Major ASIC report warns of future private credit failures
ASIC has warned Australian retail investors there “will be product failures” in the private credit space as the assets are untested for a large-scale stress event, but has stopped short of discouraging retail participation.
Issuing a long-awaited report into the public and private market, Australia's evolving capital markets: A discussion on the dynamics between public and private markets, the regulator explored the opportunities and risks in the space and ASIC’s regulatory approach. It had previously flagged last August that it would be taking an increased scrutiny into private markets funds with a report published in due course in light of the rapid growth in private markets.
Industry commentators previously discussed their concerns with Money Management about the rapid rise of private credit funds being launched and the risks they potentially pose to the retail market. Nevertheless, alternatives providers have been open about how they are targeting the retail market as the “next frontier” for business growth.
Assets under management in private credit funds rose from $0.6 billion in 2014 to $2.8 billion in 2024, a rise of 240 per cent over the decade, ASIC said. This included assets from retail investors who invested in a managed investment scheme where ASIC noted some private capital funds were reducing their buy-in to as little as $2,000 or distributing the vehicles through investment platforms.
ASIC flagged a problematic matter with private credit funds for retail investors, however, is the “unanticipated correlations in the likelihood of distress” and lack of reliable data for forecasting how these funds perform in a large-scale industry stress.
Commenting specifically on private credit, it said: “There will be more failures in private credit investments and Australian investors will lose money. ASIC is increasing its focus on private credit, not to constrain participation but with a view to being well-informed and to test whether investment offers comply with existing laws.
“We are currently undertaking work to examine private credit and the risk for retail investors more closely. This includes a thematic surveillance of retail private credit focused funds, reviewing governance and practices relating to disclosure, distribution, conflicts, valuations and credit risk management.
“Retail investors can face significant harm if persons operating businesses that on-lend retail investment monies fail to comply with the law, as evidenced by issues that have arisen in the past in relation to debentures and managed funds.
“The private credit market does not appear to be systemically important in Australia, but failures are on the horizon, and at current volumes it is untested in prior crises; regulators need to consider the risks and plan responses.”
However, ASIC chair Joe Longo said he still wants to encourage retail participation in private markets as he believes it can offer them access to diverse wealth opportunities. Nevertheless, it is critical to ensure there are high standards that can be balanced with investor protection.
Work is already underway on ensuring providers are meeting their existing obligations around licensing, design and distribution obligations (DDO), and credit risk management, as well as thematic surveillance of retail private credit funds.
AUTHOR
Laura Dew
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