ASIC has published a report on the private credit market in Australia (Report 814) which identifies areas for industry and regulator attention.
Private credit complements other sources of debt financing for businesses, including banks and public markets.
The report concludes that segments of the market targeting wholesale investors using the ‘sophisticated investor’ exemption and retail-based offerings, including platforms, have practices that do not compare favourably against international practice.
It says that lenders in these segments are more likely to have conflicts of interest, opaque fee and interest margin arrangements, inconsistent and non-independent valuation methodologies, and ambiguous terminology. These practices are more prevalent in real estate–based funds.
ASIC says that in November, it will release findings from ASIC’s private credit surveillance across retail and wholesale funds. Building on REP 814, this release will include two additional expert reports, along with its responses to the surveillance findings, expert insights and stakeholder feedback.
ASIC will outline guidance principles for compliant private credit and provide a future roadmap that includes industry standards and future surveillance activity.
The report says that investors in private credit are, in most cases, appropriately rewarded for taking sub-investment grade credit risk and maturity/liquidity risk; however, these risks are not always adequately described in offer documents and subsequent performance reporting.
The report does not make a judgment on whether managers are complying with their obligations under Section 912A of the Corporations Act 2001 for Australian financial services licences (AFS licences) or managed investment schemes.
The report does not discuss AML/CTF Compliance.
This report highlights four key areas of operation that require improvement.
- Conflicts of interest
Conflicts are prevalent across fee structures, valuations, related party transactions and loan structuring. - Fees and remuneration
Fee and remuneration structures in the sector vary widely and are often opaque and not quantified. - Portfolio transparency and valuations
Valuation practices and portfolio disclosures are inconsistent. This may have implications for reported performance and investor risk assessments - Terminology
Key terms are inconsistently defined, creating investor confusion.
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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.
