The private credit sector in Australia is bracing for increased regulatory scrutiny following a comprehensive report from the Australian Securities and Investments Commission (ASIC). The report indicates that the sector does not meet international standards and poses systemic risks to self-managed superannuation funds. This development has emerged during a period of heightened attention on the industry.
Last week, ASIC announced enforcement actions against RELI Capital, highlighting its intensified monitoring of the private credit landscape. The report, authored by Nigel Williams, a former chief risk officer at Commonwealth Bank, alongside credit rating analyst Richard Timbs, underscores significant concerns regarding the concentration of private credit investments in high-risk real estate sectors.
Concerns Over Systemic Risks and Governance
ASIC’s findings suggest that approximately half of the estimated $200 billion private credit market is tied up in real estate assets, particularly in construction and development finance. The regulator expressed concern that this concentration could create systemic risks for smaller superannuation funds and less experienced investors during economic downturns.
The report emphasizes the need for improved governance and transparency within the sector. ASIC stated, “The concentration of private credit in Australia in real estate construction and development finance may present systemic risks,” particularly for retirees relying on these investments. The agency noted that funds often lack clear reporting on their portfolios, which could obscure the true nature of the risks involved.
Historically, private credit firms and non-bank lenders have thrived following the banking royal commission, which saw traditional banks retreat from riskier lending. This shift allowed new entrants to charge higher interest rates, attracting investors with the promise of double-digit returns. Currently, private credit lending accounts for approximately 14 percent of all corporate loans, according to estimates from consultants Alvarez and Marsal.
Regulatory Recommendations and Future Actions
ASIC’s report does not outline specific new regulatory requirements but indicates that further findings will be released in November. The agency highlighted the importance of regular reporting on fund composition, independent loan valuations, and transparency regarding fees and related party transactions.
“More fulsome disclosure is good for the sustainability and maturity of the market,” ASIC stated, urging funds to provide clearer information to help investors understand their investments. The regulator also emphasized the need for consistency in how financial terms, such as loan-to-value ratios (LVRs), are defined and presented.
Concerns about transparency have been amplified by instances where private credit managers have misled investors. For example, some firms have reported that their funds have not experienced impairments, despite significant portions of their loans being under enforcement action or restructuring. ASIC’s report described such claims as “inconceivable,” particularly given the high-risk nature of many investments in the sector.
The report also called attention to instances where terms like “investment grade” were used without the involvement of recognized ratings agencies, raising questions about the credibility of such claims.
As the private credit industry navigates this challenging landscape, ASIC’s proactive stance serves as a warning to firms operating within this space. The regulator’s ongoing investigations and forthcoming recommendations could significantly reshape the private credit market, ensuring greater protection for investors and a more robust regulatory framework.
