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The regulator is increasing its focus on private credit in an effort to identify risks.
The Australian Securities and Investments Commission (ASIC) has issued a warning about the private credit market, saying that “failures are on the horizon, and at current volumes it is untested by prior crises”.
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In a discussion paper exploring the changing dynamics in capital markets published on Wednesday (26 February), ASIC said that while the private credit market does not appear to be systemically important in Australia, it had concerns about the space.
ASIC said that regulators needed more information to consider the risks and plan responses.
In the discussion paper, the watchdog said that growth in private credit has been an area of particular interest globally and is at historically high levels in Australia, but subject to less regulatory oversight compared to private equity and leveraged loans.
ASIC said: “This combination of risk factors is untested in historic stress scenarios making it critical that regulators and participants understand the associated risks.”
The regulator said that private markets operate across borders and private markets in Australia are subject to the transmission of risk from markets outside the country.
“There will be more failures in private credit investments, and Australian investors will lose money,” ASIC said.
“With the assets under management (AUM) of private equity and private credit funds at historic high levels, there is also no reliable data or precedent for forecasting how these interwoven tiers of private investment and leverage would perform and respond in a large-scale industry stress or ‘workout’ situation.”
In response, ASIC said it would increase its focus on private credit, not to constrain participation, but with a view to being “well informed and to test whether investment offers comply with existing laws”.
ASIC chair Joe Longo said more information was needed in response to concerns about the private credit market.
“We note our international peer regulators have access to more reliable and recurrent data on private markets to enhance their transparency. This makes it easier to identify risks as well as opportunities,” Longo said.
“At present, ASIC’s data and information gathering powers are inefficient and incomplete. We simply can’t do our job properly if we are in the dark.”
ASIC said it was increasing its surveillance of private market activity by focusing on:
- Corporate advisers – governance arrangements; the management of conflicts of interest, staff and insider trading; and the protection of confidential information.
- Wholesale private equity and private credit funds – governance; valuation practices; the management of conflicts of interest, staff and insider trading; the protection of confidential information; and fair treatment of investors.
- Retail private credit funds – governance, valuation practices, the management of conflicts of interest, disclosure, distribution of products, credit risk and liquidity management.
- Superannuation funds – financial reporting and audits, encompassing valuation issues.
The regulator added that it intended to publicly communicate its findings from this work in 2025, which may include a need to take further regulatory action.
This is not the first time that ASIC has raised concerns over private credit market risks. In October, it commenced proceedings against private lender Oak Capital over “allegedly engaging in unconscionable conduct to avoid the National Credit Code”.
Feedback on questions from ASIC’s latest discussion paper is due by 28 April 2025. The regulator is after responses to questions covering public equity market health, private market risks, developments in global capital markets, and the transparency and monitoring of the financial system.
[Related: ASIC launches legal action against lender]
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