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Article by Avant Group - ASIC warns of hidden risks in Australia’s $200B private credit market

ASIC warns of hidden risks in Australia’s $200B private credit market

Posted: 19 November 2025

Private credit has rapidly grown in popularity in Australian investment portfolios, offering attractive yields and diversification for investors willing to look beyond traditional bank lending. In our previous article, we explored the rise of private credit and the regulatory spotlight on LaTrobe Financial. Since then, the Australian Securities and Investments Commission (ASIC) has released a comprehensive private credit review, identifying widespread issues and setting out a roadmap for reform

What prompted ASIC’s private credit review?

ASIC’s latest reports (Report 8141 and Report 8202) follow a year-long investigation into 28 private credit funds, spanning retail and wholesale offerings. The review was prompted by the sector’s explosive growth, now estimated at over $200 billion in assets under management. The regulator’s intervention in LaTrobe Financial’s retail funds last September was an early warning, but the new reports reveal that these issues are far from isolated.

What were ASIC’s key findings?

  1. Conflicts of interest and opaque fees: ASIC found that many institutional private credit managers retain large upfront and default-related fees paid by borrowers, often without passing these on to investors or disclosing the true quantum of returns3. In some cases, managers use special purpose vehicles (SPVs) to lend to borrowers at higher rates than passed on to investors, with managers retaining the excess margin. This lack of transparency is not hypothetical. ASIC’s review found that only four of the 28 funds published any information about the interest rates or ranges charged to borrowers4. Even more concerning, just two retail funds quantified the interest earned from their assets and borrower fees. In one notable case, a wholesale fund manager took a substantial interest margin of 7.5%, rather than passing on the full economic benefit to investors. These practices obscure funds’ real risk-return profiles for investors, while leaving them in the dark about potential manager conflicts.
  2. Poor transparency and inconsistent valuations: Many funds relied on internal valuations without independent review, and some reported no impairments despite significant exposure to high-risk loans, a practice ASIC described as “inconceivable” given expected default rates of 0.5% to 15% per year for sub-investment grade credit5. The use of “as if complete” valuations in real estate lending, rather than cost-based or current value assessments, was also flagged as a method that can understate risk throughout the construction period. This can then present investors with an inaccurate picture of their risk exposure and funds’ loan-to-value ratios. ASIC found that most funds did not have effective separation between the investment committee approving loans and the representatives responsible for monitoring loan assets’ performance and value after allocation into a fund. This lack of separation can cause potential conflicts, as individuals who approve loans may be incentivised to avoid recognising impairments.
  1. Misleading marketing and distribution practices: ASIC identified aggressive marketing tactics as a concern, with some retail funds promoted as suitable for “low risk tolerance” investors or as “core” portfolio holdings, despite underlying exposures to speculative real estate and riskier borrowers6. Target Market Determinations (TMDs) were often deficient, recommending outsized allocations to private credit investment Australia without adequate disclosure of risks like capital loss, illiquidity, and limited redemption windows.
  2. Ambiguous terminology: ASIC found that terms such as “default,” “investment grade,” “senior debt,” and “secured” were used inconsistently across private credit funds, often without formal rating agency involvement or clear definitions7. This lack of clarity can easily mislead investors about the true nature of their exposures. Both retail and wholesale funds in ASIC’s review reported low levels of default, generally between 0% and 6% of the loan book8. However, these figures are not always meaningful, as each fund defined ‘default’ differently and described ‘loan security’ in its own way. As a result, investors may be presented with an incomplete or inaccurate picture of non-performing and distressed assets, making it difficult to compare products or assess the real private credit risks in their portfolios.
  3. Weak governance and limited oversight: Fewer than half of the funds ASIC reviewed had proper written policies for managing credit risk, loan impairments, and defaults9. In many cases, trustees received very little information from investment managers about how loans were performing.
  4. Poor liquidity and stress testing: The sector’s preparedness for stress scenarios was also found wanting. Of the wholesale funds reviewed, only two performed stress testing as part of their liquidity risk management10. Without proper stress testing, funds may be ill-equipped to handle market downturns or spikes in redemption requests, putting investor capital at risk.

Where to next for ASIC?

In response to these findings, ASIC has set out a clear framework for “private credit done well.” The regulator’s principles emphasise11:

  • Stewardship and organisational capability: Responsible entities and trustees must act as true stewards of investor capital, with adequate staffing, systems, and expertise in credit, risk, compliance, and valuation.
  • Transparency: Investors should have access to timely, comprehensive information on investment strategy, exposures, valuations, risks, and fees. Consistent reporting and clear definitions are essential.
  • Product design and distribution: Funds must be marketed and distributed in a way that accurately reflects their risk profile. TMDs should be robust, and allocations to private credit should be sized appropriately for investor risk tolerance.
  • Fee and cost disclosure: All fees, management, performance, borrower-paid, origination margins, and default interest, must be fully disclosed. Complex structures that obscure true costs should be avoided.
  • Conflict management and governance: Conflicts of interest must be identified, disclosed, and effectively managed. Independent oversight is critical, especially for related party transactions and multiple exposures to the same borrower.
  • Valuations: Valuations should be fair, timely, and transparent, with robust governance and periodic external audits.
  • Liquidity management: Redemption terms and liquidity risk must be clearly disclosed and managed.
  • Credit risk management: Standardised frameworks for loan origination, monitoring, impairment, and default are essential. Stress testing and escalation protocols for early signs of distress should be in place.

What does this mean for investors?

Private credit investment in Australia remains an important source of funding for borrowers underserved by banks and can offer attractive yields and diversification. However, it is not a substitute for term deposits or investment grade bonds. The sector typically lends to riskier borrowers, often in real estate development, and carries higher credit risk, greater potential for capital losses, illiquidity, and limited redemption windows.

Investors must recognise that higher returns come with higher risks. Due diligence is essential, and allocations to private credit should be sized appropriately within a diversified portfolio. Products promising high yields without transparent disclosure of risks and liquidity should be approached with caution.

ASIC’s latest private credit review therefore marks a turning point for alternative lending in Australia. The regulator has put the sector on notice; poor practices will not be tolerated, and enforcement action will follow where necessary. For managers, the message is clear: lift standards, embrace transparency, and align interests with investors. For investors, private credit can play a role in portfolios, but only as part of a well-considered, diversified strategy that matches risk tolerance and financial goals.

 

References

  1. ASIC, “Private credit in Australia,” 9 September 2025
  2. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025
  3. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 23-25
  4. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 45
  5. ASIC, “Private credit in Australia,” 9 September 2025, pp. 8-10
  6. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 20-22
  7. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 16-17
  8. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 4-5
  9. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 4-5
  10. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 4-5
  11. ASIC, “Private credit surveillance: retail and wholesale funds,” 5 November 2025, pp. 5-7