Christopher Joye, chief investment officer at Coolabah Capital Investments, described Australia’s private credit landscape – valued at more than $188 billion – as the “Wild West” due to its lack of regulation and publicly available data.
At a Pinnacle event last week, he highlighted that investors are facing the second largest default cycle on high-yield or speculative debt since the 2008-09 global financial crisis (GFC).
He noted, however, that private credit investors may not be aware of the situation due to limited information available on arrears and losses.
“I can’t show you the default data for private credit because it doesn’t exist. They don’t bring in anything,” Joye said.
“This is what happens in the Wild West when there are no regulations.”
He noted that with private credit, investors are unable to access essential information such as outstanding payments, arrears, loan-to-value ratios (LVR) and restructurings, as these details are not available. disclosed by private market managers.
Joye explained that during the GFC he advised the government on a $15 billion bailout for non-bank property lenders, which required them to adopt disclosure standards, and he believes private credit will ultimately be faced with similar disclosure requirements.
“When lenders had to pull out of the GFC, and they were shown the door, I actually advised Kevin Rudd and the government at the time on a $15 billion investment to bail out non-bank lenders – but the trade-off was they had to adhere to disclosure standards because the RBA wouldn’t support the idea unless non-banks told us what was in their home loan portfolios,” Joye said .
“Now all non-bank property lenders in Australia must disclose, on a monthly basis, their arrears, losses, LVRs, loan types, geographic dispersion, etc. I think that ultimately, private credit will be forced to do this. This.”
Andrew Lockhart, managing partner at Metrics Credit Partners, noted that their experience demonstrates how high governance standards and continuous disclosure efforts can address concerns about the opacity of private markets.
Also speaking at the Pinnacle event, he explained that Metrics funds adhere to strict governance standards, including an independent accountable entity and an independent trustee for all its funds.
“To ensure that the Responsible Entity and Trustee can comply with their continuous disclosure obligation, they have commissioned EY to carry out a monthly valuation and impairment test of our assets. Every month we distribute our income to our investors across all our funds,” he said.
“Every six months, KPMG conducts an audit and review – again, a detailed assessment of the valuation, the carrying values of these assets and the risks of potential loss.”
Under the magnifying glass of regulations
In August, the Australian Securities and Investments Commission’s latest business plan highlighted the significant growth in private markets and announced that examining these opaque markets would be a key focus of its activities for 2024-2028.
Additionally, earlier this year the International Monetary Fund called for more vigilant regulation and monitoring of private credit in its countries. April 2024 Global Financial Stability Reportwarning that while this asset class poses limited immediate risk to financial stability, its rapid growth and limited oversight could turn existing vulnerabilities into more systemic risks.
Reflecting on these developments, Joye observed that regulators are “jumping on the bandwagon” to address concerns about the concentrated nature of private debt portfolios, the use of leverage to obtain liquidity, and the lack of standardized reporting , among other problems.
“They are concerned that funds are pretending that these portfolios are very low risk and free of defects when in reality the managers are stretching their efforts and pretending,” he said.
“They are concerned about a completely unregulated shadow banking system, as well as the lack of and resistance to standardized reporting.”
