A welcome scrutiny: why ASIC’s review could be a turning point for private credit

ASIC’s current deep dive into private credit isn’t a warning shot, it’s a recognition that the market has matured enough to warrant one. For serious managers and informed investors, this scrutiny is welcomed.  

A moment of maturity

Private credit in Australia has grown rapidly over the past decade, fueled by wholesale and institutional investor inflows, growing adoption by retail investors and a wide variety of lending opportunities driven in part by bank inefficiencies and in part by a funding need that has never been met by the banks.

With that growth comes responsibility. ASIC’s Report 814: Private Credit in Australia marks the first formal attempt to map this expanding market: Its participants, practices, and risks. Far from a rebuke, it reads as acknowledgement that private credit is now large enough, and important enough, to matter to regulators, borrowers and investors alike.

For the industry’s best-run managers, there are few surprises. Much of what ASIC has identified (around valuation transparency, conflict management, liquidity discipline and fee disclosure), are areas Epsilon has been discussing publicly for some time. The difference now is that these topics have moved from the footnotes of conference panels into the mainstream of regulatory discourse.

What ASIC saw

Report 814 highlights the diversity of what falls under the “private credit” label (corporate loans, asset-backed finance, property lending), and notes that governance and disclosure standards vary widely across them. Among ASIC’s sharper observations were calls for:

• clearer disclosure of return constituents (cash yield versus capital or valuation-based gains);
• more frequent and independent asset valuations;
• greater transparency on remuneration earned by fund managers and related-party dealings; and
• consistent use of terminology such as senior, secured and investment grade.

None of these points should unsettle experienced managers. In fact, they reflect the very foundations of sound lending: Cash-based returns, transparent valuations, and aligned incentives.

Alignment with Epsilon’s approach

In past articles Epsilon has explored several of these same issues: How returns should be decomposed between income and capital; why valuations should reflect borrower-specific fundamentals; and, credit risk ratings that are driven by credible third-party models.

It is encouraging to see those themes now echoed in ASIC’s findings. The regulator’s language around “clear disclosure of return components” could have been lifted directly from our own discussion on “Don't Look Down: The risk beneath the return” a few months ago.

This alignment isn’t about self-congratulation. It simply suggests that the market’s conversation is maturing and that investors, regulators and managers are beginning to speak the same language about risk, return and transparency.

Why oversight is good for everyone

Scrutiny and trust are not opposites, they are sequential. The closer ASIC looks, the more credible disciplined managers become.

Markets with clear standards attract longer-term capital, lower financing costs, and greater borrower diversity. It is the same evolution that listed markets went through decades ago, from opacity to disclosure, from individual reputation to codified trust.

For investors, this report is an invitation to ask better questions:

• How independent are my manager’s valuations?
• How much of my return is cash yield versus capital gain?
• How is my manager earning its revenue?
• How are conflicts managed when funds share exposures?
• What happens if everyone asks for liquidity at once?

A healthy market welcomes these questions and answers them with hard evidence, not adjectives. And this conversation should rightly culminative in an effort to quantify the risk of the investment by asking what the expected loss should be through market cycles. As ASIC rightly said, “it is inconceivable that some funds show no history of impairments”.

The path forward

ASIC’s work doesn’t end with Report 814’s publication. Surveillance, further guidance, and perhaps selective enforcement actions and new disclosure expectations may follow. We’ll write some more about this in the coming weeks and months. Stay tuned!

But the tone of Report 814 is constructive, not punitive, and call for industry adopted standards rather than prescription. ASIC has called on leading industry bodies such as AIMA and FSC to demonstrate credible self-regulation. There are already great examples of this in place, with AIMA’s best practice guide to valuations readily available to all. If industry can lead the way we can help shape a framework that supports growth rather than stifles it.

Private credit isn’t a peripheral asset class anymore, it’s centre stage. Whilst we expect the click bait headlines to continue on the sector, context is important. ASIC’s scrutiny is sensible and critically, acknowledges the growing role that private capital plays in Australia. The future of this market depends not on how well private capital providers defend themselves, but on how transparently and responsibly we earn trust.