Melbourne Securities Corporation’s Remara Cash Management Fund was self-assessed as low-risk and marketed as suitable for up to 75 per cent of a retail portfolio. ASIC disagreed.
On 22 September, the regulator issued interim stop orders against three of the fund’s products, saying its target market determination (TMD) was deficient and that retail investors risked being sold something that did not suit their objectives, financial situation or needs.
At a Commercial & Asset Finance Brokers of Australia (CAFBA) summit in Sydney last week, ASIC Commissioner Simone Constant said private credit governance, controls and underwriting standards have not kept pace with the sector’s growth, and that the regulator is now well beyond warnings. ASIC has multiple enforcement investigations underway and is running active surveillance across wholesale and retail funds, she said.
ASIC published 10 principles for “private credit done well” in Report 823: Advancing Australia’s evolving capital markets, covering stewardship, governance, transparency, fees, conflicts of interest, valuations, liquidity and credit risk.
Constant said she expects boards and investment committees to use the principles as a benchmark for self-assessment and to embed them into decision-making, not treat them as optional. She asked how many boardrooms and investment committees had actually discussed the principles or built them into their own decision-making, and if not, why not.
If a manager has not assessed its fund against them, or will not say whether it has, that is the first red flag.
“As a starting point, we articulated a set of 10 principles of private credit done well – to assist industry in understanding ‘what good looks like’,” Constant said.
“Our expectation is that firms use these principles as a practical benchmark for self-assessment and uplift. And we expect boards and investment committees to consider how funds measure up against them and to embed the 10 principles into their decision-making.
“And so, I ask the question… : How many of you have discussed these principles in your own boardrooms or investment committees? How many of you have embedded these into your own decision-making? And if not, why not?”
Constant said some of the poorer practices across the industry – including “opaque remuneration and fee structures, inadequate governance arrangements, poor valuation practices, ineffective disclosure” – were “concerning and demanded scrutiny”.
Constant said ASIC reviewed 28 private credit funds and found only four disclosed the interest rates charged to borrowers. Less than half had adequate credit or default management policies, and most had no separation between the people approving loans and the people assessing their ongoing performance, she said.
“Less than half had detailed credit or impairment and default management policies in place. Most funds did not have adequate separation between those approving loans and those responsible for independently assessing their ongoing performance and value. And of the wholesale funds, only two performed stress testing as part of their liquidity risk management.
“These were clearly red flags, particularly when we think… about the critical risks to be managed in private credit – credit and liquidity risk – and the fundamental importance of course, of effective disclosure when we’re seeing such a widespread growth in the sector.”
Only two of the wholesale funds stress-tested their liquidity risk. Constant said these were clear warning signs, given how much rides on credit risk, liquidity risk and effective disclosure in a fast-growing sector.
Offering regular redemptions against illiquid, multi-year property loans creates a fragile product design that breaks down under pressure. Clarity is needed on borrower arrears, interest capitalisation, developer exposures and the exact rules governing redemption queues before a client’s capital, or their access to it, is at risk.
Constant said the collapse of Bathla showed $3.4 billion from more than 40 lenders funnelled through around 540 special purpose vehicles (SPVs). Related-party arrangements and SPVs can hide conflicts of interest that even sophisticated investors do not see, she said.
If a manager cannot explain the structure in plain terms, do not recommend the product until they can.
Constant said real estate lending makes up 40 to 60 per cent, or more, of Australian private credit. Property is not the weakest link, poor practice is, she said, but a fund concentrated in construction and development lending needs deal selection, counterparty diversification and liquidity buffers that match the cycle it is exposed to.
Constant said ASIC welcomed the Financial Services Council’s Private Markets Best Practice Standards, released in August, as a constructive first step. It is a second, industry-built reference point to check a manager against, alongside ASIC’s 10 principles.
ASIC’s 10 principles for private credit funds done well
1. Stewards of other people’s money
Responsible entities and trustees act as stewards of investor capital, ensuring that their decisions are fair and in investors’ best interests.
2. Organisational capability
Human, financial and technological resources are adequate. REs and trustees operate efficiently, honestly and fairly.
3. Transparency
Investors have access to timely, transparent information on investment strategy, exposures, valuations, risks and fees.
4. Design and distribution
Design and distribution practices are fair, transparent and appropriately targeted for investors.
5. Fees and costs
Fees and costs are fair and transparent, giving investors and borrowers a clear view of total costs.
6. Conflicts of interest
Conflicts of interest are identified, disclosed and effectively managed or avoided.
7. Governance
Structures, processes and people promote sound decision-making, compliance and accountability.
8. Valuations
Valuations are fair, timely and transparent, with robust governance.
9. Liquidity
Liquidity risk is effectively disclosed and managed, avoiding structural mismatches, with fair redemption terms aligned to portfolio liquidity.
10. Credit risk
Credit risk is effectively managed across loan origination, portfolio construction, monitoring, impairment, default and repayment.
Source: Report 823: Advancing Australia’s evolving capital markets
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