The growth of private credit poses a challenge for ASIC, with a new report showing a divide between the experience of institutional and private investors.
This year, it seems everyone is talking about private credit, including the Australian Securities and Investments Commission (ASIC). It recently commissioned a report by industry experts Richard Timbs and Nigel Williams into the character and size of the private credit market in Australia.
As Timbs and Williams observe, landing on a definition of private credit can be tricky. “Some define it as direct, non-bank one-to-one lending to corporates, while others define it as effectively all non-bank lending of a non-consumer nature.” They settle on a broad approach that captures “non-bank lending that is not publicly traded or widely issued publicly”.
Put simply, private credit involves managers that are not banks — and not prudentially regulated — raising capital from a variety of sources and lending it out at all layers of the capital stack. While sector-wide data is sketchy, Timbs and Williams estimate the size of the Australian market at around $200b in 2024, and growing rapidly.
They divide the market into three main segments. The first (20–40 per cent) is direct corporate and commercial lending to businesses. The second (between 10 and 30 per cent) is asset-backed or securitised, involving structured lending into tranched pools of assets such as mortgages and consumer receivables.
The third and largest segment (40–60 per cent) is lending for residential and commercial property, including construction and development financing. The heavy exposure to real estate is one of the factors distinguishing the Australian private credit market from others.
An alarming divide
If Timbs and Williams are correct, and the private credit market is growing, then regulators should be taking a closer look at the implications for borrowers, investors and the stability of the financial system.
For borrowers, it all looks like good news. The report argues that, “Private credit, done well, has a valuable role to play in the Australian economy. It can make an important contribution to economic growth” by complementing other sources of debt financing such as banks and public markets. This is particularly so for higher-risk leveraged corporate lending, and real estate construction and development financing, which is hard to access elsewhere.
However, that money has to come from somewhere. On the investor side, the report paints a concerning picture. There is a clear divide between the experience of very large institutional investors in private credit and the smaller and retail end of the market.
Timbs and Williams find that, “Segments of the market targeting wholesale investors using the ‘sophisticated investor’ exemption and retail-based offerings, including platforms, have practices that do not compare favourably against international practice. Lenders in these segments are more likely to have conflicts of interest, opaque fee and interest margin arrangements, inconsistent and non-independent valuation methodologies, and ambiguous terminology”.
The lessons of history
At this point, alarm bells should be ringing. But Timbs and Williams say that, “Significantly, we note that the Australian private credit market has not yet experienced a credit cycle and associated downturn” — potentially making it difficult to predict how the sector will respond when the tide inevitably turns.
Nothing could be further from the truth. Private credit is certainly not new. In an article published in the Australian Financial Review in August 1990, Robert Gottliebsen forensically unpacked the $600m collapse of private credit manager Estate Mortgage. He called it “Australia’s worst financial disaster since the war, and one of the worst this century”.
Many of the problems identified in the Timbs and Williams report — including conflicts of interest, opaque fees and inconsistent and non-independent valuation methodologies — clearly emerge from Gottliebsen’s account.
A decade of reform followed, including new retail managed investments laws in 1998 and the redesigned financial services licensing and sales regime in 2001.
But the problems persisted. In the 2000s, private credit managers Bridgecorp, Fincorp, Westpoint and Australian Capital Reserves — all funded by retail investors — fell over.
Fast-forward to the 2008 global financial crisis (GFC) and its aftermath. Retail investors in a range of private credit arrangements, including mortgage funds operated by companies like City Pacific and MFS, had their funds frozen or lost entirely.
In 2012, the non-bank property lender Banksia Securities collapsed, owing $663m to approximately 15,622 debenture holders. In subsequent proceedings, Justice Clyde Croft said the Banksia collapse had “a profound personal impact on the lives of many individual debenture holders transcending the economic losses that are the subject of these proceedings”. He could “only wish that the clock could be turned back and events made to unfold differently”.
Problems in areas identified by Timbs and Williams as requiring regulatory attention now — including conflicts of interest, valuation practices, liquidity facilitation, distributions paid out of capital and portfolio reporting — clearly contributed to these and similar failures.
These historic examples involved private credit arrangements offered to retail investors and regulated as such. Further regulation was introduced after the GFC, including the product design and distribution laws recently deployed by ASIC against La Trobe Financial, and bans on commission sales.
But these protections, whatever they may be worth, don’t apply to private credit arrangements marketed to the subset of private investors who are wholesale rather than retail.
Investors can be classified as wholesale in different ways, including if they invest more than a prescribed amount, if they have assets or income above prescribed amounts or if a financial services licensee will certify them as “sophisticated”.
Astonishingly, the prescribed amounts used in these tests have remained unchanged for 25 years. A parliamentary inquiry in 2024 decided not to increase them, despite being urged by ASIC to do so. Part of the rationale seems to have been a reluctance to reduce funding available for early-stage businesses through private equity and private credit sourced from this investor cohort.
Timbs and Williams identify both supply and demand reasons for the growth in private credit in Australia since the GFC, with “one of the drivers found in an increasing pool of money (superannuation and private wealth) seeking yield and investment diversification”.
As in the 1980s and 2000s, a lot of private credit is ending up in property development. The clear challenge for ASIC is to bring the standards of the private credit managers that chase this investor cohort up to the level demanded — and enjoyed — by the big end of town.
This article first appeared as 'Regulating the money-go-round' in the November 2025 Issue of Company Director Magazine.
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