Darrell Clark
Private credit has emerged as one of the fastest-growing segments of Australia’s capital markets, now estimated at around A$200 billion. Its rise reflects a pullback in traditional bank lending and strong investor appetite for yield. The release last month of ASIC Report 814: Private Credit in Australia (REP 814) has brought renewed focus to the sector’s governance, transparency, and investor protection standards.
While REP 814 identifies several areas of concern, including opaque fee structures, related-party exposures, and valuation practices, it also acknowledges that “private credit, done well, has a valuable role to play in the Australian economy.” Lonsec Research and Ratings supports this view and believes that higher standards are both achievable and essential for long-term investor confidence.
“REP 814 highlights the sector’s growing importance and the need to lift standards around governance and transparency”, said Darrell Clark, Deputy Director of Research at Lonsec Research and Ratings. “Lonsec’s research process already aligns closely with these principles, supporting advisers in identifying well-structured, high-quality products.”
Lonsec’s 7-factor ratings model includes specific assessments that align with the issues raised in REP 814:
- Opaque fees: Assessment included in the ‘Fees’ factor including the overall quantum of fees and fairness.
- Related party exposures or conflicts: Assessment included in the ‘Business’ factor within ‘Business Governance’ and/or ‘Portfolio Construction’ within the ‘Process’ factor.
- Valuation practices: ‘Valuation Governance’ sub-factor included in the ‘Product’ factor.
- Liquidity: Liquidity assessment including a comment on mismatches, disclosure, and redemption mechanisms included in the ‘Product’ factor.
- Investor disclosure: Assessed in the ‘Transparency’ sub-factor included within the ‘Product’ factor.
Funds that fall short in these areas receive lower scores, while those demonstrating strong governance and disclosure are recognised accordingly. Lonsec’s overall opinion and rating commentary reflect a product’s relative strengths and weaknesses versus its peer group.
Earlier this year, Lonsec Research and Ratings published Private Credit: Balancing Opportunity and Risk in a Growth Market, outlining minimum gates for managers seeking a rating. Where these standards are not met, Lonsec will not proceed to coverage. This ensures that only managers demonstrating sound practices are considered.
Australia’s private credit sector is still maturing. Strengthening governance, transparency, and conflict management will benefit investors and bring the sector closer to global standards. Lonsec Research and Ratings will continue to lead through its research methodology, supporting advisers and investors in making informed decisions.