The alert, covered by Money Management last week, has been enacted by the research house in light of increased issues affecting wholesale funds and newer launches. It flagged this is likely tied to the growing number of Australians who qualify as sophisticated wholesale investors, a topic that recently came under parliamentary scrutiny.
The alert means SQM is increasing its active monitoring of the sector and placing a greater emphasis on governance and increased due diligence screening of the funds.
It currently has ratings on 70 private credit funds covering retail and wholesale funds, representing $33 billion in funds under management. This includes funds investing in mortgages, unconstrained fixed income, diversified credit and alternative private debt.
However, it has screened out 20 fund offerings within the sector which primarily sit in the wholesale space.
One reason, it said, is the use of dubious marketing strategies involving financial advisers. Another is the lack of transparency around issues such as who the borrowers are, the subfund holdings or the group financials.
Other problems include:
- Lack of independence at board/investment committee level.
- Products being offered with a mismatch between stated liquidity and the underlying liquidity of the loan assets.
- Highly leveraged balance sheets.
- Questionable categorisation of asset holdings.
- Sizeable interest rate margins not being passed onto investors.
Managing director Louis Christopher said: “We have an expectation that wholesale funds provide the same transparency as retail funds. On that front, there is no question there has been a rapid increase on wholesale fund offerings which we think has been driven in part by a rapid increase in the number of Australians who now qualify as a sophisticated wholesale investor/high-net-worth individual; the threshold of which is still set at $2.5 million in net assets or a gross income of $250,000 per annum.
“As our financial regulators have stated in recent months, there is a clear link between weak governance and poor outcomes for investors. And so, while we have throughout our ratings research history placed an emphasis on fund governance, we are determined more than ever to reduce the risks for investors by taking an increasingly cautious approach to potential governance issues.
“It must be stated there is no imminent event that SQM Research is aware of that may trigger a series of fund failures, and that overall SQM Research expects the sector to weather current challenges. The private markets sector has a positive future in front of it as there are genuine opportunities for investors.”
