Christopher Joye, chief investment officer at Coolabah Capital Investments, has described the Australian private credit landscape – valued at over $188 billion – as the “Wild West” due to its lack of regulation and publicly available data.
At a Pinnacle event last week, he highlighted that investors are facing the second-largest default cycle in high-yield or speculative debt since the Global Financial Crisis (GFC) of 2008–09.
However, he noted that investors in private credit may be in the dark about the situation due to the limited information available on arrears and losses.
“I can’t show you default data for private credit because it doesn’t exist. They don’t report anything,” Joye said.
“This is what happens in the Wild West when you’re completely unregulated.”
He noted that, with private credit, investors are unable to access essential information such as delinquencies, arrears, loan-to-value ratios (LVRs) and restructurings, as these details are not disclosed by private market managers.
Joye explained that during the GFC, he advised the government on a $15 billion bailout for non-bank home loan lenders, which required them to adopt disclosure standards, and he believes private credit will eventually face similar disclosure requirements.
“When the lenders had to be bowed out in the GFC, and they were bowed out, I actually advised Kevin Rudd and the government at the time on a $15 billion investment to bail out the non-bank lenders – but the quid pro quo was they had to sign up to disclosure standards because the RBA wouldn’t support the idea unless non-banks told us what was in their home loan portfolios,” Joye said.
“Now every non-bank home loan lender in Australia has to disclose, every month, their arrears, losses, LVRs, the types of loans, the geographic dispersion, etc. I think, eventually, private credit is going to be forced to do this.”
Andrew Lockhart, managing partner at Metrics Credit Partners, noted that their experience demonstrates how high governance standards and continuous disclosure efforts can address concerns about the opacity of private markets.
Also speaking at the Pinnacle event, he explained that Metrics funds adhere to stringent governance standards, including an independent responsible entity and an independent trustee for all its funds.
“To ensure the responsible entity and trustee can comply with their obligation around continuous disclosure, they’ve appointed EY to do a valuation and impairment testing on our assets every month. Every month, we distribute our income to our investors on all our funds,” he said.
“Every half year, KPMG does an audit and a review – again, detailed assessment around the valuation, carrying values of those assets, risks of any potential loss.”
He added: “I think, if you’re in a private credit fund that’s got 10 or 15 assets, and it’s got a related party trustee, and you’ve got no transparency, then yes, you have a problem.”
Under the regulatory microscope
In August, the Australian Securities and Investments Commission’s latest corporate plan highlighted the significant growth of private markets and announced that a review of these opaque markets will be a key focus of its activities for 2024–28.
Moreover, earlier this year, the International Monetary Fund called for more vigilant regulation and supervision of private credit in its April 2024 Global Financial Stability Report, warning that while the asset class poses limited immediate financial stability risk, its rapid growth and limited oversight could turn existing vulnerabilities into more systemic risks.
Reflecting on these developments, Joye observed that regulators are “jumping on the bandwagon” to address concerns about the concentrated nature of private debt portfolios, the use of leverage for liquidity, and the lack of standardised reporting, among other issues.
“They’re worried about funds claiming these portfolios are very low risk and free of defaults when actually, the managers are extending and pretending,” he said.
“They’re worried about completely unregulated shadow banking and they’re worried about any lack of standardised reporting and the resistance to such.”
