'The clock is ticking': ASIC sounds alarm on private credit
Australians investing in private credit funds, either directly or through their super, could be affected by a regulatory crackdown, with ASIC warning the fast-growing sector to lift standards or face enforcement action.
ASIC commissioner Simone Constant says the regulator is now "beyond warnings" and pushed players to assess themselves against its 10 best practice principles.
Constant says ASIC expects everyone in the investment chain - fund managers, deal underwriters and trustees right through to valuers, auditors and ratings agencies - to consistently meet their responsibilities.
Private credit has grown rapidly in recent years as investors have looked for higher returns than traditional fixed-interest investments. Private credit funds typically lend money directly to businesses and property developers rather than through traditional banks.
The recent collapse of property developer Bathla put a spotlight on risks within parts of the private credit market and prompted some investors to pull money from private credit funds.
Constant says funds that allow investors to withdraw money regularly while holding assets that can take years to sell or repay face a fundamental problem that must be resolved.
One of ASIC's key concerns is that some funds allow investors to withdraw money regularly even though the underlying loans and assets may take years to repay.
"Offering regular redemptions to investors while holding illiquid, multi-year property loans creates a fragile product design that breaks down under pressure - especially when coupled with loan "management practices" that rearrange deck chairs while the tide goes out and the boat risks running aground," she says.
She says that when property projects stall and credit vehicles freeze redemptions, the damage falls squarely on the real economy.
"Contractors and trade subcontractors are left unpaid, homebuyers face the distressing prospect of losing their deposits, and superannuation members find their retirement savings locked away. The damage also falls on investors."
Private credit explained
Private credit involves investors lending money directly to businesses or property developers, rather than through traditional banks.
The sector has grown rapidly in recent years as investors and super funds have sought higher returns than those available from many traditional fixed-interest investments.
However, private credit investments can be complex and may be harder to sell quickly than shares or listed investments. This can create problems if large numbers of investors want their money back at the same time.
The warning is particularly relevant for super fund members because many large super funds have increased their exposure to private credit in pursuit of higher returns.
Constant says ASIC is worried the sector's engagement might be "too little, too late" if participants don't move with urgency towards consistent good practice. She urged the sector to strengthen standards now before problems undermine investor confidence.
"If you are a private credit fund who hasn't assessed yourself against our 10 principles of private credit done well, ask yourselves - why not? Before your investors do," Constant says.
"The clock is ticking. Whether we see broader credit stress or not, certainly the tide is going out on poor private credit practices. The collapse of Bathla reinforces why strong governance, effective oversight, clear disclosure and accurate valuations are critical."
Another concern for ASIC is whether some funds are accurately valuing loans, particularly when borrowers are under financial pressure.
"Fund managers need to review loan portfolios and apply realistic, independent valuations," Constant says.
"Carrying distressed loans at full face value to protect management fees is unacceptable."
Why ASIC is concerned about private credit
According to ASIC commissioner Simone Constant, the regulator is focused on several risks emerging in parts of the private credit market:
Liquidity risk
Some funds allow regular withdrawals even though the underlying loans may take years to repay.
Valuation concerns
ASIC wants funds to ensure loan valuations are realistic and independently assessed.
Governance and oversight
The regulator says strong oversight, clear disclosure and effective risk management are critical.
Investor protection
ASIC has warned trustees and institutional investors not to rely solely on headline returns when assessing private credit investments.
Growing stress in the sector
The Bathla collapse has heightened scrutiny of private credit and raised questions about industry standards and risk management.
Constant says while the Bathla collapse is deeply concerning, for ASIC it has not been surprising.
"We've been talking about private credit for a long time now - specifically about the risks stemming from inconsistent industry standards that haven't kept pace with the growth, significance, complexity and connections of the sector," Constant says.
"What we're seeing now, as some of those weaknesses are tested at scale for the first time by current conditions, are the first significant cracks - the first stress fractures - beginning to emerge."
Constant also called on institutional investors and superannuation trustees to not accept private credit managers at face value.
"Trustees have clear statutory obligations to act in their members' best financial interests. Fulfilling that duty requires genuine, look-through due diligence," she says.
"Trustees must look past headline returns, examine the underlying collateral, verify bad-debt provisioning, and independently test manager assumptions before committing member capital."
This article first appeared on Financial Standard
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