Stockspot’s CEO has joined a growing chorus of voices raising red flags over the asset class, citing high fees, opaque structures and governance risks that make it hard for investors to understand what they’re really buying.
“Private credit may look like a steady source of income, but beneath the surface it can carry risks that can quickly spill over when loans turn bad,” Chris Brycki, the CEO and founder of Stockspot, wrote in a recent post.
His warning comes on the heels of high-profile sector events.
Namely, last week ASIC slapped interim stop orders on the La Trobe US Private Credit Fund and two Australian term account products, citing problems with target market determinations, unclear investment time frames and weak controls over who could buy the products.
Meanwhile, Metrics Credit Partners has also been under scrutiny following Lonsec’s downgrade of three Metrics funds, highlighting overlapping investment committees, related-party transactions and rising equity exposure that could blur the firm’s mandate.
Investors reacted quickly to the latter with platforms including Macquarie Wrap pausing new superannuation inflows into affected Metrics funds, resulting in a spike in trading volumes and a drop in unit prices fell.
“Metrics has since promised fixes, including adding independent directors and creating a head of governance role. But critics argue these steps look reactive, not proactive,” Brycki wrote.
The worry, he said, is that the firm has blurred its mandate by taking equity stakes in troubled borrowers, making it harder for investors to know exactly what risks they are exposed to.
Outside of these issues, Brycki said fees are another sticking point in the asset class in general.
Referencing the ASIC-commissioned report released this week, which found some private credit managers earn undisclosed fees three to five times higher than advertised and, in some cases, keep default interest from struggling borrowers, Brycki questioned whether investors are truly being compensated for the risks.
“Private credit can be ‘like picking up pennies in front of a steam roller’. If private credit involves lending to riskier borrowers or stepping in to take over failing businesses, investors should arguably be receiving an even larger premium,” he said.
Other industry voices have recently made similar points.
Just last week, Helen Mason of Schroders warned that private credit has become “a victim of its success”, highlighting falling returns, looser lending standards, liquidity mismatches, and the expansion of private credit into exchange-traded funds and retail channels as factors that could amplify structural weaknesses.
Earlier this month, Roy Keenan, co-head of fixed income at Yarra Capital Management, said he is not opposed to private markets but believes greater transparency and clearer valuation policies would benefit the private credit sector.
“I think from ASIC’s point of view or any private credit manager, transparency and having openness on valuation policies or whatever it may be can only be good for the sector in my view,” he said.
“I think portfolio managers, we should embrace it. And yes, there will be confidentiality because there’s private agreements between counterparties and vice versa. But I’m sure we can find workarounds in some of those things."
Keenan’s advice to investors is to “stick to the big managers”– a point partly echoed in the ASIC-commissioned report, which found that private credit managers catering to the institutional end of the market demonstrate better operating practices when compared to their smaller counterparts.
