ASIC warns 'clock is ticking' on private credit as Morgan Stanley fund caps redemptions

HouGarden Australia, 22 September — Australian Securities and Investments Commission (ASIC) commissioner Simone Constant delivered a blunt message to industry leaders gathered in Sydney at an event hosted by the Commercial and Asset Finance Brokers Association of Australia (CAFBA), telling them the 'clock is ticking' on whether broader credit stress takes hold across the country.

Private credit refers to any lending that takes place outside the traditional banking sector. ASIC estimates the domestic market has grown by 500 per cent over the past decade, but Ms Constant said governance and underwriting standards have not kept pace with that expansion.

'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. '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.'

The collapse of New South Wales property developer Bathla has been cited by ASIC as a concrete example of the dangers. CVS Lane First Mortgage Fund and CVS Lane Property Finance Fund each had exposure to Bathla across nine separate loans, illustrating how private lenders can be left holding risk when construction companies fail.

ASIC reviewed 28 private credit funds over the past 18 months as part of its intensified scrutiny of the sector. The findings were stark. Only four of the 28 funds published information about the interest rates or ranges they charged to borrowers. Fewer than half had detailed, written credit or impairment and default management policies in place. Most funds lacked adequate separation between staff who approved loans and those responsible for independently assessing the ongoing performance and value of those loans. Among wholesale funds — those sold to institutional or sophisticated investors rather than retail clients — only two performed stress testing as part of their liquidity risk 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.

A second ASIC report assessed private market reporting practices globally and found Australia falls well short of the disclosure standards applied in comparable jurisdictions including Singapore, the United States, the United Kingdom and Switzerland.

ASIC had challenged the sector to lift its standards by 2027 — a deadline that is now roughly three months away. Ms Constant said the regulator is no longer prepared to wait. 'We're now beyond warnings,' she said. 'The sector should prepare for enforcement action.'

The pressure on Australian funds comes alongside fresh signs of stress in global private credit markets. Morgan Stanley announced late last week that it was again curbing redemptions at its North Haven Private Income Fund in the third quarter. The fund is valued at nearly US$7 billion, equivalent to approximately A$9.5 billion. According to a shareholder letter, investors requested to withdraw 11.4 per cent of shares during the period, but the fund capped redemptions at 5 per cent — meaning investors sought to pull out more than twice what the fund was prepared to allow.

'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.

Back in Australia, FinCap executive chairman Christian Ryan told the ABC that a contagion effect — a broad and rapid exit of cash from the sector — was 'possible'. Mr Ryan is an industry participant, not a regulator. 'That is why some funds are getting ahead of this given the general negative sentiment in the sector,' he said, adding that some local funds had already begun limiting redemptions as a precautionary measure to prevent investor panic.

Mr Ryan cautioned that the mechanism to limit redemptions had sometimes been used too late in past collapses, particularly where retail investors were directly caught out. At the same time, he noted that many private credit funds were well managed. '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. '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.'

Millions of Australians have exposure to private credit — some through direct investment in funds, others through shares in credit fund managers, and many through their superannuation funds.

Not everyone shares ASIC's level of alarm. Speaking at a federal parliamentary hearing, Reserve Bank of Australia Governor Michele Bullock said the risks appeared contained. 'Our assessment is that, on the whole, the non-bank lending activity we've observed is helping to, for instance, provide the financing that's important for greenfield construction, but we don't have a strong sense that there's been a systematic weakening of lending standards,' Ms Bullock said. She added that any weakening in lending standards in the segment would be 'primarily going to be a problem for investors who invested in those funds' and 'doesn't speak to a systemic issue.'

The tension between ASIC's warning and the Reserve Bank's more measured view reflects an ongoing debate about how serious the risks are to the broader financial system. ASIC is not waiting for that debate to be resolved. Ms Constant called on industry associations to develop and adopt compliant, good-practice standards and for member funds to sign up to them. She also pointed to the regulator's own ten principles of private credit as a benchmark funds should already be assessing themselves against. 'If you are a private credit fund who hasn't assessed yourself against our ten principles of private credit done well, ask yourselves — why not?' she said. 'Before your investors do.'