ANZ CEO Shayne Elliott calls for regulation of private credit, as ASIC action looms

The financial regulator has signalled its interest in the growing sector, pinning private credit and private markets as a priority for this year.

A four-bedroom terrace at 38 Redfern Street. The owners were locked out on October 10, when sheriffs turfed out the borrowers amid a dispute with their private credit financier.

A grand, if tired, four-bedroom terrace on the main street of Sydney’s Redfern, in the heart of the city, is an unlikely impact point for the ballooning private credit sector, but a dispute over the property has highlighted the growing market for non-bank borrowing, with bank bosses now backing intervention by regulators.

The looming sale of the property highlights two key themes of Australia’s banking sector, with muted – albeit rising – arrears levels, much unlike past slowdowns, and a pullback by many banks from lending to higher-risk borrowers who in the past tipped the country’s lenders into strife.

The terrace at 38 Redfern Street saw its owners locked out on October 10, when sheriffs turfed out the borrowers amid a dispute with private credit financier Prolend Solutions.

The Queensland-based funder moved to lock out the owners, with agents putting the house on the market in a move banking industry sources said showed the difference in approach between the burgeoning private credit sector and the heavily regulated legacy bank lenders.

Prolend Solutions head of partnerships Melissa Le Cornu declined to discuss the sale or the move to lock out the owners, telling The Australian: “We have no comment, if you have anything, please contact our solicitor.”

NAB, at its most recent results, revealed 1.39 per cent of all lending was in arrears covering almost $10bn in loans.

ANZ, reporting its results on Friday, reported an 18 per cent jump in arrears, with almost $15.3bn in default.

ANZ CEO Shayne Elliott says regulation of private credit is not far off. Picture: Arsineh Houspian

Despite this, many banks are in no rush to turf out owners, with industry figures noting the sector often worked with mortgage holders to sell their homes rather than push out borrowers and place the home on the market.

Banks, unlike private lenders, are also bound by rules and regulations imposed over the decades, with some sources commenting how rare mortgagee-in-possession sales have become.

ANZ boss Shayne Elliott told The Australian the private lending sector was overdue for regulatory intervention, warning private credit players had the potential to impact both borrowers and investors who funded their lending.

Speaking as ANZ unveiled its $6.7bn cash profit on Friday, Mr Elliott said a concern was “how credit funds treat their customers when things go wrong”, as well as how investors are looked after.

“Regulators should be all over this and thinking about it,” he said. “They’re going to have to come to a decision soon.”

The Australian Securities and Investments Commission has signalled its interest in the growing sector, pinning private credit and private markets as a priority for the regulator this year.

The banks have pointed to an uneven playing field driving business towards private lenders, with capital rules imposed on the sector in the wake of financial crises making it uneconomical for them to go down the risk curve towards more uncertain borrowers.

Mr Elliott said banks had long had “the secret sauce” in lending, being able to take money from savers and lend it to others.

“What’s frustrated private credit is they didn’t have any money,” he said.

But he said the move by superannuation funds and wealthy investors to fund private lenders had seen the sector soar.

“Now they’ve said ‘we do have money, we have all these funds’,” Mr Elliot said.

Superannuation giants such as AustralianSuper have ploughed billions into private credit, largely focused offshore.

ASIC chair Joe Longo. Picture: Aaron Francis

Albacore CIO and managing partner David Allen, who runs a global private credit fund targeting European and American corporate borrowers, said the sector was growing rapidly as banks pulled back from commercial lending.

Speaking with The Australian while on a national tour with some of the country’s largest investment funds, Mr Allen said Australian investors were “very knowledgeable” about private credit.

Locally, investment banks, including Goldman Sachs, as well as global non-bank lender Ares have backed private credit funds here.

But recent events in Australia have highlighted the risks of the sector, with the travails of Sydney pub baron Jon Adgemis embroiling a string of non-bank lenders including GlenEagle Securities, GEMI Investments, or US lenders Muzinich.

A&O Shearman Australia co-managing partner Jason Denisenko said the increasing flow of capital into private credit was attracting regulatory attention, warning the sector was now 12-18 months away from serious regulatory guidance from ASIC.

Mr Denisenko said the current stressed economic environment was likely to lead to issues in the private credit space surfacing in the coming year and attracting the focus of ASIC.

He said there were concerns around the valuations of private lending portfolios held by local managers, noting that without handing ASIC new rules this was one of the few areas they could enter the space.

“They’ve only got a few tools in their tool kit to use, in what is largely an unregulated space, those tools tend to be around potential enforcement issues and disclosure issues,” he said.

Mr Denisenko said he was also concerned with issues around conflicts of interest and disclosure to investors as ASIC had already brought action around misleading and deceptive conduct.

“I think that’s an easy approach for ASIC to take because they can effectively regulate through enforcement action,” he said.

He also highlighted “cash-like” products being offered to investors, offering bank-like returns.

Sydney funds house Pengana recently launched a private credit fixed-term product to investors, offering the chance to plough savings into products and earn above the cash rate.

Originally published as ANZ CEO Shayne Elliott calls for regulation of private credit, as ASIC action looms