Australia's corporate regulator calls out 'poor practices' in private credit

Australia's corporate watchdog has warned it ​could take action against "poor practices" by ​firms in the booming private ‌credit sector, ​from unrealistic valuations to opaque fees, if standards do not improve. The sector's rapid growth and complexity have outpaced industry ‌standards, a commissioner of the Australian Securities and Investments Commission (ASIC) said, saying the recent collapse of property developer Bathla was not surprising.

"The clock is ticking," Commissioner Simone Constant ‌said in a speech in Sydney on Tuesday. "Whether we see broader credit stress or ‌not, certainly the tide is going out on poor private credit practices." She added, "We're now beyond warnings. The sector should prepare for enforcement action."

The comments come after 18 months of stepped-up scrutiny by ASIC ⁠of the ​industry. The regulator ⁠was also surveilling wholesale and retail funds as it pursued enforcement investigations, she added. "We continue to see ⁠issues around valuations, liquidity, governance, conflicts and transparency."

The regulator estimates Australia's private credit sector to be ​worth about A$200 billion ($142 billion). It is heavily exposed to real estate ⁠lending, making up about 40% to 60% of the market. Such lending was vulnerable to inflation, cost increases, project ⁠delays ​and unrealistic asset valuations, Constant said.

As a result, fund managers must make difficult decisions when loans deteriorate, she added, rather than "protecting fees or appearance". Bathla owed ⁠A$3 billion to more than 40 lenders when it entered administration, a debt burden ⁠administrators said appeared to ⁠be a significant contributor to its failure.

"The collapse of Bathla reinforces why strong governance, effective oversight, clear disclosure and accurate ‌valuations are critical," ‌Constant said. ($1=A$1.4073)