Niche Australian fund-rating house, SQM Research, has put the entire private credit sector ‘on watch’ amid regulatory concerns and simmering risks that could see a number of product downgrades this year.
In a statement last week, the research house called out a long list of “issues” seen with “increasing frequency” in the fast-growing private credit market – especially among wholesale funds.
The researcher says its concerns centre on some private credit fund practices including lack of transparency, poor disclosure, conflicts of interest, and “dubious marketing strategies involving advisers”.
While the problems were not “endemic” in the sector, SQM says the risks appear most commonly in newer wholesale funds.
SQM has “screened out” about 20, mostly wholesale, private credit funds over the previous 12 months while it rates 70 or so products in the asset class.
Several Australia-based private credit funds are also offered in the NZ market, either structured as portfolio investment entities – wholesale or retail – and under the trans-Tasman mutual recognition agreement.
Louis Christopher, SQM managing director, said in the release: “We have an expectation that wholesale funds provide the same transparency as retail funds.
“On that front there is no question there has been a rapid increase on wholesale fund offerings which we think has been driven in part by a rapid increase in the number of Australians who now qualify as a sophisticated wholesale investor/high net worth individual; the threshold of which is still set at $2.5 million dollars in net assets or a gross income of $250,000 per annum.”
Last month a joint Federal parliamentary committee report recommended no change to the country’s wholesale thresholds, dismissing concerns expressed by the Australian Securities and Investments Commission (ASIC) and others.
However, Christopher said “there is a clear link between weak governance and poor outcomes for investors” as pointed out by regulators.
“And so, while we have throughout our ratings research history, placed an emphasis on fund governance, we are determined more than ever to reduce the risks for investors by taking an increasing cautious approach to potential governance issues,” he said.
The research house, though, does not expect a private credit meltdown similar to the 2008 crisis that saw many mortgage trusts freeze redemptions.
“While SQM Research expects the bulk of its existing ratings to not be impacted by this watch, it cannot rule out some funds to being downgraded or discontinued over the next 12 months,” the release says.