The growth of private credit in Australia has been rapid, largely unannounced, and insufficiently scrutinised. What began as a specialist strategy for sophisticated institutional investors has become a mainstream allocation for superannuation funds managing the retirement savings of millions of ordinary Australians. The governance frameworks that apply to those allocations have not kept pace with the growth.

The Disclosure Gap

Public market investments are subject to daily pricing, continuous disclosure obligations, and extensive regulatory oversight. Private credit investments are subject to none of these in the same form. Valuations are determined by fund managers using methodologies that are not standardised and not independently verified on the same schedule as public market assets. The result is a sector in which approximately 40% of borrowers have negative free cash flow but in which the stress this represents is not necessarily visible in reported valuations.

This matters for superannuation fund members because the reported performance of their fund is partly a function of these valuations. When private credit assets are carried at values that have not been tested by a market clearing event, the reported returns of funds with significant private credit allocations may overstate the actual economic position of those portfolios.

Conflicts of Interest

The governance of private credit allocations by superannuation funds raises conflict of interest concerns that are not adequately managed by current frameworks. Fund managers who originate and manage private credit investments also advise on their valuation. The separation between the origination function and the valuation function that applies in public markets does not apply with the same rigour in private markets.

"In finance, as in law, complexity is often the enemy of accountability. When nobody can understand the structure, nobody can be blamed for the outcome."

ASIC has announced that private credit governance, valuation practices, liquidity, conflicts of interest, fees, and disclosure are all within its surveillance focus. This is the right set of issues. Whether the surveillance will produce meaningful change depends on what ASIC finds and how it responds.

What Reform Should Look Like

The reform agenda for private credit governance in Australia is not complicated in concept, even if it is demanding in implementation. It requires: standardised valuation methodologies applied consistently across the sector; independent verification of valuations on a regular schedule; enhanced disclosure to fund members of the nature, scale, and risks of private credit allocations; and separation of origination and valuation functions sufficient to manage the conflicts of interest that currently exist.

None of these reforms would prevent superannuation funds from investing in private credit. They would simply ensure that those investments are made, managed, and reported in ways that genuinely serve the interests of fund members rather than fund managers. That is, in the end, what the system is supposed to do.