(Bloomberg) -- An Australian corporate watchdog’s probe into the private credit market faces challenges including the absence of a secondary loan market and non-standardized fees, underscoring the risks particularly for retail investors in the growing market.
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The Australian Securities & Investments Commission is conducting a two-year private-markets review amid persistent concerns over loan valuations. With trading in the after-issuance market thin — as most investors buy and then hold the loan — the regulator faces headwinds in a sector estimated by advisory firm Alvarez & Marsal as accounting over 10% of the country’s A$1.4 trillion ($892 billion) corporate debt in 2023.
The scrutiny from ASIC is timely as more wealthy Australians and retail investors are piling into private credit. Opportunities were previously limited mainly to pension funds due to the high barriers to entry, but they are now becoming increasingly accessible to individuals.
“There are clear risks for investors if valuations are not handled appropriately, including impacts on investor entry and exit prices and fee calculations,” said an ASIC spokesperson in response to questions.
To determine the market’s valuation, the global standard is fair value and is determined by the marketplace, according to David Larsen, managing director specializing in alternative asset advisory at Kroll LLC. Fair value is “the amount that you would receive if you sold the investment in an orderly transaction using market participant assumptions as of the measurement date or valuation date,” he said.
In the US, often sighted as the market leader, many direct lenders are set up as publicly-listed “business development companies,” a type of private lender. They are required to update their investors every quarter, giving investors better visibility on their loan prices.
Credit managers are also regulated and the reporting under US Securities and Exchange Commission rules in relation to business development companies is “much further along than we are,” said Hiran Wanigasekera, executive director and co-head of Australian diversified credit at IFM Investors Pty Ltd. “It’s part of that evolution process that we also need to get to that level and style of disclosure and transparency.”
The lack of mandatory disclosure around these valuations in Australia adds to the problems faced by ASIC and is similar to that in the UK and Europe, where regulators have also raised concerns.