'Clock is ticking' as ASIC warns private credit sector investors could bail
Simone Constant has fired a shot across the bow of Australian private credit. (ABC News: John Gunn)
ASIC commissioner Simone Constant has fired a shot across the bow of Australian private credit, warning the clock is ticking on poor lending practices.Β
Meanwhile, a private credit investor has told the ABC a contagion or run of funds in the industry remains "possible" should more investors worry about retrieving their money from funds.
Ms Constant will speak today at a gathering in Sydney hosted by the Commercial and Asset Finance Brokers Association.
ASIC has signalled there is no time to waste in preventing an Australian private credit crisis.
Today, ASIC commissioner Simone Constant will tell a gathering in Sydney hosted by the Commercial and Asset Finance Brokers Association (CAFBA) that the "clock is ticking" on "whether we see broader credit stress or not" in Australia.
The collapse of NSW property developer Bathla has highlighted how private lenders are exposed to financially vulnerable construction companies.
Bathla continued running high-profile promotions during its decline. (Supplied: Instagram)
CVS Lane First Mortgage Fund and CVS Lane Property Finance Fund had exposure to Bathla across nine different loans.
"Our work has shone a light on the weaknesses in private credit, but despite our ongoing calls for uplift across the sector, too many have been too slow to respond," Ms Constant said.
"And what we're seeing now, as some of those weaknesses are tested at scale for the first time by current conditions, are the first significant cracks β the first stress fractures β beginning to emerge."
Private credit is any lending outside the banking sector.
While returns are relatively high, they come with risk, and it's growing.
One estimate has the sector domestically growing by 500 per cent over the decade, according to ASIC.
"But governance, controls and underwriting standards have not kept pace with this growth," Ms Constant said.
"The collapse of Bathla reinforces why strong governance, effective oversight, clear disclosure and accurate valuations are critical.
ASIC commissioner Simone Constant, ASIC executive director of markets Calissa AldridgeΒ and ASIC chair Joe Longo. (Supplied:ASIC)
Over the past 18 months, ASIC has intensified its scrutiny of private credit, beginning with its discussion paper on public and private markets.
"It was illuminating," Ms Constant said.
"The poorer practices β opaque remuneration and fee structures, inadequate governance arrangements, poor valuation practices, ineffective disclosure β were concerning and demanded scrutiny.
It painted a seriously concerning picture.
"These were clearly red flags β particularly when we think about the critical risks to be managed in private credit such as credit and liquidity risk, and the fundamental importance of effective disclosure in such a widespread and growing space," Ms Constant said.
The second report assessed private market reporting practices globally.
It found Australia falls well south of the line of information and disclosure of other comparable jurisdictions like Singapore, the US, the UK and even Switzerland.
But Wall Street is ground zero for the alternative investment market and there are fears this massive, risky US private lending ship is sinking and investors are jumping out.
"Globally funds under management have quadrupled in a similar time frame and it's estimated that there are now more private equity funds in the US than McDonald's stores," Ms Constant said.
Global investment bank Morgan Stanley announced late last week it was curbing redemptions at its nearly $US7 billion ($9.5 billion) private credit fund again in the third quarter.
Investors requested more than twice the amount the fund was willing to repurchase.
The Morgan Stanley building in Times Square in New York City. (Reuters: Brendan McDermid)
The North Haven Private Income Fund capped withdrawals at 5 per cent after investors asked to pull 11.4 per cent of shares, according to a shareholder letter.
But the private credit risks for Australia are growing too, especially in the real estate and construction sectors.
And millions of Australians are exposed to private credit β some through direct fund investment, others through shares in credit fund managers, but many through their superannuation fund.
FinCap executive chairman Christian Ryan told the ABC that a contagion or broad, rapid exit of cash out of the sector was "possible".
"That is why some funds are getting ahead of this given the general negative sentiment in the sector," Mr Ryan said.
That is, Mr Ryan said, some funds locally have begun to limit redemption as a precautionary measure to prevent investor panic.
But, he said, many private credit funds are well run by their managers.
"There are losses from time to time and being a credit manager, it is about limiting this risk as much as possible before investing," he said.
"I do know that many of the fund managers have great people that will be doing whatever they can in the background to look after investor funds."
Speaking at a federal parliamentary hearing on Friday, Reserve Bank governor Michele Bullock also indicated Australian private credit risks were being contained.
Reserve Bank governor Michele Bullock indicated Australian private credit risks were being contained. (ABC News: Tobias Hunt)
"Our assessment is that, on the whole, the non-bank lending activity we've observed is helping to, for instance, provide the financing that's important for greenfield construction, but we don't have a strong sense that there's been a systematic weakening of lending standards," Ms Bullock said.
"Our assessment there would be that any weakening in lending standards in that segment are primarily going to be a problem for investors who invested in those funds.
"It doesn't speak to a systemic issue," she said.
Simone Constant will speak today at a gathering in Sydney hosted by the Commercial and Asset Finance Brokers Association. (ABC News: Billy Cooper)
The corporate cop is not taking any chances on private credit and the risks it may pose to the financial system.
"We're now beyond warnings," Ms Constant said.
"The sector should prepare for enforcement action."
The next step, Ms Constant will tell the gathering today, is for other industry associations to develop and adopt their own compliant, good practice standards and of course for the member funds themselves to sign up to them.
"Even without the associations, our road map is there," she said.
"If you are a private credit fund who hasn't assessed yourself against our ten principles of private credit done well, ask yourselves β why not?
