Retail investment into private credit funds could surpass that of sophisticated investors, according to ASIC, but the regulator is unsure how these individuals are first being introduced to the vehicles.
In the regulator’s private market report, it discussed the growing volume of retail investors who were accessing private credit funds and said, based on experience overseas, the number of retail investors could surpass sophisticated ones in the future.
Development seen already in the US includes growth in evergreen funds, emergence of private market ETFs, and increased retail investment, all themes now beginning to emerge in Australia.
“In Australia, these developments point to an ever more structurally complex market with a higher proportion of retail and less sophisticated investment flowing into it,” it said.
Unfortunately, when it comes to their introduction to the space, the regulator said it had been unable to clarify how these retail investors were finding their way into these investments or who was making the recommendation, whether that was financial advisers, platforms or brokers.
“At this stage, we have not been able to build an accurate picture of how and where in the adviser or wealth management sector – including platforms – that retail investors are being introduced to private credit offerings,” it said.
“As retail demand continues to grow as expected, it would be helpful for ASIC to develop a good picture of the retail segment’s avenue to the private credit market. That information may also be useful for providing some insight into the knowledge and capability of those parties making investment recommendations to retail investors to invest in private credit.”
This is especially concerning as ASIC has already identified deficiencies in the target market determination (TMD) of three private credit funds that could have been accessed by retail investors and issued interim stop orders. Problems in the TMDs included an inappropriate level of portfolio allocation given the risks of the fund and failing to adequately specify an investment time frame for retail clients.
Nevertheless, ASIC identified the role of financial advisers and research houses as holding “considerable power and influence” over the retail and wholesale market. Research houses have already flagged their own concerns with the private credit sector this year, particularly the number of newer, less-established fund managers entering the space and the lack of the transparency in their offerings.
Given the rising volume of retail interest, ASIC recommended a greater number of reports would be beneficial.
“Private credit offerings are frequently subject to review and recommendations or otherwise by asset consultants, research houses, financial advisers and other brokers. These organisations play an important role in the private credit ecosystem, especially in the wholesale and retail investor segments of the market,” it said.
“Their views are considered and often relied upon by investors who do not always have the skills to assess private credit offerings for themselves. As a result, these organisations hold considerable power and influence.
“From an overall market information and education basis, greater numbers of independent research reports and public analysis of private credit offerings can only be beneficial for the sector.”
Another factor expected to boost retail demand for private credit was the phase-out of AT1 bank hybrids, a popular investment option for retail investors who have benefited from their income and franking credits. Their phase-out by 2032 will leave some $40 billion on the table, which is seeking a new home within fixed income.
“We expect the retail component of the market to grow, boosted in part by a potential influx of capital as the $40 billion bank hybrid market matures,” the regulator stated.
Speaking to Money Management earlier this year, some financial advisers were lukewarm about investing their clients in private credit due to their concerns over the illiquidity.
Financial adviser Andrew Saikal-Skea said he had explored the funds for a number of years, but never found one where he is comfortable to invest.
“I can see it is very tempting for advisers as they promise high returns, so it is understandable they get drawn in. But I look at it from the perspective of wanting to feel comfortable and not lose my client’s money,” Saikal-Skea said.
“There are so many funds out there, and it’s hard to have confidence that the one you pick isn’t going to end up being problematic. I keep abreast of it and consider the options. I can see the advantages, but I haven’t found anything I like. For me, the balance is tilted towards making sure my clients don’t lose money.”
ASIC said it will release a response to its discussion paper on capital markets as well as its surveillance of retail and wholesale private credit funds in November.
