One is the sheer size and rapid growth. It’s been estimated that the market is worth up to $US3 trillion globally ($4.6 trillion) and about $200 billion in Australia.
But another problem is we don’t really know how big the sector is, unlike in banking, where regulators and the markets scrutinise banks’ loan books closely. There are also concerns about a lack of consistency in how assets are valued, how fees are charged and the potential for conflicts of interest, though the Australian Securities and Investments Commission has said it’s a mixed picture in the industry.
Big super funds’ exposure to private credit has been growing as the asset class has boomed. Credit: Dominic Lorrimer
J.P. Morgan boss Jamie Dimon colourfully identified the broad fears when he said the two recent US collapses raised his antenna and said, “when you see one cockroach, there are probably more”.
For ASIC, the timing of the recent blow-up has been useful for raising awareness. ASIC chair Joe Longo has been warning about private credit risks for more than a year. Earlier this month, he was in the US to meet with big banks, investors and US regulators. At the same time, US investors got increasingly worried about private credit risks.
It’s a fair bet that private credit was one of the topics that came up repeatedly in Longo’s talks with the likes of JP Morgan, Goldman Sachs, investment giant Blackstone and the chair of the Securities and Exchange Commission.
Longo said his discussion with regulators in the US made it clear they did not think the problems were “systemic” and that the US watchdog was publicly supportive of the private credit market.
ASIC chair Joe Longo has repeatedly flagged concerns about private credit.Credit: Alex Ellinghausen
“It has shaken some complacency around private credit, but I don’t think players in the market or the regulators are concerned about a systemic issue,” Longo said.
Others have opted for more dramatic language. IMF boss Kristalina Georgieva last week said worries about non-bank lending were questions that often kept her awake at night.
Bank of England governor Andrew Bailey also grabbed headlines last week by saying the two firms’ collapses could point to wider problems. He wondered if they were a “canary in the coal mine”.
Capital Economics says worrying about potential risks is the raison d’etre for regulators, but all the same, their concerns have been pretty clear.
“Given the ongoing hunt for asset price bubbles, whether in tech or AI or gold or crypto-assets, it is perhaps worth asking whether there is a bubble in private credit,” it said.
What does all this concern mean for Australia? Importantly, Australia’s $200 billion private credit market is not the same as that in the US, where funds are doing all sorts of business lending.
About half of our private credit goes to funding real estate lending, especially property development, which is a crucial but risky sector that has repeatedly caused hefty losses for banks.
As for how the private credit boom affects you, there’s a very good chance you’re exposed to private credit through your super fund.
Super funds have been allocating a growing share of their money to “private” or unlisted assets, and credit (i.e. loans) is a key part of that. So if you’re with a big retail or industry super fund, you probably have exposure to private credit, and it has probably made you some good money.
Loading
That exposure is only likely to grow over time because it’s such a fast-growing sector. ASIC said large super funds were typically investing in private credit funds with “sound” governance and fees.
Self-managed super funds had also piled into the sector, ASIC said, though it worried that some of them might not appreciate the risks they were taking.
It must be said that, so far, private credit has delivered strong returns to super members, and that’s why the funds keep ploughing their money into the asset class.
ASIC has also said there is a wide range of operators out there, some with much higher standards than others. What’s more, it said that if private credit was done well, it could fulfil an important economic function by providing a new source of funding for businesses so they could invest and grow.
But the watchdog wants to see a lift in standards, and it will say more on this next month when it publishes the latest piece in its work on private markets.
Whenever there’s rapid growth in new financial activity, people naturally worry about the risks building up beneath the surface. In truth, we won’t know the full picture until the private credit funds and the businesses they have lent money to are tested by an economic shock.
But for now, it’s in all our interests for regulators to run a fine-tooth comb over this rapidly growing sector, and for investors to tread carefully.
