The private credit sector in Australia is facing increased regulatory scrutiny following a report from the Australian Securities and Investments Commission (ASIC). The findings suggest that the industry operates below international standards and may pose systemic risks, particularly to self-managed superannuation funds. This report highlights a growing concern about the concentration of investments in high-risk real estate and development projects.
ASIC’s report was prepared by Nigel Williams, a former chief risk officer at Commonwealth Bank, and credit rating analyst Richard Timbs. It comes during a period of heightened oversight within the sector, which has seen the regulator take action against firms like RELI Capital as part of its intensified monitoring efforts. The report indicates that around half of the estimated $200 billion private credit market is invested in real estate assets, a situation that could threaten the stability of smaller investment funds and vulnerable investors.
Sector Under Pressure from High-Risk Investments
The private credit industry has grown significantly since the banking royal commission, which led banks to withdraw from lending to riskier sectors. As a result, private credit firms emerged, often charging higher interest rates while providing attractive double-digit returns to their investors. Currently, private credit lending constitutes about 14 percent of all corporate loans, according to a December estimate from consultants Alvarez and Marsal.
However, the sector faces challenges, including rising construction costs and declining commercial property values. These factors have placed substantial pressure on borrowers within the property industry, which in turn affects private credit lenders. ASIC noted that the Australian private credit market is not aligned with international best practices, particularly due to the high concentration of investments in risky property and development finance.
Calls for Greater Transparency and Accountability
The regulator emphasized the need for improved transparency within the sector. Many funds lack clear reporting on their portfolios and valuations, making it difficult for investors to understand their risks. ASIC pointed out that borrower fees are not consistently passed on to investors compared to global standards.
While some funds that attract investments from large superannuation firms demonstrate sound governance, ASIC highlighted the importance of regular reporting on fund composition and independent loan valuations. The report also indicated that terms used in communications with investors needed to be standardized to ensure clarity. For instance, quoting loan-to-value ratios (LVRs) based on completion value rather than cost can misrepresent risk during construction periods.
ASIC’s findings also revealed significant discrepancies in how private credit managers communicate their performance. For example, some firms have claimed they have not experienced impairments, despite nearly 9 percent of their loans being subject to enforcement action or restructuring. This inconsistency raises questions about the reliability of their reporting and the potential risks to investors.
The regulator has not yet outlined specific regulatory changes but plans to release further findings from its ongoing surveillance of retail and wholesale funds in November. ASIC’s report underscores the critical need for enhanced disclosure practices in the private credit sector, which it believes are essential for the sustainability and maturity of the market.
In summary, the private credit sector is at a crossroads, facing greater regulatory oversight and calls for transparency. As the industry adapts to these challenges, investors will be watching closely to ensure their interests are protected.
