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The corporate regulator has warned that Australia’s booming $200 billion private sector must lift its game after a probe uncovered a wide range of problems including opaque fee structures, poorly managed conflicts of interest and unclear communication to investors about risks.
Private credit – the practice of fund managers raising money from investors and lending directly to borrowers – is a rapidly growing and unregulated part of global finance that is attracting intense scrutiny from regulators.
Private credit is booming, partly because super funds are piling into the sector.Credit: Louie Douvis
The sector has surged since the global financial crisis, filling the gap left by banks as they retreated from riskier lending such as to property developers. In Australia, the rapid growth has also been fuelled by a wave of investment from superannuation funds.
The Australian Securities and Investments Commission (ASIC) says private credit can help the economy if it’s done well, citing figures from EY that found the domestic private credit market has ballooned by more than 500 per cent since 2015 to more than $200 billion.
But ASIC says a “significant improvement” is needed in industry practices. On Wednesday, it will publish a report saying its surveillance has uncovered a range of failings that could harm investors, erode trust in the industry and hold back the industry’s development.
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ASIC chair Joe Longo said the watchdog would continue to keep a close eye on private credit, and it wanted to see better practices take hold or it would push for regulation of the industry.
“You can expect ASIC to continue to be closely monitoring what’s going on in this sector,” said Longo, who will address the National Press Club on Wednesday.
“ASIC will upgrade its regulatory guidance. We will make clear what we think the legal obligations are, but even so, we still think there’s room for better practices to develop. And unless we see that happening in a consistent way coming out of the sector, then we will be calling for additional regulation.”
ASIC’s warning to private credit funds came as the regulator unveiled a wider “roadmap” to encourage growth of both private and public capital markets in Australia, including measures to encourage more sharemarket listings.
While market capitalisation of the ASX has nearly doubled in the past decade, the number of listed companies has fallen over that time and the value of equity raised in initial public offerings (IPOs) has plunged.
ASIC indicated it was keen to reinvigorate the market for IPOs, and said some participants viewed regulation as one reason for the decline in listings. It encouraged the ASX to look at simplifying future editions of its corporate governance principles to ensure they were not deterring businesses from listing on the sharemarket.
Longo said other developed countries were grappling with similar issues to Australia, and he emphasised that growing both public and private markets was important because it would help businesses to grow, creating jobs.
“Markets aren’t some abstract construct,” Longo said. “They represent the money and investment flowing through our economy.”
“They are literally the lifeblood that lets businesses grow and employ people. And to that end, we want to ensure that we’re making active choices about how these markets develop, so we get the markets we want.”
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“The alternative is that technological developments and the opportunism of other countries could see Australia become a passive recipient of changes which may not be for the better.”
ASIC’s findings on private credit were based on surveillance it conducted of 28 private credit funds, the regulator pointing to various examples of “poorer practices”.
It said many funds were not transparent about the interest rates they charged to borrowers, there were problems with “weak governance and poorly managed conflicts of interest” and most funds reviewed by ASIC had poor valuation practices.
ASIC has also raised concerns over what funds were telling investors about non-performing loans, saying funds defined important terms such as “default” or “loan security” inconsistently.
Some bank bosses have previously called for stronger regulation of private credit, and Australian Banking Association chief executive Simon Birmingham welcomed ASIC’s focus on the industry.
“This appears to be welcome progress to ensure private credit has high standards in investor protection and market integrity while taking steps to increase transparency,” he said.
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