Non-bank lender Woodbridge Capital has called for more stringent regulations to improve the transparency of private credit funds and reduce risks for investors after ASIC indicated it was undertaking further surveillance on a number of private credit funds last week.
The Corporate regulator said it would be increasing its surveillance of private equity and private credit funds in relation to fund governance, valuation practices, and the management of conflicts of interest as part of its broader review of the space.
Speaking to Investor Daily, Woodbridge Capital co-founder, managing director and chief investment officer Andrew Torrington said there was currently a lack of rules for private credit funds relating to valuations, the disclosure of fees and leverage, a lack of standardisation across monthly reporting and the management of operational risk.
"It's all very grey so bad funds take advantage of it. They're hiding risks and hiding fees and investors can't see that," he said.
"There are no regulations about how the value is done in private credit funds so you've got a lot of funds that value their own assets and you've also got some funds that are rating themselves," said Torrington.
"How are investors supposed to know that the rating of that fund has been done by the fund itself? How are investors supposed to know whether a fund is valuing its assets externally or internally?"
Torrington said while demand for private credit has never been stronger, regulation has failed to keep pace.
"ASIC has fallen behind [on this] while interest in the asset class has exploded," he said.
Woodbridge Capital previously highlighted a range of issues and risks in relation to the private credit asset class in a submission to ASIC's discussion paper on public and private markets earlier this year.
It warned the Corporate Regulator that it must "significantly widen" its view of risk in relation to the private credit asset class.
The submission identified a range of issues including investment managers self-rating their own credit, a lack of oversight where funds do not have an external trustee or responsible entity appointed, valuation risks, operational risk and poor disclosure of leverage and fees.
Woodbridge Capital stressed that investment managers should not be self-rating their own credit as this could potentially mislead investors about the risk of the product.
"The private credit loans should be unrated. We have seen an instance of a lender saying their loans are BBB rated which we are not sure how this is possible," it said.
"It is possibly a highly misleading representation to investors as to the risk of the product."
The submission also highlighted that not all private credit funds appoint an external trustee or responsible entity, which is critical to "safeguarding investor interests and ensuring true transparency around risk and returns".
"Without an independent third-party overseeing fund operation, the investment manager retains unchecked control over reporting, asset valuation, and risk exposure—creating a significant conflict of interest," it said.
"This lack of oversight can lead to misrepresentation of portfolio performance, understated risks, or selective disclosure of information, ultimately leaving investors exposed to losses they were not fully aware of."
The external trustee or responsible entity, it said, acts as an impartial gatekeeper, "ensuring adherence to the fund’s mandate, verifying valuations, and holding the manager accountable".
Torrington said while some of the large private credit funds have appointed external trustees, there are still many private credit funds which haven't.
The submission also outlined that independent unit pricing was also essential in a fund to ensure fair and accurate valuation of investor holdings, free from potential bias or manipulation by the investment manager.
"Accurate unit pricing directly impacts how investors enter, exit, and assess their positions in the fund, making it a critical component of transparency and investor protection," it said.
It also stressed that in order to mitigate valuation risks, private credit funds should adopt best practices such as establishing and following a robust valuation policy that conforms to fair value standards set by bodies like the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS).
Woodbridge Capital also believes that private credit funds should be implementing robust internal controls, investing in advanced technology and cybersecurity measures, provide comprehensive training for staff, and develop contingency plans for external events.
