Morningstar ups private credit research amid fund boom

Morningstar has become the latest research house to express concern about private credit funds, suggesting it is conducting further checks before dealing out a fund rating.

Speaking at the firm’s investment roundtable on 25 November, attended by Money Management’s sister brand Investor Daily, Matt Olsen, Morningstar director of manager research ratings, said it is important for a ratings house to consider how a fund markets and distributes itself as well as its investment performance and portfolio.

ASIC has already issued interim stop orders against three fund managers for problems with their target market determinations (TMDs) and how they were being marketed to investors. These temporarily prevented the funds being distributed until changes were made to ensure protection of retail investors.

These included two from La Trobe, one from RELI and one from TruePillars Investment Trust.

Olsen said: “If there were, for example, situations when there was distribution of a product with misaligned incentives, that’s something that might be a red flag.

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“Not wanting to get specific on any type of fund but you need to look at how it is being marketed, is it being properly represented to the market, does it have the appropriate target market determination and appropriate representation with respect to risk-return objectives and who the investor is? Getting a sense of those types of things is important to consider.”

While he didn’t specify a particular asset class facing these problems, he said private credit and private equity funds were “on everyone’s mind” at the moment.  

Morningstar has already launched a methodology for rating semi-liquid funds and it is expected this will be expanded into other asset classes in due course.

Olsen’s comments follow earlier ones made by research houses Lonsec and SQM around the escalating number of fund managers launching funds in this space, particularly as many lacked the necessary track record or experience of having managed these funds across a full market cycle.  

ASIC has also issued its own report into the sector, particularly from the perspective of retail investors and questioned how these complex funds are reaching the retail market and whether research houses play a role.  

ASIC observed private credit researchers relied heavily on fund operators and investment managers to provide data and information, and have limited capacity for independent verification.

Researchers’ assessments tended to prioritise governance structures and investment strategy over direct credit risk analysis. Furthermore, the researchers ASIC engaged with highlighted a lack of standardisation in valuation and provisioning practices across the Australian market, raising concerns about transparency and consistency.

“Given the considerable influence a rating can have on a fund’s distribution and an investor’s decision, research houses hold a unique position within the market. This role enables them to potentially drive improvements across critical areas such as fund governance, valuation practices, risk management practices and disclosure standards.  

"It is therefore important for research houses to ensure the robustness of their ratings processes in the private credit market, to help influence industry practices and support trust and confidence in this market,” ASIC said.