Retail investors steered into private credit with little oversight, ASIC report finds

One of the most striking findings in the ASIC-commissioned report, Private Credit in Australia, by former banker Nigel Williams and infrastructure investor Richard Timbs, is that even after 30 interviews and months of research, to the authors it remained unclear how retail investors are being brought into the market, or whether those advising them have the expertise to do so safely.

“At this stage, we have not been able to build an accurate picture of how and where in the adviser or wealth management sector – including platforms – that retail investors are being introduced to private credit offerings,” the report said, adding that traditional avenues would include financial and wealth advisers, accountants and brokers.

The authors also pointed to anecdotal instances of brokers being paid introduction fees for directing clients into private credit funds.

They further added: "As retail demand continues to grow as expected, it would be helpful for ASIC to develop a good picture of the retail segment’s avenue to the private credit market.

"That information may also be useful for providing some insight into the knowledge and capability of those parties making investment recommendations to retail investors to invest in private credit.”

The pair warned that understanding these flows is increasingly urgent as retail demand grows, partly fuelled by the $40 billion bank hybrid market maturing.

There are “legitimate questions”, according to the researchers, about whether, in some cases, retail investors could “fully understand and appreciate the nature of their private credit investment exposure, based on readily available information”.

“Growing retail investment exposure to private credit should be another focus area for operational review and improvement,” Williams and Timbs said.

“The greatest area of opacity and investor risk is at the intersection of these two components (that is, retail investment into real estate private credit).”

Even without a clear picture of how retail investors are entering the market, the report said advisers and research houses hold “considerable power” over both retail and wholesale flows.

To improve transparency and oversight, the authors suggested: “From an overall market information and education basis, greater numbers of independent research reports and public analysis of private credit offerings can only be beneficial for the sector.”

ASIC last week flagged deficiencies in the target market determination (TMD) of three private credit funds accessible to retail investors, issuing interim stop orders.

Problems included inappropriate portfolio allocations for the risks involved and unclear investment time frames.

Meanwhile, research houses have raised concerns about a surge of newer, less-established fund managers and a lack of transparency in their offerings.

At a broader level, the research argued that “private credit, done well, has a valuable role to play in the Australian economy”.

What the report called out is less the existence of private credit than how it is packaged, priced and disclosed.

At the heart of the critique are four recurring themes: conflicts of interest – “prevalent across fee structures, valuations, related party transactions and loan structuring”, opaque remuneration, inconsistent valuations, and terminology.