Andrew Kemp
ASIC’s call-out around weaknesses in private credit fund governance and valuation practices has support from leading asset consultant Frontier Advisors.
Frontier has provided its perspective following the release of ASIC’s report on the Australian private credit market, highlighting opportunities for investors and platforms to strengthen transparency, governance, and risk management.
The ASIC report, which surveyed 28 private credit funds, identifies a number of risks in private credit. The report notes areas where investor protection and market transparency can be improved, including conflicts of interest, valuation practices, fee arrangements, liquidity management, and investment reporting.
Frontier works closely with institutional investors across the spectrum, including some of Australia’s largest investors, providing detailed assessments of fund governance, valuation methodologies, and risk management practices.
The firm is positive on the private credit sector and while it says some of the issues raised are less common in the institutional market, agrees with the regulator that the bar can be raised on standards of transparency and consistency.
Frontier’s key call-outs and areas for attention in the report include:
- Conflicts of interest: The report flags structures where managers use special purpose vehicles to capture net interest margins rather than passing them to investors or where managers commit to a target return for the investor yet generate a potential competing interest through hidden fees or higher risk asset exposure.
- Valuation practices: The lack of independent, robust and timely valuations can weaken investor confidence and transparency in this asset class.
- Liquidity management: certain private credit funds can face liquidity mismatches between assets and investor capital requirements particularly in stressed environments, including the risk of distributions being paid from capital without sufficient disclosure.
- Investment reporting and transparency: Reporting on loan characteristics, risks and valuations can be opaque, and unclear terminology in documentation can lead to investor confusion.
“Private credit remains a key component of the investment landscape, but it comes with complexities that demand rigorous oversight,” said Andrew Kemp, Deputy Head of Research and Head of Private Markets at Frontier.
“Assessment of risk has been a central tenet of our approach to private credit due diligence for many years. Our private market credit survey is a key part of this process, allowing us to compare spreads, assess risk, and benchmark performance across managers and over time.”
Frontier has been running a detailed, independent survey of the private credit universe for eight years assessing all areas of risk across a wide range of leading private credit managers across Australia, Europe and US. The results have informed the asset consultants work with some of the country’s largest superannuation funds.
In a reflection of growing interest from asset owners, Frontier reports that in the last eighteen months the firm has completed an extensive review of over 100 private investment valuation policies and been engaged on a number of projects providing valuation committee support, addressing out-of-cycle triggers, gap analyses of policies and practices, and enhanced data assessments.