Who actually receives the return? The economics investors cannot see in private credit

Executive Summary

The Australian Securities and Investments Commission released Report 846, Private credit funds: Do investors know what they’re getting?, on 10 November 2026. It identifies persistent weaknesses in transparency, governance, fee arrangements and investor protection across the sector, and it does so in terms that are difficult to read as anything other than a second warning: many of the deficiencies identified in ASIC’s November 2025 Report 820 remain unresolved.

ASIC examined 24 retail and wholesale credit funds managing approximately $18 billion, alongside 46 financial advice cases involving 19 advisers. Its findings suggest that some investors may be carrying substantial credit, liquidity and capital risks without adequate disclosure of either their true exposures or the economic benefits retained by fund managers and associated entities.

For a research house, the most consequential finding is not a list of breaches. It is that the figure most commonly used to compare managers — the disclosed management cost — may describe only part of what a manager and its associates actually earn from a loan book. If that is so, comparisons of fees, risk-adjusted returns and alignment of interests between managers can be distorted without any individual disclosure being untrue.

Investors supply the capital and bear the credit losses. ASIC’s question is who receives the rest.

Exhibit 1: The Surveillance in Numbers

Source: ASIC REP 846, pp. 8–10; Foresight Analytics. Findings relate to ASIC’s surveillance sample, not the entire private credit industry.

The Finding That Reframes Fee Comparison

ASIC found that only two of the 24 funds reviewed passed the full economic benefits of interest and borrower fees to investors. In one example, undisclosed borrower fees, interest margins and default interest retained by a related-party lender exceeded four times the fund’s disclosed management costs. For every dollar distributed to investors in that fund, the related party received approximately 38 cents during the relevant year.

The mechanism matters more than the multiple. A borrower does not pay a fund; a borrower pays into a structure. Interest, establishment charges, servicing fees, interest margins and default penalties can each be collected at a point before the fund, by the manager or by an entity associated with it. What arrives at the fund is the residual, and the management cost is charged on that residual.

Exhibit 2: Where the Borrower’s Payments Go

Source: ASIC REP 846; Foresight Analytics.

These arrangements are not necessarily inappropriate in themselves. Origination and servicing are real functions and can legitimately be paid for. The difficulty is that inadequate disclosure of them makes the resulting economics invisible to the one party that cannot observe the loan directly.

A disclosed management cost can be accurate and still describe only a fraction of what a manager and its associates earn from the same loan book.

What a Management Expense Ratio Does Not Capture

If the management expense ratio measures only one of two revenue streams, then the standard comparison between two managers is not a like-for-like comparison. A manager charging a visibly higher management cost but retaining nothing elsewhere may be cheaper, in the only sense that matters to an investor, than a manager charging less and collecting more upstream.

Reconciling the two measures is not conceptually difficult, but it depends on information the manager must choose to provide. It means beginning with what borrowers paid in aggregate over a period — interest, establishment and servicing charges, margins and any default interest — and tracing each component to the entity that received it. The difference between that gross figure and what the fund recorded as revenue is the amount retained before the fund. A manager comfortable with its own arrangements can produce that reconciliation from records it already keeps; reluctance to produce it is itself informative.

Exhibit 3: Two Ways of Measuring the Same Manager

Source: Foresight Analytics, drawing on ASIC REP 846.

The fourth row deserves attention. Where default interest and workout charges accrue to a related entity, a deteriorating loan can generate revenue for that entity at the moment the fund’s own position is weakening. That is not a prediction of behavior; it is a description of an incentive that diligence should identify and test.

Structure as a Risk in Its Own Right

Eighteen of the 24 funds operated through multiple layers of intermediary entities. ASIC raised concerns about complex corporate structures, special-purpose vehicles, related-party exposures and transactions between funds controlled by the same management group.

Complexity is not misconduct, and layered structures exist for sound reasons including security, tax and funding. But each additional layer places distance between the investor and the asset, and distance is where verification fails.

Exhibit 4: What Each Additional Layer Obscures

Source: ASIC REP 846; Foresight Analytics.

Inter-Fund Transfers and Transmitted Stress

ASIC documented separate examples in which approximately 17 per cent and 15 per cent of fund assets were transferred between related funds within a single year without full investor disclosure. A transfer of that scale is not an administrative matter. It changes what a fund holds, and it does so between two vehicles whose investors have no relationship with one another.

Exhibit 5: What an Inter-Fund Transfer Can Move

Source: ASIC REP 846; Foresight Analytics.

The concern extends beyond conflicts of interest. Inter-fund transactions can transmit losses, liquidity stress and valuation uncertainty across products that are marketed to investors as separate.

Where the Capital Structure Is the Conflict

One of the most consequential examples in Report 846 involves affiliated funds holding different-ranking interests in the same borrower or property development — senior debt, mezzanine debt and equity. Such structures can be commercially legitimate. They become a governance problem at the point of distress, because the decisions that follow are no longer neutral between the manager’s own funds.

Exhibit 6: The Same Decision, Seen from Two Ranks

Source: Foresight Analytics, drawing on ASIC REP 846.

ASIC also documented a transaction in which a fund purchased the interests of external co-investors, enabling those investors to exit while increasing the remaining fund investors’ exposure to the same loan. The transaction may have been properly priced. The point for diligence is that the manager was on both sides of a decision about who stayed and who left.

What Retail Investors Were Told

Nine of the 12 retail funds reviewed failed to clearly disclose important information about underlying assets, structures or risks. Ten of the 12 had target market determinations that ASIC regarded as poorly designed, and three funds used marketing materials that overemphasized returns, stability, liquidity or capital preservation.

The particular concern is the positioning of private credit as an alternative to traditional fixed-interest products or term deposits without adequately explaining the differences. A term deposit is a claim on a bank. A private credit fund is a claim on a pool of loans that cannot be readily liquidated.

Exhibit 7: Where the Comparison Breaks Down

Source: ASIC REP 846; Foresight Analytics.

These risks are most acute where a fund offers frequent withdrawals while holding loans extending over several years. Liquidity risk should therefore be assessed independently from historical return volatility: a fund displaying stable monthly unit prices may nevertheless carry substantial latent credit and liquidity risk.

Concentration in Financial Advice

ASIC’s surveillance of 46 advice cases involving 19 advisers found a strong relationship between excessive portfolio concentration and inadequate evidence of compliance with the best interests duty. In one case an adviser recommended an allocation of 87 per cent to a single private credit fund. In another, a conservative investor intending to purchase a home was advised to place half her available funds into a private credit investment, without adequate justification of the additional risks.

Exhibit 8: What the Advice Findings Do and Do Not Establish

Source: ASIC REP 846; Foresight Analytics.

The distinction is worth preserving. Treating a percentage as a regulatory ceiling would miss the finding, which concerns the quality of the reasoning behind an allocation rather than its size alone.

From Warnings to Orders

The surveillance has already generated six interim stop orders and multiple referrals for further investigation. ASIC identified disclosure or target market determination concerns involving products operated by Australian Secure Capital Fund, Murdoch Clarke Mortgage Management, Melbourne Securities Corporation and Fidante Partners, and subsequently revoked the interim orders after the responsible entities addressed the concerns.

These interventions should not be read as findings that every product operated by the named entities is deficient, nor as evidence that a disclosure problem establishes a credit default.

Exhibit 9: The Direction of Regulatory Travel

Source: ASIC REP 846; Foresight Analytics.

The Unfinished Business of Report 820

The most uncomfortable feature of Report 846 is its continuity with what came before. Deficiencies identified in November 2025 persist in November 2026, through a period of heightened regulatory scrutiny and growing evidence of borrower stress across segments of the market.

For a research house this changes the weight that should be given to a manager’s own assurances. Where a regulator has described a practice as deficient and the practice continues, the burden of demonstrating that a particular manager is an exception properly sits with the manager, and the evidence should be documentary rather than conversational.

That distinction is practical rather than rhetorical. A manager asserting that its arrangements differ from those ASIC describes is making a claim capable of being evidenced: by a reconciliation of borrower economics to fund revenue, a related-party transaction register, the instructions given to valuers, the minutes of the committee that approved an inter-fund transfer, and the target market determination as it actually reads rather than as it is summarized. Each of those documents already exists inside a well-run manager, which is what makes them a fair test. A diligence process that accepts a description in their place has not examined the thing the regulator identified.

The Foresight Private Credit Diligence Framework

Report 846 reinforces the case for moving beyond fund assessment based predominantly on historical returns, manager experience and reported volatility. Foresight considers the following seven areas essential to assessing the quality, resilience and investor alignment of a private credit strategy.

Exhibit 10: Seven Pillars of Private Credit Diligence

Source: Foresight Analytics.

Assessment should also incorporate forward-looking stress scenarios examining defaults, loss given default, collateral impairment, liquidity restrictions and potential reductions in distributions. That is especially relevant in commercial real estate debt, where development delays, higher financing costs and refinancing constraints can deteriorate borrower creditworthiness quickly.

The seven pillars are not independent of one another, and the interactions are usually where the risk sits. A structural weakness becomes a valuation problem when assets move between related funds at prices nobody outside the group has tested. A valuation problem becomes a liquidity problem when a unit price that has not moved invites redemptions the portfolio cannot fund. A liquidity problem becomes a suitability problem when the investors presenting for redemption were told the fund behaved like fixed interest. Assessed pillar by pillar in isolation, each of those steps can look acceptable; it is the sequence that produces the outcome investors experience.

Questions for Investment Committees

The following questions are designed to be answerable from documents the manager already holds. Each asks for evidence rather than assurance, and each is drawn from a finding in Report 846 rather than from a general principle. A manager that cannot answer within the four domains below is not necessarily deficient, but the gap is itself a diligence finding and should be recorded as one.

Exhibit 11: Questions for Investment Committees

Source: Foresight Analytics.

Diligence Spotlight Takeaway

Report 846 should not be read as evidence that private credit is unsuitable for investors. The asset class continues to finance Australian businesses and property projects, and it can offer diversification and attractive income. What the report makes clear is that governance and transparency practices have not consistently kept pace with the sector’s growth.

The central issue is not the possibility of borrower default, which is inherent in credit investing. It is whether investors understand the economic risks they are assuming, the protections available when loans become impaired, and how the financial incentives are distributed across managers, intermediaries and other stakeholders.

Foresight expects manager differentiation to become more pronounced as credit conditions tighten. Managers demonstrating underwriting discipline, transparent fee arrangements, independent governance and robust liquidity management should be better placed to retain investor confidence. Opaque structures, undisclosed economic benefits, weak conflicts management and inappropriate distribution practices warrant heightened scrutiny.

For advisers, institutional allocators and research houses the regulatory message is unmistakable: a private credit rating must assess the integrity of the investment structure and its governance as rigorously as the creditworthiness of the underlying loans.

Source: ASIC, Report 846, Private credit funds: Do investors know what they’re getting? 10 November 2026. Foresight’s analytical observations and proposed diligence framework are independent interpretations of the regulatory findings. ASIC’s sample-based observations should not be extrapolated mechanically to all private credit funds.

About Foresight Analytics & Ratings

Foresight Analytics, an independent Sydney- based firm, provides investment ratings, data analytics, assurance and advisory solutions to leading investment management companies, superannuation funds and wealth groups across the Asia Pacific.

Foresight’s innovative, evidence-based approach blends both human and forensic insights into the analyses of economies, markets, themes, investments products and portfolios. Foresight Analytics was founded in 2015 by Jay Kumar, a former executive of Morningstar, Optimix Investment Management, ANZ Wealth & Private Bank and the Reserve Bank of Fiji.

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