Private credit body takes shape as scrutiny intensifies

Brooke will remain involved until an independent chair and chief executive are appointed.

The proposed body will assess private credit managers seeking accreditation against ASIC’s 10 principles, with funds to undergo annual reviews.

Managers that do not initially meet the threshold will have an opportunity to remediate identified shortcomings before being reviewed again.

Its proposed public database is expected to set out information that investors can use to compare managers and funds more easily, including strategy, loan-to-value ratios, duration, yields and returns, arrears, defaults, impairments, losses, fees, margins, liquidity and redemption arrangements.

The database will initially redact managers’ identities for 12 months, giving firms with lower scores time to address weaknesses before their results are attributed publicly.

Industry-led standards push

Brooke said the association was intended to help the sector establish its own higher benchmarks while giving investors clearer information on which to base their decisions.

“The aim of the PCAA is an industry movement which investors are more freely making decisions that are well informed and a high set of standards the industry drives itself toward,” Brooke said.

The initiative arrives as private credit attracts greater attention from investors and regulators who are concerned about how risks, performance and liquidity are communicated in a market where data has historically been less standardised than in publicly traded credit.

Private credit has received heightened ASIC scrutiny over the past two years as more capital has moved into the asset class.

At the Commercial & Asset Finance Brokers Association of Australia’s (CAFBA) commercial property and development finance summit in Sydney on 22 September, ASIC commissioner Simone Constant warned managers and boards that enforcement action would follow unless standards improve urgently.

Constant said the regulator had moved beyond warnings, arguing that private credit managers were not lifting standards quickly enough and that ASIC was prepared to use its full regulatory toolkit.

Brooke said some private credit funds were already making meaningful progress on self-regulation, but inconsistent guardrails across the market remained a problem.

“The industry body will help shape standardisation. You can see these things in public credit markets, but not private markets as yet,” he said.

Comparable information

The PCAA’s proposed focus will extend beyond headline returns, with common definitions and consistent reporting on credit stress set to be central.

Brooke said the association would tackle both basic inconsistencies and more difficult questions around how managers classify and disclose deteriorating loans.

“There are really simple things like definitions, and then more complex items like how defaults, arrears and impairments are reported. As an investor, one needs to be able to compare and contrast what is on offer, as do borrowers,” Brooke said.

The PCAA board is set to include at least three directors, with committees covering standards, education, advocacy and regulation, and audit and risk.

Its establishment also follows the Financial Services Council’s August release of an industry standard for private markets and private credit, which sought to improve consistency, transparency and confidence.

[Related: ASIC reveals probe into further 24 private-credit funds]