Concentration of private credit sector a concern: ASIC report

The current state of Australia's private credit sector could pose a systemic risk to small and self-managed super funds, as well as sophisticated investors, a review by ASIC suggests.

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ASIC has released the interim report from its review into the nation's $200 billion private credit market, which it says could pose a systemic risk to many investors if a downturn were to occur.

The review has so far found that while most investors are "appropriately rewarded for taking sub-investment grade credit risk and maturity/liquidity risk", these risks are not always adequately outlined in offer documents and performance reports.

It said, unlike the global private credit market, much of the local industry is concentrated in real estate construction and development finance "which has represented the majority of credit losses in past economic downturns in Australia and overseas."

"This segment of the market may present as a systemic risk for small and self-managed superannuation funds and 'sophisticated' investors in a downturn," the interim report reads.

"The concentration of Australia's private credit market in higher-risk real estate construction and development is where we see the greatest area for improvement for investor protection and market integrity.

"This market segment has a higher concentration of investors using the wholesale sophisticated investor exemption, and with less transparency on conflicts of interest, manager remuneration disclosure, and valuations and portfolio reporting."

In all, the interim report identifies four key areas of the sector requiring improvement. These are conflicts of interest, fees and remuneration, portfolio transparency and valuations, and terminology.

The report said conflicts of interest are prevalent across fee structures, valuations, related party transactions and loan structuring. It also said fee and remuneration structures vary widely and are often opaque and not quantified, adding that there is inconsistency in fees charged and they're not often disclosed, meaning some investors don't know the true cost of the fund.