The Australian Securities and Investments Commission (ASIC) has called on the A$200 billion (US$132 billion) private credit industry to address worrying practices.
Australia’s corporate regulator said it was concerned about opaque remuneration and fee structures, related party transactions and governance arrangements, valuation practices and inconsistent use of terms for effective disclosure.
“Enhanced standards are needed to lift practices across the sector,” Chair Joe Longo said in a media release.
ASIC was releasing its latest report on Australia’s public and private markets, Private Credit in Australia, by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams.
“'While the report highlights some encouraging practices, it also reveals concerning behaviours that fall short of market expectations and more importantly that are inconsistent with existing financial services law,” Longo said.
It comes only days after ASIC blocked $20 billion asset manager, Latrobe Financial Asset Management, from raising money through three fixed interest products.
ASIC commissioned the review in response to the rapid growth of the sector in Australia, which in turn represents just a fraction of the US$2.5 trillion value in 2024 of the global private credit market, a figure that has quadrupled in 10 years.
A tightening in bank capital rules for higher-risk credit after the global financial crisis, especially in real estate lending, was a driver of this growth.
Practice in the parts of the market targeting wholesale investors using the ‘sophisticated investor’ exemption and retail-based offerings, including platforms, did not compare favourably against international practice, the authors wrote.
Lenders were more likely to have conflicts of interest, opaque fee and interest margin arrangements, inconsistent and non-independent valuation methodologies, and ambiguous terminology.
Conflicts of interest were prevalent across fee structures, valuations, related party transactions and loan structuring, and fee and remuneration structures varied widely and were often opaque and not quantified.
They recommended ASIC look more closely at:
- management and disclosure of conflicts of interest
- valuation practices
- fee disclosure (including quantum) and alignment of interest with investors
- liquidity facilitation
- investment report information
- distributions paid out of capital, and
- definitions of key terms
“Significantly, we note that the Australian private credit market has not yet experienced a credit cycle and associated downturn,” Timbs and Williams wrote.
