Private credit has surged in Australia over the past decade to an estimated $200 billion. It’s pitched to investors as a source of steady income, diversification and access to lending opportunities beyond the big banks. Two of the biggest names in the sector, Metrics Credit Partners and La Trobe Financial, have grown into household names.
But events over the last month show the risks investors face when governance and transparency don’t keep up with growth. Lonsec’s downgrade of several Metrics funds and ASIC’s stop orders against La Trobe’s funds, highlight why retail investors need to tread carefully.
ASIC shines a light on the sector
These two high-profile cases landed just as ASIC released a landmark 46-page report into the private credit sector. The report uncovered widespread practices that put managers’ interests ahead of investors. These included funds repaying investors with their own capital, mislabelling loans as senior or secured, and disguising troubled loans through restructures or accounting tricks. It also exposed how managers pocket multiple layers of undisclosed fees, sometimes three to five times higher than those advertised, and even keep default interest for themselves when a borrower fails to pay.
ASIC stopped short of banning these practices but demanded far greater transparency. The message was clear. Investors deserve to know exactly how funds are making money, and whether those returns are truly sustainable.
Metrics Credit Partners: governance concerns and mandate creep
Metrics Credit Partners manages more than $30 billion across listed and unlisted funds. It built its brand as a leading non-bank lender and alternative investment fund manager. This month Lonsec downgraded three Metrics funds, citing governance weaknesses.
Key issues included:
- The same people sitting on both debt and equity investment committees, creating potential conflicts of interest.
- Related-party transactions and lending practices that went beyond normal expectations.
- A rising reliance on equity, with the Metrics Income Opportunities Trust’s equity-like holdings climbing from 14% to 34% in just one year.
The response was swift. Macquarie Wrap, one of the largest investment platforms, halted new superannuation inflows into four Metrics funds. Investors also reacted, with trading volumes surging and unit prices falling.
Metrics has since promised fixes, including adding independent directors and creating a head of governance role. But critics argue these steps look reactive, not proactive. The worry is that the firm has blurred its mandate by taking equity stakes in troubled borrowers, making it harder for investors to know exactly what risks they are exposed to.
La Trobe Financial: ASIC intervenes
While Metrics is facing pressure from research houses and platforms, La Trobe Financial has found itself directly in the sights of regulators.
ASIC has issued interim stop orders against the La Trobe US Private Credit Fund and two Australian term account products. The regulator said the stop orders were to protect consumers from buying products that may not be suitable for their objectives, financial situation or needs.
ASIC found problems with the Target Market Determinations (TMDs) for these funds, including:
- Portfolios that carried more risk than the TMDs suggested.
- Investment timeframes that were not clearly set out for retail investors.
- Weak distribution conditions, which risked the products being sold to the wrong investors.
The stop orders prevent La Trobe from issuing new product disclosure statements or recommending these funds until fixes are made. ASIC noted the move followed its broader review of the private credit sector, covering governance, transparency, valuation and investor protection.
Fees: are private credit investors really being compensated for the risk?
Beyond governance and suitability concerns, there’s another issue investors should be alert to: fees.
Private credit funds often advertise headline income returns of 8 to 12 per cent or more. That can sound attractive compared with bonds or term deposits. But investors only ever see their return after fees are deducted. Intermediaries and managers can take a significant share of the income generated, leaving investors with less than they might expect for the level of risk involved.
The bigger question is whether those net returns are really high enough to compensate investors for the risks. As I’ve said before, private credit can be “like picking up pennies in front of a steam roller.”
If private credit involves lending to riskier borrowers or stepping in to take over failing businesses, investors should arguably be receiving an even larger premium.
When too much of the return is being eaten up by fees, it tips the balance away from investors.
ASIC’s findings underline this problem. The regulator found that non-disclosed remuneration can be three to five times higher than the stated fund management fee. In some cases, managers even keep default interest from struggling borrowers for themselves, a practice ASIC described as “egregious”.
What investors should take away
Before investing in these types of products investors should ask:
- What are the fees, and do the net returns fairly reflect the risk?
- How are loans and troubled assets valued, and is this transparent?
- Are the risks and investment mandate clear, or is there potential for “mandate creep”?
- Does the product really suit my objectives, timeframe and tolerance for risk?
Private credit may look like a steady source of income, but beneath the surface it can carry risks that can quickly spill over when loans turn bad. Without strong governance, transparency and fair fees, investors may find the rewards don’t match the risks.
Recent events with Metrics and La Trobe show how fragile confidence can be. Reputational hits can spark swift platform bans, regulatory action and investor withdrawals.
For those considering this asset class, tread carefully and make sure the returns truly justify the risks.
At Stockspot we don’t recommend private credit investments. The mix of high fees, illiquidity and opaque structures makes it difficult for investors to truly understand what they’re getting into.
Instead, we recommend our clients include high grade bonds and gold in their portfolios through ETFs. Both have historically offered stronger defensive diversification. They are transparent, liquid and don’t carry the equity-like downside that private credit often suffers when share markets turn sour.
