Perpetual’s Michael Murphy penned a piece this week urging investors to “get ahead of regulatory changes” and do their own due diligence on private credit investments.
Citing ASIC’s recent private markets report and the regulator’s fears regarding transparency, Murphy alleged that there is evidence of managers leaving asset valuations unchanged despite broader market downturns.
Some managers, he wrote, are leaving asset values at par even during periods of extreme dislocation like the pandemic.
“The question to ask is: are your assets marked to market? When assets become impaired, are you marking them down to reflect that? This is the kind of thing that’s fine until it’s not,” Murphy said.
He also alleged that some managers use “self-estimated credit ratings” instead of independent ratings from agencies like S&P or Moody’s, referring to the process as “marking your own homework”.
“They generally get auditor to sign off, but I don’t think they really push back on those in the way you would if it was done by a proper rating house,” Murphy said.
“The way we treat those is anything that isn’t rated, we have it in a non-rated bucket and tell investors to think of that as sub-investment grade exposures, even though we think they’re still really high-quality investments.”
Moreover, the portfolio manager alluded to conflicts of interest in private credit, alleging that some managers retain upfront fees, potentially prioritising high-fee deals over those with better long-term risk-return outcomes.
“You don’t want investors going for deals just because they have the highest upfront fees.
“We think it’s best practice to have a flat management fee, so you’re aligned to investor outcomes.”
Perpetual’s note is just the latest swipe at fund managers operating in private credit, an area in which Perpetual itself operates.
Just this week, it was reported that Count Financial has recommended for its advisers to exit three Metrics Credit Partners funds, over concerns with private credit risks.
The $22 billion non-bank lender pushed back, arguing its investment products are institutional-grade, with strong transparency and governance standards.
Speaking to InvestorDaily’s sister brand Money Management, Lonsec said on Wednesday it has enhanced its private markets model to better capture additional risks such as illiquidity and governance.
“Lonsec’s approach to the growth in Australian private credit funds has led to adjustments and an uplift to the seven-factor model and the governance framework overseeing the initiation of coverage,” said Darrell Clark, deputy head of research and sector manager – alternatives at Lonsec Research and Ratings.
“While private credit clearly has benefits, it also carries risks related to illiquidity, valuation governance and leverage, among others.
“Lonsec applies rigour in any review process to ensure these factors are thoroughly captured and integrity is maintained in any rating generated. Moreover, Lonsec seeks to remain adaptable to evolving market dynamics and ASIC’s ongoing reviews of private markets, ensuring our approach aligns with best practices and regulatory expectations.”
