In short:
ASIC commissioner Simone Constant has fired a shot across the bow of Australian private credit, warning the clock is ticking on poor lending practices.
Meanwhile, a private credit investor has told the ABC a contagion or run of funds in the industry remains "possible" should more investors worry about retrieving their money from funds.
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investors → fire → funds
Ms Constant will speak today at a gathering in Sydney hosted by the Commercial and Asset Finance Brokers Association.
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Constant → speak → Association
ASIC has signalled there is no time to waste in preventing an Australian private credit crisis.
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ASIC → signal → crisis
Today, ASIC commissioner Simone Constant will tell a gathering in Sydney hosted by the Commercial and Asset Finance Brokers Association (CAFBA) that the "clock is ticking" on "whether we see broader credit stress or not" in Australia.
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we → tell → Australia
The collapse of NSW property developer Bathla has highlighted how private lenders are exposed to financially vulnerable construction companies.
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lenders → highlight → companies
CVS Lane First Mortgage Fund and CVS Lane Property Finance Fund had exposure to Bathla across nine different loans.
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Fund → have → loans
"Our work has shone a light on the weaknesses in private credit, but despite our ongoing calls for uplift across the sector, too many have been too slow to respond," Ms Constant said.
"
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Constant → shine → sector
And 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.
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cracks → see → conditions
While returns are relatively high, they come with risk, and it's growing.
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it → come → risk
One estimate has the sector domestically growing by 500 per cent over the decade, according to ASIC.
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sector → have → ASIC
"But governance, controls and underwriting standards have not kept pace with this growth," Ms Constant said.
"
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Constant → keep → growth
The collapse of Bathla reinforces why strong governance, effective oversight, clear disclosure and accurate valuations are critical.
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governance → reinforce → Bathla
"We challenged the sector to lift standards by 2027 — that's three months away.
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that → challenge → 2027
"
ASIC runs ruler over sector
Over the past 18 months, ASIC has intensified its scrutiny of private credit, beginning with its discussion paper on public and private markets.
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ASIC → run → markets
"It was illuminating," Ms Constant said.
"
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Constant → illuminate → ?
The poorer practices — opaque remuneration and fee structures, inadequate governance arrangements, poor valuation practices, ineffective disclosure — were concerning and demanded scrutiny.
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practices → concern → scrutiny
"That scrutiny came through two ASIC reports," she said,
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she → come → reports
It painted a seriously concerning picture.
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It → paint → picture
Of the 28 funds we reviewed:
- Only four published information about the interest rates or ranges charged to borrowers.
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four → review → borrowers
- Less than half had detailed, written credit or impairment and default management policies in place.
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half → have → place
- Most funds did not have adequate separation between those approving loans and those responsible for independently assessing their ongoing performance and value.
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funds → have → performance
- And of the wholesale funds, only two performed stress testing as part of their liquidity risk management.
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two → perform → management
"These were clearly red flags — particularly when we think about the critical risks to be managed in private credit such as credit and liquidity risk, and the fundamental importance of effective disclosure in such a widespread and growing space," Ms Constant said.
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Constant → think → space
The second report assessed private market reporting practices globally.
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report → assess → practices
It found Australia falls well south of the line of information and disclosure of other comparable jurisdictions like Singapore, the US, the UK and even Switzerland.
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Australia → find → Singapore
But Wall Street is ground zero for the alternative investment market and there are fears this massive, risky US private lending ship is sinking and investors are jumping out.
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investors → be → market
"Globally funds under management have quadrupled in a similar time frame and it's estimated that there are now more private equity funds in the US than McDonald's stores," Ms Constant said.
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Constant → quadruple → stores
Global investment bank Morgan Stanley announced late last week it was curbing redemptions at its nearly $US7 billion ($9.5 billion) private credit fund again in the third quarter.
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it → announce → quarter
Investors requested more than twice the amount the fund was willing to repurchase.
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fund → request → amount
The North Haven Private Income Fund capped withdrawals at 5 per cent after investors asked to pull 11.4 per cent of shares, according to a shareholder letter.
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investors → cap → letter
'Contagion risk'
But the private credit risks for Australia are growing too, especially in the real estate and construction sectors.
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risks → grow → sectors
And millions of Australians are exposed to private credit — some through direct fund investment, others through shares in credit fund managers, but many through their superannuation fund.
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others → expose → fund
FinCap executive chairman Christian Ryan told the ABC that a contagion or broad, rapid exit of cash out of the sector was "possible".
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contagion → tell → sector
"That is why some funds are getting ahead of this given the general negative sentiment in the sector," Mr Ryan said.
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Ryan → get → sector
That is, Mr Ryan said, some funds locally have begun to limit redemption as a precautionary measure to prevent investor panic.
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funds → say → panic
"If you reflect on the material collapses in the past where retail investors in particular have been caught out with investors directly, this type of mechanism is enacted sometimes too late.
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type → reflect → mechanism
But, he said, many private credit funds are well run by their managers.
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funds → say → managers
"There are losses from time to time and being a credit manager, it is about limiting this risk as much as possible before investing," he said.
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he → be → risk
"I do know that many of the fund managers have great people that will be doing whatever they can in the background to look after investor funds."
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they → know → funds
Speaking at a federal parliamentary hearing on Friday, Reserve Bank governor Michele Bullock also indicated Australian private credit risks were being contained.
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risks → speak → Friday
…and 9 more, not listed.
The Aporia