ASIC's report at a glance

ASIC's latest reports into private credit fund practices confirm that Australia is facing a pivotal moment for the sector. 'Done Well', private credit funds offer a critical investment alternative for both investors and borrowers alike, which in part explains the rapid growth in the sector in recent years. ‘Done poorly' private credit funds can expose investors to several risks that may not be well understood. Given the increased exposure of retail investors to the sector, either directly via exchange traded funds, or via superannuation funds, greater regulatory and stakeholder scrutiny is expected.. The latest reports include:

• REP 820: Private credit surveillance: retail and wholesale funds. Building on and closely aligned to REP 814, the report draws on the results of ASIC’s detailed review of market practices and reinforces for a number of key focus areas. This includes the best practices that managers and fiduciaries should be targeting, as well as the poorer practices that will undoubtedly attract ongoing regulatory focus. Specifically, ASIC highlights 10 key principles for private credit done well.
• REP 821: Private capital market reporting. The report compares Australia’s reporting and disclosure regime with peer and leading countries globally and acknowledges that Australia currently lags behind several jurisdictions which have more comprehensive reporting regimes. We expect a deliberate focus by regulators to uplift the reporting regime in Australia, likely starting with a voluntary pilot next year.
• REP 822: Australia’s capital markets: forces shaping the next decade. This report considers the macroeconomic, structural, regulatory and technological forces that will impact the future direction of both public and private markets and considers four potential outcome scenarios that could emerge.
• REP 823: Advancing Australia’s capital markets. Discussion paper response report: Specifically responding to feedback received on ASIC’s 5 February 2025 discussion paper on capital markets and the shifting dynamics between private and public markets, the report provides a clear indication as to the expected regulatory settings and response both in the immediate and medium term. Importantly, the report reiterates the importance of both public and private markets and makes clear the objective of ensuring Australia continues to be an attractive investment destination and a backer not a blocker of investment and capital.

Implications and focus areas for managers, trustees and responsible entities

Regulators, investors and other stakeholders expect higher standards from managers in how their funds are managed, governed and reported on. ASIC plans to use a combination of existing tools and regulation, refreshed guidance and voluntary industry cooperation to move the industry towards the leading practices highlighted in REP 820 and 814. In particular, fund operators and fiduciaries should benchmark their operating and governance practices against the principles for private credit done well (Table A of REP 820) and plan their transition to a mature, compliant state:

1. Stewardship of other people’s money
2. Organisational capability
3. Transparency
4. Design and distribution
5. Fees and costs
6. Conflicts of interest
7. Governance
8. Valuations
9. Liquidity
10. Credit risk 

Managers, trustees and responsible entities should focus on:

• Assessing their maturity state against leading practice: Investors and research houses will increasingly favour managers who demonstrate strong stewardship, robust capability, transparent reporting, and fair treatment of investors. Robust assessment and prioritised response plans will be key.
• Planning for any current regulatory exposure: ASIC has been clear that many current practices observed fall short of existing law and regulation. Managers and fiduciaries should expect heightened regulatory scrutiny and enforcement where practices fall short, especially regarding fees, margin structures, and conflicts of interest.
• Proactively embracing industry-led improvements to strengthen practices and reporting: The more proactively the industry adopts leading practices, the less likely stringent regulation will be required.

Eight core themes with practical actions

Drawing on ASIC’s reports and market observations, these eight focus areas should guide how fund operators and fiduciaries prioritise improvements in operations, risk management, governance, and reporting.

1. Managing conflicts

Actual and potential conflicts are common in private credit. In this environment, a strong conflicts management framework is essential and will become increasingly important for funds to demonstrate compliance with their obligations under section 912A of the Corporations Act. Key focus areas include:

• Related-party transactions (e.g. loans to affiliated developers, asset transfers, fund-level investments)
• Capital stack exposure (multiple positions in the same borrower)
• Valuation conflicts (fee-linked valuations, pressure to report strong returns)
• Fee-driven incentives (special situation fees influencing strategy)
• Conflicted allocation decisions (ensuring equitable allocation between funds)
• Line 2 challenge (embedding independent challenge across the investment and valuation lifecycle)

Call to action: 

• Ensure you have a Board approved Conflicts of Interest policy, addressing both actual and perceived conflicts which could arise across the investment lifecycle (e.g. related parties, fees, valuations).
• Ensure your conflicts management framework and supporting governance and operating model enables appropriate identification, consideration and recording of conflicts, regular conflict reporting, clear escalation, independent oversight, and effective mitigation (e.g. recusal, investor disclosure).
• Train all relevant staff and Directors on Conflicts protocols, with contingency plans for qualified replacements when recusals are required.
• For complex transactions, consider implementing bespoke transaction specific arrangements to ensure conflicts are properly identified and managed.

   

2. Fee structures and disclosures

Fee arrangements in private credit vary widely, and according to ASIC, are often complex and lack transparency, creating potential misalignment between manager and investor interests. ASIC expects that funds review their fee structures and disclosures for transparency and where fees are not paid directly to the relevant funds, there is a reasonable justification for the fee basis. Key focus areas:

• Retention of borrower fees: ASIC indicates a preference for all fees flow to the fund, with manager remuneration via the management fee.
• Net interest margin capture: Full disclosure of intermediary vehicles and retained margins.
• Frequent fee events: Direct fees for loan extensions, amendments or frequent refinancing which may influence how a deal is structured could raise questions about whether such actions always serve investors’ best interests.

Call to action:

• Review fees to ensure these are primarily paid to the fund, and where paid to the manager, disclosures are timely, transparent, and justified.
• Consider if borrower fees are a true fee for service, or if they are actually a return on a loan.
• Ensure all intermediary structures are fully disclosed to enable investors to assess manager remuneration and investment risk.
• Consider whether structuring practices (e.g. short tenors, frequent refinancing) risk prioritising fees over long-term value and whether there are controls to prevent this.

   

   

3. Valuation practices and disclosures

ASIC encourages industry-led standards on valuation methodology, with a focus on:

• Disclose valuation methodologies and independence of credit rating processes
• Use independent valuations where possible, with a focus on the lender or security holder.
• Regular monitoring for impairment triggers, with clear assessment, escalation, and reporting
• Consistent use of key metrics (e.g. LVRs for construction lending should be clear and consistent)
• Segregation of duties for those responsible for ongoing valuation and from teams focused on origination.

Call to action:

• Ensure there is Board-approved valuation policy covering all asset types, with appropriate functional segregation of those responsible for valuations, and independent review that is consistently applied.
• Acknowledging the practical challenges, implement a risk-based approach for determining whether independent valuations or third-party reviews should be conducted quarterly for illiquid / complex assets, and whether there are clear triggers for ad-hoc reviews.
• Ensure valuation decisions and supporting rationale are documented, and that disclosures to stakeholders are timely, transparent, and aligned with actual valuation methods.
• In offer documents, ensure risk disclosure related to valuations are adequate and that disclosure of valuation procedures reflect actual practice.

4. Portfolio reporting 

There is a wide variation in portfolio reporting practices and ASIC signals an expectation for more comprehensive, consistent disclosure:

• Regular updates on loan and portfolio composition, concentrations, arrears, and distribution policies
• Enhanced disclosures for retail investors, including valuation approaches and liquidity risks
• Timely, consistent updates to all investors on material information (valuation, liquidity, conflicts, fees, credit ratings)
• Consistent use of common terms like “investment grade”, “senior secured”, “loan-to-value ratio”

Call to action:

• Ensure key terms used in portfolio reporting are clearly defined and consistently used.
• Participate in industry discussions regarding aligning key terms where appropriate. 
• Consider whether current portfolio disclosure is granular enough to give investors a true picture of risk and performance, including restructures and PIK interest. 

For retail funds, ensure complex performance and reporting issues are explained in a way retail investors can understand.

5. Credit underwriting and monitoring

ASIC found fewer than half of funds had written policies for provisioning, managing credit impairments, or defaults. Key focus areas:

• Consistent frameworks for credit assessment and due diligence
• Disclosure of loan security and transparent LVR limits
• Clear, documented policies for defaults and regular monitoring
• Independent risk oversight and regular stress testing
• Transparent communication of credit risk management and portfolio risks with consistent definitions to enable meaningful investor comparisons.

Call to action:

• Review your credit risk underwriting and monitoring capability and capacity, and the appropriateness of reporting lines. 
• Ensure there are defined workout and impairment policies, standards and procedures. 
• Confirm you have the right credit risk capability in Line 2 to effectively oversight and challenge processes.

6. Marketing and distribution

Marketing and distribution must ensure the product is offered only to investors who understand the risks and have the financial capacity to handle potential losses. Funds should review marketing and distribution of their products with a key focus on:

• Risk disclosure (liquidity, valuation, credit risks in all materials)
• Portfolio alignment (fund positioning reflects risk profile, using conservative allocations for high-risk strategies)
• Clarity in offer documents about investment strategy and assets
• Targeted distribution (ensuring products reach the right market)
• Strong risk and compliance oversight to ensure alignment with TMDs and regulatory obligations
• Investor eligibility and suitability are confirmed to reduce mis-selling risk

Call to action:

• Review TMDs and marketing materials to ensure clear, unambiguous details on liquidity, valuation, and credit risks, and that fund positioning aligns with its risk profile.
• Clarify investment strategy and underlying assets in offer documents and ensure they clearly set out any investment parameters applicable to the product.
• Ensure you are adequately verifying investor eligibility in line with fund type and risk profile (e.g., confirm wholesale client status for wholesale funds; apply targeted distribution conditions for retail funds).
• Confirm you have robust risk and compliance oversight to ensure marketing and distribution align with TMDs and regulatory obligations. 

7. Liquidity risk management

Managers should prioritise clear disclosures on liquidity risks and redemption terms, have in place equitable redemption policies, and conduct robust liquidity stress testing. Ensuring suitable second line risk capacity to provide review and oversight over liquidity risk management and disclosure is a further consideration. Key focus areas include:

• Developing, and maintaining liquidity management tools, and supporting policies and procedures including the ability to conduct timely stress testing. ASIC suggests weekly testing is good practice.
• Providing investors with clear disclosure of how liquidity risk could impact them, and the related redemption and distribution policies.

Call to action:

• Confirm your policies address liquidity mismatches and include requirements for regular stress testing and response planning. 
• Ensure protocols are in place to manage liquidity conflicts across funds and at the manager level. 
• Ensure redemption terms reflect asset liquidity.
• Confirm you are providing investors with clear disclosure on liquidity gates, stress testing practices and related redemption and distribution policies. 

8. Governance

Rapid growth across the sector has prompted organisations to reassess whether governance structures match their current size and complexity. ASIC expects:

• Independence between management and Board of fund operators, and between responsible entity/trustee boards and business
• Clear mandates for committees and governance structures
• The right mix of expertise, including risk representation to provide independent challenge
• Adequate staffing across key areas (credit, risk, valuation, liquidity, conflicts)
• Robust processes to maintain objectivity and active oversight
• Comprehensive, up-to-date policies for fund operations

Call to action:

• Review your governance framework to confirm it provides independent oversight by the responsible entity or trustee, clearly separates board and management responsibilities at the investment manager, embeds and empowers line 2 risk to provide test and challenge, and includes up-to-date committee charters.
• Ensure there is robust reporting and communication protocols between investment managers and responsible entities/trustees, to enable active oversight including regular updates on performance, liquidity, valuations, and portfolio changes.
• Maintain detailed policies covering allocations, valuations, liquidity, credit risk, conflicts of interest and governance to support fair and transparent fund operations and review operational effectiveness across these areas. 
• Consider whether your organisation has the necessary staff capability to provide effective governance. 

Ready to take the next step? Get in touch with us to explore how we can help you respond to ASIC’s evolving expectations.  

Our multidisciplinary team brings together market-leading legal, consulting, and contentious regulatory expertise across all aspects of funds management and private markets. This combination allows us to provide clients with specialist legal advice and practical implementation support, ensuring that your practices evolve to meet contemporary expectations.