including credit) — asic.gov.au
• ASIC, Regulatory Guide 45: Mortgage schemes — improving disclosure for retail investors (benchmarks on liquidity, related-party transactions and valuation policy) — asic.gov.au
• ASIC, Regulatory Guide 259: Risk management systems of fund operators — asic.gov.au