‘What’s going on here?’: ASIC probes fast-growing private debt markets

Investors chasing higher interest rates and seeking exposure to the fast-growing private credit market in Australia may need protection, the head of the country’s corporate regulator has said.

Australian Securities and Investments Commission chair Joseph Longo said the corporate watchdog was prioritising a probe into private markets – debt or shares which are not listed on public exchanges – over the coming year and had put together a team to look into the sector.

ASIC chair Joseph Longo: “Should we be worried about conflicts of interest and valuations?”Credit: Peter Rae

“As we see more and more activity in the private market, the question I’ve got for myself and ASIC is ‘What’s going on here?’” Longo said at a Bloomberg event in Sydney on Wednesday. “Are they less transparent? Should we be worried about conflicts of interest and valuations?”

Private credit in particular is a fast-growing asset class through which investors can lend to companies that are unable to secure traditional bank lending. Often, this is done through private credit funds, which raise money from investors seeking higher interest rates and then loan that money directly to businesses and property developers.

As interest rates have remained high, returns on these funds have increased and become more attractive to investors. The main risk is loan default, which private credit funds typically try to mitigate through holding many different loans in their portfolios.

At an Australian Financial Review roundtable on Tuesday, bosses of some of the country’s biggest banks called for major players in the nearly $200 billion Australian private credit sector to provide better disclosure to investors.

Private credit markets can be opaque because private loans don’t directly trade on exchanges such as the ASX. However, there are some listed credit funds on the bourse which are bound by disclosure rules required by the platform.

“We need to understand better what’s going on,” Longo said. “The very nature of private markets is lack of transparency and data. ASIC is agnostic about whether the capital is raised in the private market or the public market, [but] if there are particular issues or concerns about the regulatory settings, I’m looking for actionable ideas. What we want is protection of investors and integrity.”

An investigation by The Australian Financial Review recently found evidence that private credit funds have been reluctant to write off badly performing loans, with some lending to companies that quickly go broke and paying themselves more money in fees than they hand over to investors.

Longo said he was conscious of the role ASIC was playing in the sector, which could unintentionally be going against public interest.

Hearing “quite a bit” about the cost of compliance in public markets, Longo said he was mindful that “if those requirements are having such a chilling effect on access to the public markets that people are driven into the private markets, we create new problems there.”

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