ASIC calls out questionable practices of some private credit managers: What Australian investors need to know

This week, ASIC released Report 814: Private credit in Australia, a landmark review of an industry now estimated at around $200 billion in size. For investors, private credit has emerged as a compelling alternative to traditional fixed income, offering the potential for attractive yields and diversification by lending directly to businesses and projects outside the banking system.

When structured and managed well, private credit can provide investors with steady income and lower correlation to listed markets. But the review commissioned by ASIC makes clear that the quality of practices across the industry is uneven. Some managers operate with global best-in-class standards, while others are impacted by conflicts of interest, have poor disclosure, and are overly reliant on property development lending. These differences matter for advisers and investors seeking to allocate capital with confidence.

What was the purpose of the review?

ASIC commissioned the review, undertaken by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams, to assess how the private credit market is operating in Australia, to highlight good practices that build confidence, and to flag poor practices that undermine transparency and investor protection. While the report does not pass judgment on individual managers, it offers a framework for what “good” looks like and where improvements are needed.

What did they find?

The report’s findings were mixed. On the one hand, it observed strong practices among large institutional managers who serve superannuation funds or operate globally. These managers were found to typically provide robust governance, clear fee disclosure, and independent oversight of valuations. On the other hand, the report identified serious concerns in parts of the market targeting wholesale or retail investors, where conflicts of interest, opaque fees, weak valuations and poor disclosure were common.

Below is a summary of some of the standards of better and weaker private credit investment offerings in the Australian market:

Many of the weaker practices that were identified create a lack of transparency and significant potential for conflicts of interest between managers and their investors, eroding investment protections and market integrity.

The report also noted the high concentration of Australian private credit in property lending. With roughly half the market linked to real estate finance, potential systemic risks have been identified for small, SMSF or wholesale investors who tend to be the main investors in these funds, particularly if property values fall or development activity slows.

What does best practice look like?

To address these issues, the report pointed to a set of standards the industry should consider adopting. These include quarterly independent valuations, consistent portfolio reporting, full disclosure of all manager remuneration, clear definitions of key credit terms, independent oversight of related-party transactions, and straightforward disclosure of leverage and liquidity. Collectively, these practices would be designed to build trust and align the interests of managers with those of investors.

At Betashares, we believe private credit is an attractive asset class that warrants an allocation in many investors’ portfolios. However, we also believe transparency and governance are crucial in its delivery to investors.

That is why we chose to partner with Cliffwater LLC, a leading US private credit manager whose approach we consider represents global best practice, to launch the Betashares Private Capital Cliffwater Private Credit Fund. This fund primarily invests in the US-domiciled and regulated Cliffwater Corporate Lending Fund.

Cliffwater’s approach is built on transparency and investor alignment. Cliffwater employs a robust valuation framework, utilising or having reference to independent third-party valuation agents for more complex or illiquid assets to assist in the valuation process. This approach reduces conflicts of interest and provides confidence in reported values. The underlying portfolio is reported quarterly to the US Securities and Exchange Commission (SEC), with full disclosure of holdings at both fair value and cost, giving investors clear visibility on what they own and how assets are valued.

The fund’s fees and costs are straightforward, with no hidden margins or side arrangements, e.g. where the underlying manager receives additional incentives from the borrowers. This ensures that our investors receive the full benefit of loan economics. Reporting is frequent and detailed, covering performance, portfolio composition and leverage. Governance is robust, adhering to the stringent standards applied by the SEC to interval funds operating under the Investment Company Act of 1940.

In short, we believe that Cliffwater’s practices are strongly aligned to the ‘good practices’ the report has identified with respect to independent valuations, transparent fees, comprehensive disclosure and strong governance. In addition to Cliffwater’s strong track record, these attributes are why Betashares has partnered with them to deliver this strategy to Australian investors.

Key takeaway for advisers and investors

ASIC’s review shows that private credit “done well” can deliver significant benefits, but also that standards across the market remain uneven. Advisers and wholesale investors should look beyond headline yields to assess whether a manager demonstrates transparency, independence and alignment of interests with investors.

As this asset class continues to expand, maintaining these standards will be essential to building long-term trust and delivering sustainable outcomes for investors.