Christopher Joy, 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 the lack of regulation and publicly available data.

At a Pinnacle event last week, he highlighted that investors are facing the second biggest default cycle in high-yield or speculative debt since the Global Financial Crisis (GFC) of 2008-09.

However, he noted that private credit investors may not be aware of the situation because of the limited information available on delinquencies and losses.

“I can't show you default data for private credit because it doesn't exist. They don't report anything,” Joy said.

"This is what happens in the Wild West when you're completely unregulated."

He noted that in private credit, investors do not have access to essential information such as arrears, delinquencies, loan-to-value ratios (LVRs) and restructurings, as these details are not disclosed by private market managers.

Joy explained that during the GFC he advised the government on a $15 billion bailout for non-bank home loan lenders, which required them to adopt disclosure standards, and he believes private credit will eventually face similar disclosure requirements.

"When lenders had to be turned down in the GFC, and they were turned down, I actually advised Kevin Rudd and the government at the time for a $15 billion investment to bail out non-bank lenders - but the quid pro quo was they had to adhere to disclosure standards of information because the RBA was not going to support the idea unless the non-banks told us what was in their home loan portfolios,” Joy said.

“Every non-bank home loan lender in Australia now has to disclose every month their arrears, losses, LVRs, loan types, geographical dispersion etc. I think eventually private credit will be forced to do that.”

Andrew Lockhart, managing partner at Metrics Credit Partners, noted that their experience shows how high governance standards and ongoing disclosure efforts can address concerns about opacity in private markets.

Also speaking at the Pinnacle event, he explained that Metrics' funds adhere to strict governance standards, including an independent responsible entity and an independent custodian for all of its funds.

“To ensure that the responsible person and the trustee can meet their duty of continuous disclosure, they have appointed EY to carry out an assessment and impairment testing of our assets every month. Every month we distribute our earnings to our investors from all our funds,” he said.

"Every six months KPMG does an audit and a review - again, a detailed assessment around the valuation, the book value of these assets, the risks of potential loss."

He added: "I think if you're in a private credit fund that has 10 or 15 assets and has an associated custodian and you don't have transparency, then yes, you have a problem."

Under the regulatory microscope

In August, the Australian Securities and Investments Commission's latest corporate plan highlighted the significant growth of private markets and announced that a review of these opaque markets would be a key focus of its activities for 2024–28.

Also, earlier this year the International Monetary Fund called for more vigilant regulation and supervision of private credit in its April 2024 Global Financial Stability Reportwarning that while the asset class poses a limited immediate risk to financial stability, its rapid growth and limited oversight could turn existing vulnerabilities into more systemic risks.

Reflecting on these developments, Joy noted that regulators are "jumping in" to address concerns about the concentrated nature of private debt portfolios, the use of leverage for liquidity and the lack of standardized reporting, among other issues.

"They're worried about funds claiming that these portfolios are very low-risk and default-free, when in fact the managers are extending and pretending," he said.

"They're worried about completely unregulated shadow banking, and they're worried about the lack of, and resistance to, standardized reporting."