“Private credit has almost been a victim of its success,” said Helen Mason, who manages fixed income and multi-asset strategies at Schroders.
She said post-Global Financial Crisis low-yield conditions fuelled investor demand for higher returns, popularising the asset class and creating an environment where lenders increasingly took on riskier loans in order to service demand.
“Before you were getting 14 per cent, now you’re getting 10, now 8 per cent for the same amount of risk if not more because lending standards have reduced,” Mason said.
Concerns over governance are mounting, Mason warned, echoing Lonsec’s recent downgrades of several Metrics funds and SQM’s earlier note that private credit remains ‘on watch’.
“Say one of the loans goes into default, because they are not required to have an external valuer, they don’t say, ‘We’ve defaulted’… They’re marking their own homework essentially,” Mason said.
Liquidity mismatches in listed private credit structures are another growing concern, she said, meaning investors may struggle to redeem their units if the underlying assets cannot be sold quickly, creating potential delays and losses.
“You can’t put illiquid private loans into a listed structure and expect liquidity to hold up forever. It works while sentiment is strong, but once markets turn, investors discover their units can plunge to a discount,” Mason said.
The warnings come as ASIC on Thursday announced its intervention in retail private credit, highlighting potential consumer harm.
Namely, the regulator announced it has issued interim stop orders against the 12 Month Term Account and 2 Year Account products offered under the La Trobe Australian Credit Fund, citing deficiencies in target market determinations and concerns that investors may be exposed to inappropriate risks.
The stop orders prevent La Trobe from accepting new investments into the affected products while the issues are addressed.
Mason said advisers should be cautious, particularly given discrepancies between rating agencies and governance concerns.
She also flagged private credit's expansion into exchange-traded funds (ETF) and retail channels, which she said could exacerbate underlying structural weaknesses.
“The worst thing is they’re now all doing ETFs. What could possibly go wrong, when an instrument that you say is liquid … trades daily, but the underlying assets are illiquid? I am worried!” she said.
Concluding her warnings, Mason said regulation may be necessary to protect investors.
“Regulation might make some of these companies unviable … I back regulation.”
As reported by InvestorDaily this week, investors and advisers are facing growing uncertainty in private credit, as research agencies deliver sharply divergent assessments of the same funds.
While quantitative measures largely align, qualitative evaluations – particularly around governance and risk management – can differ significantly, creating challenges for both institutional and retail investors.
AMP chief economist Shane Oliver said such differences are not necessarily a red flag, but they should be treated as a cautionary signal.
“If someone’s raising it, flagging it as an issue, it would give you a bit of caution over it,” he told InvestorDaily.
