As regulatory pressure mounts on private credit funds, some in the advice profession have begun to re-assess the application of the asset class in client portfolios.
Arch Capital financial adviser Nigel Baker says he gets “emails every day” from various private credit fund managers.
“My big concern is that it should never have been in the retail space, so we don’t use it,” Baker tells Professional Planner.
The Australian Financial Review reported on Tuesday that Count has recommended its advisers sell holdings in at least three funds run by Metrics Credit Partners.
Professional Planner understands this was triggered as part of an internal review of licensees Count acquired from Diverger after to re-assess product lists post-acquisition.
Count’s oversight appears as private markets, particularly private credit, look likely to come under deeper scrutiny from the corporate regulator.
ASIC released a whitepaper in February, seeking feedback on how to better regulate the private market sector.
The regulator noted the growing interest in private credit in recent years and said it believed “failures are on the horizon”. It is undertaking work to examine private credit and risks to retail investors, including thematic surveillance of retail private credit-focused funds.
Additionally, the Reserve Bank of Australia and International Monetary Fund have raised concerns about potential “liquidity mismatches” from private market investments, particularly private credit.
Koda Capital chief investment officer Norman Zhang told the Professional Planner Researcher Forum in December last year that getting private market investments wrong could lead to compounded double-digit losses annually.
But Arch Capital’s Baker says his biggest concern with the asset class is liquidity.
“If people start selling then you want to be the first out,” he says.
“Underneath the bottom of all these things, in my view, is investments that aren’t suitable or understood by retail clients and probably not understood a lot by the actual advisers advising them.”
Evalesco CEO and adviser Jeff Thurecht says the firm has never allocated client money to private credit because they have “always” had concerns with illiquidity risk being the leading factor.
“Consider that many of the Australian offerings are real estate focused, including development and mezzanine finance, and as such the underlying security assets are inherently less liquid and higher risk than perhaps their label suggests,” Thurecht says.
“As we have seen over the years across a range of ‘bubbles’ as more money flows into the sector it can encourage more risks to be taken because quality opportunities are thin on the ground and the money needs to go somewhere.”
Advice ‘will cop it again’
Baker is also concerned about the impact failed private credit funds will have on the advice community.
“When things do crack, it’s not going to be pretty and it would be sad to see because the financial advice industry will cop it again because it will be [people saying] what are the planners doing selling this stuff,” Baker says.
Moran Partners Financial Planning principal Paul Moran says he has confidence in Metrics as a manager but still has concerns about others attempting to gain a foothold in the sector when they don’t have the expertise.
He adds there “very big and very obvious differences between what are highly reputable operators” compared to those who have come in late to take on the tailwinds of the private credit trend.
“We’ve been using Metrics users for a long time, and we see no reason to shift from Metrics,” Moran says.
“We think they’ve got a good handle on how they operate, they got a lot of experience, but there’s others out there who are just collecting money, just raising funds because there was an opportunity.”
In a statement, Metrics says the firm is “very proud of the strong performance outcomes we’ve delivered for investors”.
“Private Credit is growing because the asset class is meeting the needs of a large investment cohort, in particular those seeking an allocation that can provide capital stability, income, and portfolio diversification,” a Metrics spokesperson says.
“We strongly believe this growth has a very long way to go. We welcome any advisers to speak with our team should they want to learn more about this asset class.”
Count’s research partner Lonsec had given “recommended” ratings to several Metrics funds.
The researcher declined to comment on Metrics specifically, but a spokesperson says they are about to commence a review into alternatives, as part of their regular review cycles and it is anticipated the operating environment will be an agenda item.
Lonsec currently researches and rates 28 private credit funds, 20 of which are Australian private credit, including Metrics.
A research note published this week by Darrell Clark, the firm’s deputy head of research and sector manager for alternatives, said that while the asset class has benefits it also carries risks related to illiquidity, valuation governance and leverage.
Zenith Investment Partners, who also reviews the Metrics funds, said it wouldn’t comment on the ratings of specific funds.
Client interest
Baker says he doesn’t get any requests or feedback from clients who specifically want private credit in their portfolios.
“I think that’s BS when the industry says that,” Baker says.
“I’ve been around 25 years, and I don’t have clients coming in telling me they want to invest in private credit. It’s advisers, because they’re selling stuff that’s being sold to them. You don’t need it, it’s not required for a retail client.”
Baker says private credit managers have a right to make the product, but it’s not suitable for most retail clients. “This is a higher risk investment,” Baker says.
“It doesn’t look and feel like cash; it’s nothing like it but that’s what it is being presented as in a portfolio.
“We’ve all been around long enough to see what happened in the GFC. I’m not saying I’m predicting that’s around the corner but when that happens…you see people trying to get out of products like that and they can’t, and that’s very painful for people who don’t have the means to survive without that allocation.”
Likewise, Thurecht says that while for wholesale and wealthier clients the risk may be acceptable if it is priced correctly, retail clients can rarely afford to tolerate frozen funds in their portfolios.
“That being said using private credit or anything with a hint of being ‘private’ or ‘unlisted’ in managed accounts that are designed to be liquid is fraught with danger, and something we will consistently avoid,” Thurecht says.
*Article was updated on 20 March 2025 to include response from Metrics provided after initial publication.
The issue with this sector is so many providers seem to take a “direct to retail consumer” approach as their default sales strategy. The investors may feel they are winning by going direct (cutting out middle man – not paying for product advice), without appreciating the vetting of an investment product a professional adviser is required to do.
In the event of a product failure, advisers will no doubt be held to account – as they should be. The concern I have is for the vast number of unadvised retail investors that decided going direct was a sensible strategy!