Australia probes private credit lenders, warns on valuations

[SYDNEY] Australia’s corporate watchdog is investigating a number of private credit funds and warning industry managers to make sure that asset valuations are “grounded in realistic assumptions” before an end-of-month reporting deadline.

“We are absolutely 100 per cent unequivocally ready, willing and able to use our full suite of regulatory enforcement tools,” said Simone Constant, Commissioner of the Australian Securities & Investments Commission (Asic). “It is such an important area because private credit is growing in importance in so many investors’ investment portfolios.”

The industry faces its “first test” as liquidity tightens, and borrower stress puts a spotlight on valuations and governance, Asic said in a separate statement. Multiple “enforcement investigations” are underway, it added.

Asic’s warnings come as the once-booming US$1.8 trillion global private credit industry is grappling with higher defaults and withdrawal requests from largely wealthy retail investors that are concerned about AI-disruption to the software sector, a large beneficiary of past direct lending.

In Australia, the real estate sector is a major borrower in the roughly A$200 billion (S$181 billion) industry and regulators have repeatedly expressed concern about the potential for risks there, making it a focus for investigations.

“The firms under surveillance will be in a proportionate representation of those who do property, including development and construction finance lending,” Constant said, without identifying the entities. “That is where the vast majority of private credit funds in Australia are.”

The Australian regulator is not alone in expressing concerns about private credit valuations.

Wall Street’s top prosecutor Jay Clayton, the US attorney for the Southern District of New York, said earlier this month that his office is looking at possible valuation discrepancies in the private credit marketplace.

Despite signs that some institutional investors, including in Australia, are cooling on the asset class, industry titans this month pushed back on that narrative at a major European conference.

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The need to ensure accurate and up-to-date loan valuations is not solely a responsibility of private credit managers, Constant stressed, pointing to investors in such funds, including the nation’s A$4.5 trillion pensions industry, called superannuation.

“We address our call to action to a range of parties, including superannuation funds and chief investment officers,” she said. “That does rely on superannuation funds, the trustees holding all those in the chain that sit around their investments to account for meeting the right standards.”

Asic said a recent survey showed credit deterioration in certain sectors with pockets of higher defaults, impairments and loan amendments. The survey comprised data from 22 managers, covering 52 funds with around A$76 billion of assets under management. BLOOMBERG