ASIC prepares to ‘provoke’ on private assets, markets, as private credit booms

The financial regulator is weighing intervention in the growing unlisted assets and private markets amid record investor interest.

Private credit is increasingly funding Austrlaia’s property development industry, turbocharging the rise in our skylines. But the rise of the asset class has regulators worried.

The financial regulator is “provoking discussions” with investors and lenders as it weighs up intervention in the growing private markets and private lending landscape, which some money managers have likened to the “wild west”.

The Australian Securities & Investments Commission is preparing to publish a report into private markets and private assets near the end of February, as it lifts surveillance of the industry that has exhibited poor behaviour but escaped strict regulatory scrutiny.

It comes as industry figures talk up the prospects of a private credit boom, with private markets and unlisted assets increasingly featuring investment portfolios.

But other money managers have warned the sector presents a growing risk to retirees and investors, with opaque valuations and limited disclosure leading to questions about actual returns as opposed to exaggerated claims.

Sources close to ASIC said the regulator’s private market interventions were aimed at getting industry participants’ views on how to police the growing sector, which is increasingly capturing the interest of retail investors and retirement giants.

ASIC chair Joe Longo said the burgeoning investments in unlisted assets, private markets, and private lending by superannuation funds made the sector of interest to all Australians.

Ratings agency Moody’s says 13 Australian funders, including five superannuation funds, are already among the top 20 private lenders in the Asia-Pacific.

Mr Longo said suggestions public markets were dead and that “everyone’s going to the private model” were superficial.

But he said it was important to consider issues of disclosure in private markets.

ASIC has also been critical of private lenders, largely in the home mortgage market, singling out a number of non-banks which would otherwise be subject to the prudential regulator’s oversight, in a report into hardship in the home loan sector last year.

ASIC chair Joe Longo at Elizabeth Quay, Perth. Pic Colin Murty

The regulator is also focusing on valuations in private markets, with Mr Longo warning these played a key role in retirement savings for many Australians.

A number of players have muscled into the market in recent years, in a bid to raise cash from Australians to fund overseas lending operations or otherwise bankroll private sector activity locally.

Investment bank MA Financial is among those pushing into the market, with plans to raise a $300m private credit trust.

Qualitas and Metrics have also picked up a number of retail and wholesale investors backing their various funds.

Metrics recently ended up the owner of a string of restaurants, including high-end steakhouse Rockpool, after Quadrant Private Equity walked away from Pacific Hunter Hospitality, the company owning the operations.

Reach Alternative Investments head of investments Jonathan Ng said the regulator could home in on disclosures of performance or valuations in private assets or private markets.

Many of these markets can often feature side-letters or deals not actively disclosed to investors.

Mr Ng said private lending in Australia was the “wild west”.

Several major private lenders including Justin Epstein’s GEMI have frozen redemptions, or are saddled with poorly performing loans like Milbrook.

Mr Ng said private credit was the most vulnerable area for ASIC intervention, given its rapid growth and profusion of players.

Reach Alternative Investments co-founder Jonathan Ng.

Sydney finance house Pengana has also ploughed cash into private lending, launching a number of retail and wholesale funds on the back of a $200m push from fundies Soul Patts.

Pengana Credit chief executive Nehemiah Richardson, who heads the group’s private lending operation, said despite the hiccups in global private credit markets, the sector was “just going to continue to grow”.

He said the pullback of banks from commercial lending would continue, and forays into asset-backed lending from private operators were also now on the horizon.

Mr Richardson said Pengana was exploring more private credit products, with possible announcements in the coming six months.

But he cautioned these may change, depending on discussions.

Mr Richardson said Pengana’s funds were an opportunity to provide Australian investors with access to European and American private credit markets.

He said the US and Europe had “such an interesting asset class” available for investors, with a “really nice risk adjusted return” and “low volatility”.

Pengana has since launched several investment options into the market, including close funds as well as its ASX-listed Pengana Private Credit Trust.

The fund offers access to over 2000 individual loans across 19 underlying funds.

But Mr Richardson said beneath the different “buckets” offering access to the loans, Pengana was operating a “master portfolio”.

Mr Richardson said Pengana’s loan portfolio had outperformed initial expectations, with all but two of the 19 underlying funds topping their targets.

The Pengana Credit Trust reported a combined $164.6m deployed across 20 managers, with almost 60 per cent of its allocation to US markets.

Pengana noted the trust was given “several fund valuations” in December, telling investors “these valuations continue to demonstrate strong returns that, over time, should grow the (net asset value) of the trust”.

ASIC is closely scrutinising disclosures of private asset portfolio values to investors.

Mr Richardson said the same opportunities for private credit didn’t exist in Australia, noting banks continued to service mid-market companies, with much of that lending remaining on regulated banks’ deposit sheets.

“In Australia the investments are in commercial property – you would not have a vibrant commercial property industry if you had to rely on the major banks. They don’t have the risk appetite,” he said.

Pengana Credit CEO Nehemiah Richardson.

Mr Richardson said Australia instead funded many of its riskier companies through secondary funding, where banks lent to loan managers who in turn lent to commercial developers.

Star Entertainment is a standout as a major Australian company taking cash from both banks and private lenders.

The casino operator’s $300m loan syndicate is led by Macquarie Group and Deutsche Bank, and also features Soul Patts, Perpetual, Barclays, Regal and ARCM.

Mr Richardson said private credit in Australia was also clustered in private equity buyouts, with the likes of Bain Capital or KKR funding their transactions via the non-bank market. “Australian private credit plays an ­important intermediation role but we’re not bringing that,” Mr Richardson said.

Mr Richardson pointed to private lender Liberty Financial, which writes loans across home mortgages, business, car, and ­personal loans, as an example of a diversified local private lender.

“The only thing that will blow up Liberty is if we have unemployment at 7 per cent,” he said.

Liberty Financial, which was reviewed by ASIC over its handling of hardship cases, has made much of the residential mortgage backed security (RMBS) market to fund its lending, pricing a $1.25 billion loan in October last year.

This came after issuing a $900m SME loan deal in September last year.

Originally published as ASIC prepares to ‘provoke’ on private assets, markets, as private credit booms