Australia warns private credit industry of increased enforcement action

Australia’s financial regulator has warned the country’s private credit industry to expect increased enforcement activity as it steps up scrutiny of lending practices, valuations and governance following the collapse of Sydney-based developer Bathla Group, according to a report by Bloomberg.

Simone Constant, a commissioner at the Australian Securities and Investments Commission (ASIC), is due to tell a property conference in Sydney that the regulator has moved beyond issuing warnings to the sector, with several enforcement investigations already underway.

ASIC is also conducting surveillance across both wholesale and retail funds and has identified practices that it believes have fallen short of expected standards, according to prepared remarks for Constant’s speech.

The regulator is calling on private credit managers to conduct detailed reviews of their loan portfolios and ensure assets are being valued independently and realistically. Superannuation trustees should also strengthen due diligence before allocating members’ capital to private credit strategies, while valuers, auditors and ratings agencies need to ensure that valuations accurately reflect underlying risks and that potential problems are identified early.

The warning comes as scrutiny intensifies around Australia’s private credit market, estimated at about AUD200bn ($143bn), much of which is exposed to real estate lending.

ASIC has increased its oversight of the sector this year, including a six-week exercise during which funds were required to provide detailed information on a weekly basis. The regulator subsequently said it was investigating a number of private credit funds to assess whether their valuations accurately reflected underlying assets and risks.

Constant is also expected to announce a further round of surveillance in the near term, aimed in part at examining overseas redemption activity and changes in valuations at Australian funds.

The regulator’s concerns have been reinforced by the failure of Bathla Group, which entered voluntary administration earlier this month after struggling to meet its debt obligations.

Bathla had accumulated about AUD3.4bn of debt across 40 lenders, with its financing structured through roughly 542 special purpose vehicles. The complexity of the group’s borrowing arrangements has highlighted concerns around transparency, governance and the ability of investors and regulators to assess risks across private credit structures.

Constant is expected to argue that the Bathla collapse demonstrates the importance of stronger governance, effective oversight, clear disclosure and accurate valuations across the private credit market.

The intervention represents a significant escalation in regulatory pressure on an asset class that has expanded rapidly in Australia as institutional investors and other capital providers have sought higher returns from private lending.