Australia’s Private Credit Funds face new valuation test before June 30

Australian private credit sector is set for greater regulatory attention ahead of the reporting season to June 30. This includes direction from the Australian Securities and Investments Commission to fund managers to update their asset valuations so they can reflect current market conditions more accurately.

The guidance comes on the back of ASIC finalising its review of 22 private credit managers responsible for managing 52 funds valued at roughly A$76 billion. ASIC states it found deficiencies in the way certain valuation methodologies, governance arrangements and disclosure disclosures were performed, with some signs also evident of the weakening credit quality in specific sections of the market.

ASIC Takes Aim at Asset Pricing

Fund managers are instructed by ASIC to re-value loan assets prior to the release of end-year financial statements and investor reports. ASIC states that they wish to see asset valuations be supported by reasonable evidence and take account of the changing economic and borrower circumstances.

Instances were highlighted where debt restructurings, covenant breaches and borrower stress required a heightened level of scrutiny. ASIC warns against lagging valuations that must be kept fresh and transparent, especially at year-end, when investor returns and fund performance data are dependent on them.

$200B Australian Market Now in the Spotlight

With estimations of its worth reaching approximately A$200 billion, the Australian private credit market is at the heart of the recent growth in the size of Australia's overall private credit sector, a situation brought about by increased exposure to private debt strategies from institutional investors and the availability of funding beyond that of the banks to businesses.

In recent times, the sector has become an integral contributor of capital to commercial property developments, infrastructure-related projects and mid-sized Australian companies. The exponential rise in private credit lending is not without increased scrutiny from regulators over disclosure standards, liquidity management and consistency of valuation methods.

According to ASIC Commissioner Simone Constant, asset values must be defendable under close scrutiny and should reflect inherent risks.

Regulators the world over are focused on the risks of private credit

In line with ASIC's move, other major financial markets such as the US, the UK and the EU have also ramped up their supervision of private credit and private market funds, given the ongoing global expansion of the industry.

Regulators have specifically sought to determine if investor value is truly being represented and if adequate transparency is afforded with regards to investor exposure. ASIC is keeping close watch over this industry and requires robust reporting and good governance from the companies before the end-of-June reporting season.

Source: AFR

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