“Private credit, done well, has a valuable role to play in the Australian economy,” the authors of an ASIC-commissioned report said – and yet the same report warned the sector is riddled with practices that could leave investors exposed.
The report, prepared for ASIC by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams, and published on Monday, found roughly half of the estimated $200 billion market is concentrated in real estate-related lending, much of it in construction and development finance – a segment the authors said carries elevated risk.
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.
Conflicts of interest
One of the sharpest findings relates to how managers are compensated.
While international managers typically pass all borrower fees to investors, the report found some Australian managers “retain 50–100 per cent of upfront and other fees paid by borrowers”.
These borrower-paid fees are commonly excluded from headline fee disclosures – a practice that can materially understate the true cost to investors.
“Non-disclosed remuneration can be a multiple of up to three to five times the publicly disclosed fund management fees,” the authors said.
Additionally, the report flagged that in borrower negotiations, fee structures that allow managers to retain a large portion of fees could be at odds with maximising interest margins for investors. In certain cases, the authors said, interest payments may even come from loan capital.
Worse, the report described how “net interest margin capture” can occur: lenders use special purpose vehicles to lend to borrowers at one rate and pass a lower rate to investors while “managers retain the excess margin”, creating a structure where the manager is both adviser and beneficiary.
“This means the manager may be acting on behalf of investors and on their own account as the lending intermediary,” Timbs and Williams said.
“It also means the true interest return for the risk being taken is not being passed on to investors, or is not completely transparent to investors, impacting their potential understanding and assessment of credit risk,” they warned.
According to the authors, the benchmark is clear: “Best practice, consistent with most international practice, is for borrower fees to be paid directly to fund investors, with managers charging transparent management fees.”
Governance gaps exposed
Related party transactions further complicate the picture.
Namely, loans to related developers, or transfers between funds managed by the same group, may occur without robust independent valuation oversight, Timbs and Williams highlighted.
“This can be compounded by a lack of independent governance in fund management,” they stated, adding that multiple capital stack exposures – holding any combination of senior debt, mezzanine debt, and equity positions in the same borrower – can create further conflicts in decision-making and actions during periods of distress.
“While conflicts are not inherently detrimental, their existence increases risks for investors, without full disclosure, independent oversight and clear governance protocols.”
Valuations: Infrequent, internal, and inconsistent
If fees can obscure what investors pay, valuation practices may obscure what they actually own, with the report flagging many funds “do not undertake quarterly valuations, and some rely on internal processes without independent review”.
That combination, the authors said, risks overstating asset values and under-reporting impairments – especially acute in property development where value swings are dramatic.
The report also drew attention to technical but consequential choices – for example, valuing real estate on a gross-rent basis rather than a net-effective-rent basis when rental incentives are substantial, or quoting loan-to-value ratios based on forecast completion values rather than current cost – all moves, the authors stated, that can materially understate risk.
Secondary issues
Secondary issues highlighted in the report include questions around liquidity, investment reporting, definitions, and concentration.
On liquidity, the report questioned whether disclosures about opportunities and processes are adequate, given differences between open-ended and closed-ended funds. It also warned of liquidity mismatches between investor withdrawal needs and the underlying asset pool, noting the importance of stress testing.
On investment reporting, the report found inconsistent practices across the market, leaving investors – particularly retail participants – with limited visibility of their true exposures.
On definitions, the authors pointed to the inconsistent or vague use of key terms, urging clearer and more standardised explanations.
And on concentration, the report raised concerns about the unknown amount of debt and credit risk within certain sectors, especially real estate, alongside the growing exposure of retail investors to private credit.
Real-estate concentration
In an area of the report specifically dedicated to real estate, the authors highlighted that Australia’s market differs from many overseas peers because of the sheer proportion of private credit sitting behind real estate.
The pair warned that “the concentration of Australia’s private credit market in higher-risk real estate construction and development is where we see the greatest area for improvement for investor protection and market integrity”.
“This market segment has a higher concentration of investors using the wholesale sophisticated investor exemption, and with less transparency on conflicts of interest, manager remuneration disclosure, and valuations and portfolio reporting,” Timbs and Williams wrote.
That matters, the pair noted, because construction finance is often negative cash flow – interest is capitalised, and returns depend on successful sale or refinance at completion.
“A number of the real estate funds targeting self-managed superannuation funds offer monthly distributions of approximately 0.70–1.00 per cent, despite these loans not generating regular interest payments. The question needs to be asked as to whether distributions are being paid from capital – from loan capital drawdown or new investor funds,” the authors said.
“More transparency of the cash income the funds produce to support fund distributions to investors is needed. A suggestion for addressing this point is to require that fund reporting show the proportion of distribution income coming from cash income received by the fund and from capital. Such a ratio will be easier for retail investors to understand than a detailed cash flow statement.”
What should ASIC do?
Far from merely alarmist, the report also set out a list of practical, measurable good practices, including “regular” fund composition reporting (number of loans, concentration by borrower, proportion of loans in arrears), independent quarterly valuations, full disclosure of all manager remuneration (including borrower fees and net interest margins), and clearer definitions of key terms such as “security” or “senior”.
“We believe there will be industry support for industry-led guidance on best practice operations and reporting for Australian private credit,” Timbs and Williams said.
“Despite the market being broad, and the wide range of quality and capability among private credit operators, it is likely that the larger and more significant participants would coalesce around practices similar to what we have outlined as good practices,” the authors noted, adding that smaller, “less sophisticated operators” may be less interested in “voluntarily signing up to improved practices”.
Why it matters
The report concluded that, for now, the market is too small to pose a systemic threat, making widespread risk “unlikely to be a major concern today”.
It did, however, warn that concentrated exposures – especially in property development – and growing bank linkages to private credit could change that calculus in a downturn.
“Stress testing for the impacts of an economic downturn, especially on real estate values, would be particularly instructive for managers and regulators,” the authors advise.
If the market is to keep growing without sowing future losses, the report said, participants should embrace transparency rather than resist it.
“The integrity of the market depends upon investors, borrowers and the broader financial community having confidence in the transparency and workings of the sector”.
How did ASIC react
In a statement accompanying the report’s release, ASIC chair Joe Longo said the research showed the importance of adhering to existing regulation and highly regarded global standards to ensure confidence in Australia’s private credit sector.
“Private credit is playing an important role in our capital markets and Australia should implement industry standards that align with international best practice,” Longo said.
“Enhanced standards are needed to lift practices across the sector. They will help promote confidence, improve market integrity and empower investors to make informed decisions.
“When an industry agrees on clear standards, it shows a strong commitment to doing things right and we welcome the industry’s commitment to leading this work. They need to act decisively.”
ASIC, Longo added, expects meaningful action in response to these findings and will not hesitate to intervene where progress falls short.
In November, ASIC will release its response to the discussion paper on Australia’s evolving capital markets, alongside its retail and wholesale surveillance findings.
The regulator said the response will set out clear principles, supported by further research and expert input, to shape its future priorities, work program, and regulatory roadmap.
