This article is from the Australian Property Journal archive
Having learnt a lesson during the global financial crisis, the Australian Securities and Investments Commission (ASIC) has become more proactive, and will put the private capital markets under the microscope, signalling potential regulatory changes to address risks in the emerging asset class.
ASIC’s paper, Australia’s Evolving Capital Markets: A Discussion Paper on the Dynamics Between Public and Private Markets, highlights key trends such as the decline in public market listings, the rapid growth of private market investments, and the increasing dominance of superannuation funds in shaping market dynamics.
ASIC chair Joe Longo said while private credit is not yet systemically significant in Australia, he warns of potential failures as the sector remains untested by prior crises.
ASIC is probing the emerging private credit market, which has seeing remarkable growth growing 6% year on year to $205 billion at the end of 2024, according to a report by Alvarez and Marsal. Of that figure, about $85 billion is in commercial real estate loans.
Australia’s private credit market is still in its infancy compared to global peers, where the market topped US$1.5 trillion at the start of 2024 and is projected to reach US$2.8 trillion by the end of 2028.
“There will be more failures in private credit investments, and Australian investors will lose money. ASIC is increasing its focus on private credit, not to constrain participation but with a view to being well informed and to test whether investment offers comply with existing laws.” ASIC warned.
Melbourne-based specialist IDA managing director Adam Kaye said Australia’s debt capital markets already benefit from strong self-regulatory prudential behaviours and the regulator’s oversight and imprimatur is critical to enable the continued flow of capital into the asset class with confidence in the levels of rigour, governance, transparency and compliance of market participants.
“We believe the regulator’s attention is timely and important. Australia’s CRE private credit sector emerged in the immediate aftermath of the Global Financial Crisis which was followed by a 10-year cycle of asymmetric investment conditions which permitted the sector to establish itself in a highly benign or favourable economic and real estate climate with limited oversight or regulation.
“The post-Covid economic cycle will likely be radically different or at the very least, less benign than the formative years of the sector, requiring a clearer understanding of the overall market size, its composition, sub-markets and practices to measure sectoral risk and the appropriateness or sustainability of current methodologies and practices,” he said.
“We believe Australia’s debt capital markets already benefit from strong self-regulatory prudential behaviours as a cultural strength of overall capital markets more generally but for the CRE private credit sector to properly establish itself as a permanent and significant and much needed component of wholesale domestic credit supply.
“The regulator’s oversight and imprimatur is critical to enable the continued flow of capital into the asset class with confidence in the levels of rigour, governance, transparency and compliance of market participants,” he added.
“As a market participant of over 15 years we are not aware of nor have we observed any endemic practices or industry wide behaviours which we believe ought give rise to more acute concern over the operation of the CRE private credit sector than any other fiduciary sectors making up the balance of Australia’s private capital markets.
“Of course there are bad actors participating in the sector and errant behaviours which ought be exposed and regulated out. But it is important in our opinion for ASIC to take a hasten slowly rather than a sledgehammer approach – in the absence of a prevailing weight of evidence for a need to the contrary – to ensure appropriate balance and pragmatism in regulatory policy lest they render the sector economically unviable which would be directly contrary to their objective,” he continued.
Kaye said it is important to ensure a robust, vibrant and dynamic CRE private credit sector in Australia.
“We measure current market share for AUD CRE private credit at or around ~18% of total CRE credit supply versus ~38% in the UK and ~48% in the US on a like for like basis. That suggests we are still less than half-way to maturity if our CRE private credit market ends up reflecting a similar share of overall CRE domestic credit supply as the US and UK markets. To us that demonstrates the importance of a robust, vibrant and dynamic CRE private credit sector to help underwrite the supply of critically needed accommodation and national infrastructure amidst the continued pull-back of Basel regulated ADI’s from the sector.
“It is logical and reasonable for ADI’s to withdraw from higher-risk credit transmission amidst the increasing compliance and provisioning costs imposed under Basel III and IV offering opportunity for private capital markets to step into that breach given its higher level of risk-tolerance. To us that represents a healthy, robust and dynamic debt capital marketplace required to ensure the ongoing transmission of credit supply continues in orderly fashion.” Kaye said.
Non-bank lender Ironstate’s Rohan Barraclough said the regulator’s timing is appropriate given private credit is now a significant part of Australia’s credit market and the recent coverage of some managers facing challenges.
“The regulator’s discussion paper is particularly prescient as it relates to commercial real estate private credit given recent press coverage of some managers working through challenging investments.
“The regulator wants to ensure that investors have confidence to make informed investment decisions when investing in Australian private credit. The regulator and industry should be aligned with making the market more investible by a wider range of investors as the market continues to mature. It’s important that regulations don’t stifle growth and competition, however, the regulator is aware of this balance and has made clear that they are not looking to “constrain participation”.
Barraclough added that the move should not be a surprise given that globally, where the private capital market is mature, it is regulated.
“Regulators in some other jurisdictions collect data on their private market funds and ASIC has indicated that they will increase data collection of private markets in Australia. It’s reasonable for the regulator to have data on private markets so they can make informed regulatory decisions,” he added.
Meanwhile a lender who is subject to regulations as a listed entity, spoke to Australian Property Journal on the condition of anonymity so they can be candid, welcomed ASIC’s move.
“We are a large lender, and we welcome ASIC’s announcement. We have robust compliance and risks assessment and would not have a problem with regulation.
“The private credit market in Australia is growing rapidly.
“But the sector has minimum reporting requirements, low barriers to entry and with the promise of great wealth. It’s a recipe that attracts cowboys and this move will weed out those cowboys.
“We welcome base regulation in an opaque market.
“Base regulation will give more clarity and confidence to investors, particularly protect retail investors,” they said.
Meanwhile ASIC chair Joe Longo said it was important to balance market attractiveness with investor protection.
“Public and private markets support one another, and both are critical to our economy, so it’s important we approach this from both an opportunity and risk perspective. The critical point for ASIC is whether there is a need for interventions to address risk or adjustment to how regulation operates to take advantage of opportunities important for the attractiveness of our capital markets.
“We can’t be complacent about the future of Australia’s public equity markets. While history tells us that the current downturn in Australian IPOs and public companies is likely cyclical, deterioration in the quality, diversity and depth of public companies would have significant adverse effects on the economy and on investors’ participation in it. While we don’t see regulatory settings as the dominant factor here, there may be opportunities to adjust in order to improve the attractiveness of our markets.” Longo said.
