Private Credit's Moment of Reckoning: ASIC Sounds the Alarm as Global Risks Mount

The world of private credit is growing at an unprecedented pace, and Australia's corporate regulator is watching closely. ASIC commissioner Simone Constant has warned that the opaque and rapidly expanding sector could be heading for a "bumpy" period, particularly as global markets show signs of strain and local property values come under pressure.

Wall Street is ground zero for the alternative investment market, and there are fears this massive, risky US private lending ship is sinking. Investors are jumping out, and the ripples are being felt as far away as Australia.

Blue Owl, a major US private credit firm, had to limit investor withdrawals this year as the company bled value from souring software investments. Its shares have plummeted 40% this year as investors fretted about its exposure to ailing software companies. US auto lender Tricolor Holdings and UK mortgage lender Market Financial Solutions have already collapsed.

"If the Australian property is overvalued, and we see those practices emerging, and it happens at scale, you get gaps," Constant told The Business. "When you get those gaps, you get problems with liquidity, you get lagging in data, you get the risk of default, for example. Investors putting their money into things that don't stack up" .

The Scale of the Problem

Private credit refers to lending outside the banking sector. In Australia, it has ballooned from roughly $35 billion a decade ago to $250 billion today . Over half of all private lending in Australia is concentrated in property development and construction, making the sector particularly vulnerable to a downturn in the housing market .

It's not just retail investors exposed. Superannuation funds and institutional investors have piled into the asset class. With Australia's $4.5 trillion superannuation sector deeply intertwined, the regulator is worried about what happens when the music stops.

"So increasingly, every working Australian, investing Australian does have exposure to private credit," Constant said.

Global Warning Signs

Central banks are taking notice. The Bank of England launched a system-wide exploratory scenario exercise in December to better understand the risks in private markets . Governor Andrew Bailey has noted "some signs of strain," with a "quite big increase in requests for outflows".

Verdad Adviser managing partner Dan Rasmussen has been warning of major global financial stability risks from an eventual implosion of US private credit. He warns of a negative feedback loop in which software companies default on their debt and trigger further panic.

"There's $100 billion of loans outstanding, and there's only $50 billion of new fundraising in private credit," he said. "No bank is going to lend to them, so either the private credit lends to them or they go bankrupt" .

Local Risks and Reality

Australian private credit provider Brett Craig, director of private credit at Aura Group, said investors in Australian property finance need to be careful.

"Lending against property construction transactions is a good way to make money if you know what you're doing and you can actually step in should the borrower default," he said. "But it is a very good way to lose money if you don't have that ability to step in and complete a project".

Wilson Asset Management portfolio manager Nick Kelly shares the concern. "I think the Australian market will face its own challenges in the future, just given the amount of capital that's being deployed into this market, into assets that I don't think are as safe as some people perceive them to be," he said .

Private credit has grown to a size and breadth that hasn't been seen before, and regulators are warning it hasn't been properly tested in a downturn. For Australian investors, the key question is how much of their superannuation is exposed to this opaque sector and what happens when the risks hidden beneath the surface finally surface. As Constant put it: "What could go wrong? Investors could lose money. They may not understand they're going to lose money, and that could happen at some scale".