From the European side of the ledger, Stephane Blanchoz, a client solutions manager at BNP Paribas Asset Management, said extra scrutiny is simply the cost of doing business – especially on valuations.
“It’s not nuclear science. It’s a question of cash flow, question of probability of default, question of liquidity premium,” he said in Sydney on Friday.
Speaking at the Australian Wealth Management Summit, Blanchoz highlighted how long-standing regulatory engagement and disciplined valuation practices have been central to private credit markets abroad.
“Ten years ago, a bit more than that, I went to the regulator explaining how we would value illiquid credit … And the regulator stamped it, it’s part of our activity program. We operate under regulation,” he said.
“Second, we have auditors like PwC, those types of firms, stamping the valuation we’re doing. In addition to that, when we go for distribution to non-professional investors, evergreen format, we are making sure we have a third party, independent valuators deep diving into the credit, to confirm what we are doing.”
The point, he said, is to ensure the asset class is not viewed as opaque.
“We have to be transparent, and that is absolutely normal.”
Speaking alongside Blanchoz on a panel specifically about private credit, Andrew McVeigh, managing partner at Remara, pushed the urgency button.
His firm runs institutional money through private credit structures with layered oversight, with McVeigh sharing that “monthly, we have about 80-odd eyes that look at the cash flow report”, but he worries smaller peers will struggle.
“Not all private markets and not all asset managers in private markets are created equal,” he said, warning that the crunch is most likely where governance budgets are thinnest.
“[In] Companies similar to us and similar to Metrics, that have retail funds, there is a very high bar and high standards. I think the challenge is when you start to get into funds and managers that are wholesale only, and are relatively small, sub a $100 million, they generally have a lot less resources for the governance and oversight that is needed,” McVeigh said.
“It’s a key point that ASIC will need to look at, because there will be challenges that will come in private market investment firms in less than 24 months.”
ASIC signalled it will not sit on the sidelines as private markets boom, declaring it is “not a passive observer” and will not take a “wait and see” approach.
Currently, the regulator appears to be weighing up whether strategic interventions are needed to manage the risks that come with private markets, while keeping public markets clean and accessible.
It has called for feedback, released submissions, commissioned expert papers and undertaken closer surveillance of private-credit providers, and most recently flagged that a dedicated paper on private credit will land next month.
But the sector, for its part, is pushing back on the idea that a crackdown on private credit has already arrived.
Andrew Lockhart, CEO and managing partner at Metrics, told the Australian Wealth Management Summit that what’s been painted as a probe into private credit is “actually a review into private markets”.
In his words: “ASIC is quite right to say, ‘Are managers that are operating in private markets adhering to high corporate governance standards and are doing things that are appropriate to deliver good outcomes for investors?’ That’s really the basis for the discussion paper. It wasn’t an investigation into additional regulatory requirements in relation to private credit.”
Lockhart did, however, acknowledged that one outcome of the process has been ASIC subjecting some private credit managers to reviews as it works to better understand the sector.
But Metrics, he assured, was built different – “as an institutional-grade asset manager” with independent oversight from day one.
“When we set up the business, we set it up with an independent responsible entity and trustee to ensure there was appropriate governance and oversight of the activities of the investment manager. That regime still remains today, and I think it’s the best thing,” he said.
The weak spot, he, like McVeigh argued, is elsewhere – managers “that perhaps don’t have the necessary skillset, resources, the technical capacity”, raise a fund in a wholesale vehicle with a related party trustee as the trustee of that entity.
“There’s clearly a lack of independent oversight,” Lockhart said.
“That obligation to ensure that investors’ best interests are protected is fundamentally the culture within our business.”
His bottom line is cooperative: “From our perspective, we’re very supportive of the role of ASIC in terms of ensuring that investor protections are in place.”
