‘Not a free lunch’: Is the tide turning on private credit for advisers?

In the wake of a high-profile stop order, product downgrades and ASIC’s increasingly watchful eye, Freshwater Wealth founder Roger Perrett has suggested the shine of private market’s perception has now worn off.

In July, ASIC announced it would be increasing its surveillance of private equity and private credit funds, specifically looking at fund governance, valuation practices, and the management of conflict of interest, as part of a wider review into the private credit market.

With ASIC now paying such close attention to private markets, and rightfully so, Perrett told Money Management this might be a signal that the rest of the financial services industry should also be taking a closer look at what is happening in the space.

“There’s just been so much positive news and positive updates about credit, like it’s the answer to everything. Now we’re starting to see some negative stories and negative press coming out about it. 

“More and more advisers are thinking, ‘Hang on a minute, this isn’t the free lunch that people thought it was, they’re not just term deposits’,” Perrett said.

He explained that the overly positive view of private assets had triggered the “natural tendency” for people to ignore the risk, despite the inherently complex nature of the asset class.

“As we know with investments, every investment has a risk, and we can’t discount that. It’s not to say private credit is going bad, I think the tide is turning in terms of the view of it. It isn’t just the answer to everything where you get these almost risk-free type returns. There’s a bit of realisation now, which I think is a good thing.”

Speaking with Money Management earlier this month, Andrew Dunbar, director and senior financial planner for Apt Wealth Partners, said client overconfidence has become a challenge when it comes to their understanding of private markets, setting them up for challenges if and when a market downturn occurs.

Taking recent events with Shield and First Guardian as an example, he suggested that many investors may not have considered key factors before jumping into these complex products.

“How much do people really understand about these funds they’re investing in? Whether they have independent custodians? Whether they have audited accounts? Do they know that there’s a record of the investments that they’re making? Do they have a track record? What’s the ownership structure of the fund?”

Dunbar added: “These are all issues that we, with an internal investment team, spend a lot of time and effort on before we approve an investment and make sure our clients understand that. My fear is that there’s a misunderstanding among other clients.”

Recent cases have also brought more awareness to private markets, with research house Lonsec downgrading two Metrics Credit Partners funds in September citing governance concerns, including the Income Opportunities Trust from “recommended” to “investment grade”, and the Master Income Trust from “highly recommended” to “recommended”.

This came just six months after Count Financial advised its 550 advisers to sell out of the ASX-listed Metrics Income Trust and Metrics Income Opportunities Trust, along with the unlisted Metrics Direct Income Fund, noting the risks of private credit.

Commenting on this, Perrett said: “The research houses coming out and downgrading them, that’s a bit of a warning sign.”

Later that same month, ASIC imposed an interim stop order on the La Trobe Australian Credit Fund after concerns the target market determination (TMD) for the 12-Month Term Account and 2-Year Account products were suggesting an inappropriate level of portfolio allocation and didn’t include appropriate distribution conditions.

While the stop order was lifted less than a week later, Perrett suggested that these events have made advisers and investors rethink their perspective of private markets and make them more wary. 

This is exacerbated by ASIC’s surveillance and acknowledgement of the fact that further work is needed when working with retail advisers and investors which may have caused apprehension among the industry.

“Do the investors really know what they’re investing in here, and do they really know the risks, or do they think it is literally a term deposit with a better rate?”