ASIC puts private credit on notice ahead of EOFY

ASIC has put Australia's private credit sector on notice, calling on funds to ensure their June 30 asset valuations are current, accurate and grounded in realistic assumptions.

The regulator expects all participants including boards, auditors, responsible entities, trustees and chief investment officers, to assess current private credit practices against ASIC's ten principles and lift standards where needed.

Late last year, ASIC's deep dive in the sector found fund managers downplay the risks of their products and flout basic disclosures of the state of their investments. It said while some are doing the right things by investors, many are not doing so on a "material" basis.

ASIC said its message is straightforward: participants should use this reporting cycle to challenge assumptions, refresh valuations, and lift practices in line with its published principles.

ASIC recently also conducted a survey into the sector from March 26 to May 14, collecting responses from 22 managers covering 52 funds and around $76 billion in assets under management.

While it noted the survey is only a snapshot of the local market conditions, it flagged credit deterioration emerging unevenly with pockets of higher defaults, impairments, and loan amendments.

It found while most funds continue to manage liquidity adequately, buffers are tightening and macroeconomic pressures, including inflation, rising costs and supply disruptions are affecting borrower performance.

While redemption requests are contained, higher activity is being observed in some funds investing in global private credit managers.

ASIC's broader work on the sector also indicates valuations lagging economic reality and weaker borrower conditions may expose pressure in property development through cost escalation, project delays, soft presales, unsold stock, and weaker refinancing conditions.

It noted some portfolio concentration to a single developer group or related assets can increase risk where the underlying project performance changes and market conditions tighten.

ASIC said products described as stable or low risk may perform very differently in current conditions, particularly where there is higher concentration to construction lending, capitalised interest.

"For these reasons, refreshing June 30 valuations are an immediate point of action in private credit and across private markets investments generally. If valuations do not reflect current conditions and incorporate verified accurate information, there is a higher risk of misinformation and poor investor outcomes," ASIC said.

"ASIC expects participants to challenge assumptions and refresh valuations to ensure they are based on realistic and supportable inputs... Market participants should not wait for formal defaults before reassessing asset values and related risks."

ASIC noted in the United States and Europe weaker market conditions are already driving rising defaults, valuation uncertainty and redemption pressures.

It said while Australia's market has acknowledged structural differences, including greater exposure to real asset-backed loans in construction and property, those differences are not a defence against risk.

"Retail investor and superannuation exposure is increasing, and recent isolated incidents have highlighted how Australian retail investors can be exposed to offshore redemption constraints and liquidity pressures through local feeder funds," ASIC said.

"There are inherent linkages between the international and domestic markets as with all global financial markets."

ASIC highlighted meeting these obligations cannot be outsourced.

"Participants must ensure that all those in their funds management value chain-from origination through to audit-are meeting their responsibilities to support participants' obligations," ASIC said.