ASIC announces new taskforce to review private credit

With higher interest rates, private credit has been booming this year, generating double-digit returns.

The Australian private credit sector alone is worth almost $200 billion while the size of the US private credit market at the start of this year was approximately $1.5 trillion, according to Morgan Stanley.

What is private credit?

Also known as private debt or direct lending, private credit refers to any lending by non-bank financial institutions (including private equity firms).

It tends to be popular among investors, offering attractive returns and consistent and reliable income. It also offers lower risk than investing directly in shares or exchange traded funds (ETFs).

Amid recession fears and tighter bank lending, private credit offers borrowers pricing certainty, which has helped fuel the market's growth in recent years.

It's also compelling for investors during periods of economic uncertainty when liquidity becomes a primary concern.

Why is ASIC reviewing private credit?

But private credit has come under the spotlight recently as it typically has less regulatory oversight than traditional banking institutions. Now, the Australian Securities and Investments commission (ASIC) has announced a taskforce to review private credit, with a view to regulating it.

ASIC chair Joseph Longo said the corporate watchdog was prioritising a probe into private markets over the coming year and had put together a team to look into the sector.

"As we see more and more activity in the private market, the question I've got for myself and ASIC is 'What's going on here?'" Longo said at a Bloomberg event in Sydney recently. "Are they less transparent? Should we be worried about conflicts of interest and valuations?"

Emanuel Datt, chief investment officer of Datt Capital, believes the move is crucial for enhancing investor transparency.

"Regulation in the private credit sector is necessary for a few key reasons. One, to ensure accurate disclosures especially around valuation; two, to ensure transparent and appropriate disclosures of fees; and three, to ensure appropriate and timely risk disclosures to investors," he told Money.

"The majority of private credit issuers are good players however, like any industry, bad players exist.

"The benefit of greater regulation is to fix a consistent minimum standard of disclosure, ensuring a fair playing field for all investors while eliminating 'bad actors' in the sector."

Capspace managing director Tim Keith also supports the move, telling Money "transparency is key".

"Investors need to understand the risks and benefits of their investments, both before and during the investment period in a private debt fund," he says.

What is the risk of such an opaque asset class?

Keith says the probe was likely to highlight the need for clarity regarding private credit funds' underlying loans and security.

"Any material changes in loan performance or security value should be communicated to investors," he said.

Arrowpoint's Michael Kurland similarly agreed with the move, applauding ASIC's taskforce.

"It's crucial that investors have complete information about the funds and credit assets they invest in," Kurland told Money.

But Kurland says Arrowpoint was transparent, providing quarterly updates on corporate investments and naming and providing specific loan details for each investment, subject to confidentiality considerations.

He says investors should feel adequately compensated through higher returns and quarterly cash distributions, "especially as this burgeoning asset class seeks to provide necessary diversification to an investor's asset portfolio".

"Even some of Australia's most conservative investors, like industry superannuation funds, have embraced private debt due to the attractive income streams it can offer," Kurland says.

Longo says the ASIC taskforce was about building trust in the financial system, which has direct benefits on the job market.

"While Australia's private markets are dwarfed in size by our listed equity markets, their opacity presents an outsized risk to market integrity, particularly as more investors become exposed," he says.

As for interest rates, as term deposit rates fall, this could benefit borrowers of private credit.

"Private credit facilities may be highly advantageous for borrowers, given their significantly faster time to close and on terms that can be specifically tailored to the borrower," Datt says.

However he stressed term deposit rates do not necessarily impact private credit investments directly.

"They may make the asset class more attractive to investors given the relatively attractive yields that may be on offer."

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