DIY super funds and retail investors have been issued a fresh warning about the risks of joining the rush into the $200 billion private credit market, after a new report underlined the sector’s concentration in risky real estate lending.
One of the fastest-growing segments of finance is private credit, which refers to lending that takes place outside the banking system. Instead of coming from bank deposits, the money loaned by private credit funds is raised from investors directly, including superannuation funds large and small.
Savings held in superannuation funds has helped to fuel the growth of private credit.Credit: Dominic Lorrimer
It’s a type of lending that has surged since the global financial crisis, as investors have filled the gap left by more cautious banks, which have curbed riskier business lending, such as to property developers.
But the boom in private credit has also prompted scrutiny from regulators around the world, and a new paper commissioned by the Australian Securities and Investments Commission (ASIC) warns of the potential risks from this more opaque and less regulated form of financing.
The report, by infrastructure investment executive Richard Timbs and former ANZ executive Nigel Williams, warned that a key risk in the sector was the heavy concentration in real estate lending, in particular when unsophisticated investors were putting their money into this market.
About half of the $200 billion in private credit loans in Australia were in real estate finance, which is generally regarded as a riskier type of lending, it said.
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The largest super funds were typically investing in private credit funds with transparent fees and valuations, it said, but it questioned whether smaller retail investors fully understand the risks they are taking on.
“The concentration of Australia’s private credit market in higher-risk real estate construction and development is where we see the greatest area for improvement for investor protection and market integrity,” the report said.
