'Beyond warnings': ASIC to come down heavy on private credit

The corporate regulator has urged the private credit sector to uplift standards, noting participants should prepare for enforcement action if they fail to do so.

ASIC commissioner Simone Constant said the regulator is now "beyond warnings" and pushed players to assess themselves against its 10 best practice principles.

Constant said ASIC expects everyone in the investment chain - fund managers, deal underwriters and trustees right through to valuers, auditors and ratings agencies - to consistently meet their responsibilities.

The recent collapse of property developer Bathla put a spotlight on the private credit sector, as investors pulled their money back from private credit exposures.

Constant noted offering regular redemptions to investors while sitting on illiquid assets creates a structural mismatch that must be resolved.

"Offering regular redemptions to investors while holding illiquid, multi-year property loans creates a fragile product design that breaks down under pressure - especially when coupled with loan "management practices" that rearrange deck chairs while the tide goes out and the boat risks running aground," she said.

She added when property projects stall and credit vehicles freeze redemptions, the damage falls squarely on the real economy.

"Contractors and trade subcontractors are left unpaid, homebuyers face the distressing prospect of losing their deposits, and superannuation members find their retirement savings locked away. The damage also falls on investors," she said.

Constant said ASIC is worried the sector's engagement might be "too little, too late" if participants don't move with urgency towards consistent good practice. She urged the sector to strengthen standards now before there is a loss of trust.

"If you are a private credit fund who hasn't assessed yourself against our 10 principles of private credit done well, ask yourselves - why not? Before your investors do," Constant said.

"The clock is ticking. Whether we see broader credit stress or not, certainly the tide is going out on poor private credit practices. The collapse of Bathla reinforces why strong governance, effective oversight, clear disclosure and accurate valuations are critical."

ASIC recently put the sector on notice, calling on funds to ensure their June 30 asset valuations are current, accurate and grounded in realistic assumptions.

"Fund managers need to review loan portfolios and apply realistic, independent valuations," Constant said.

"Carrying distressed loans at full face value to protect management fees is unacceptable."

Constant said while the Bathla collapse is deeply concerning, for ASIC it has not been surprising.

"We've been talking about private credit for a long time now - specifically about the risks stemming from inconsistent industry standards that haven't kept pace with the growth, significance, complexity and connections of the sector," Constant said.

"What we're seeing now, as some of those weaknesses are tested at scale for the first time by current conditions, are the first significant cracks - the first stress fractures - beginning to emerge."

Constant also called on institutional investors and superannuation trustees to not accept private credit managers at face value.

"Trustees have clear statutory obligations to act in their members' best financial interests. Fulfilling that duty requires genuine, look-through due diligence," she said.

"Trustees must look past headline returns, examine the underlying collateral, verify bad-debt provisioning, and independently test manager assumptions before committing member capital."