After an independent review found troubling practices in the fast-growing private credit fund sector, Australian regulators are calling on the industry to boost standards.
The Australian Securities and Investments Commission (ASIC) said a review of the sector — commissioned amid rapid growth in the A$200-billion industry — found a range of investor protection issues, including opaque compensation and fee structures, inconsistent disclosure, weak governance, related-party transactions and valuation concerns.
Among other things, the review found “potential misalignment between managers and investors” in fee and compensation structures “that often fail to quantify and make readily observable the true cost of managing the fund.”
It also pointed to the need for improved governance arrangements to address practices such as lending to related parties, holding debt and equity in the same entity in a fund, and intra-fund transactions. Other areas flagged included independent valuation practices, liquidity mismatches, improved investment reporting, concentration risk and credit risk, particularly in real estate investments.
The report noted that about half of the sector’s assets are devoted to real estate, including “significant investment in higher-risk real estate construction and development and, concerningly, involves a concentration of less experienced investors.”
The regulator said the review’s findings align with its surveillance efforts, which have recently resulted in compliance and enforcement action against several private credit funds.
“While the report highlights some encouraging practices, it also reveals concerning behaviours that fall short of market expectations and, more importantly, that are inconsistent with existing financial services law,” ASIC chair Joe Longo said in a release.
“ASIC expects meaningful action in response to these findings and will not hesitate to intervene where progress falls short,” he added. “Enhanced standards are needed to lift practices across the sector. They will help promote confidence, improve market integrity and empower investors to make informed decisions.”
The ASIC said that in November it will release new guidance and set its future policy direction, following a consultation on its capital markets that focused on the shifting lines between private and public markets. That work has also been informed by the regulator’s recent surveillance.