ASIC has spent a year asking private credit nicely. Now write the rule

Nine loans, one borrower

Two funds run by the same manager had exposure to the collapsed New South Wales developer Bathla across nine separate loans, according to the ABC. Nine loans sounds like a spread. It is one bet written nine times. Whatever diversification the fund documents describe, the thing that determines whether investors get paid is the solvency of a single developer — and that developer is now in collapse, with a stalled pipeline the ABC puts at 14,000 apartments, roughly 18.5 per cent of the new housing stock due to be built in the state this year.

Into that, ASIC commissioner Simone Constant tells a Sydney gathering of asset finance brokers that the “clock is ticking” on whether Australia sees broader credit stress. She adds that the regulator’s work has shone a light on weaknesses in private credit but that, despite ongoing calls for uplift, too many have been too slow to respond.

That sentence is a verdict on ASIC’s method

Read it again. A regulator is saying it has spent a sustained period asking an industry to improve, and the industry has largely not. That is not a finding about the sector’s character. It is a finding about the instrument. Calls for uplift have no deadline, no threshold and no consequence for ignoring them. A fund manager who upgrades its valuation practices bears real cost and gains nothing over the one who does not. Exhortation in a competitive market selects for the firms that ignore it.

The honest conclusion from “too many have been too slow” is that persuasion has been tried and has failed, and the next step is a rule. Instead the framing is that the clock is ticking — language that puts the outcome in the hands of markets and the weather. It is not. ASIC licenses these funds and sets the terms on which they may be sold to retail investors. Whether Australia gets a disorderly unwind of private credit is substantially a policy choice, made now, by the people making the speech.

The run is a design feature, not a lending failure

The investor quoted by the ABC is worried about contagion — about people not being able to get their money out. That is a different problem from bad lending, and it is the more urgent one.

Private credit funds sold to retail and wholesale investors commonly offer periodic redemptions: monthly, quarterly, with some notice. The loans behind them run for two or three years and cannot be sold quickly at anything like carrying value. Between those two facts sits an arithmetic that never works under stress. If a borrower stops paying and the loan is extended rather than written down, the unit price still reflects the old carrying value. Whoever redeems first gets out at a price set before the loss is recognised. Whoever stays absorbs it, and also absorbs the sale of the fund’s best assets to fund the exit. Once investors understand that, leaving early is not panic. It is the correct response.

This is why lending standards and liquidity terms need separate treatment. Better underwriting shrinks the losses. It does nothing about who bears them or in what order. You can have a well-underwritten book and still have a run, because the run is driven by the exit queue, not the credit quality.

The case for leaving it alone

The strongest argument against acting now is timing. Force independent revaluation and mandatory notice periods into a jittery sector and you may trigger the exodus you were trying to prevent. Redemption gates in particular are a signal, and investors read signals faster than they read fund constitutions.

The second argument is housing. Banks have retreated from construction lending; private credit has filled the gap. The Bathla collapse shows what is at stake when that financing chain breaks — a fifth of a state’s annual apartment supply going still. Tighten too hard and you starve the pipeline.

Both deserve an answer. On timing: runs are caused by ambiguity, not by clarity. A fund that tells investors plainly that they will get their money ninety days after asking, and publishes an independent mark on its loan book twice a year, is far less run-prone than one that implies near-cash liquidity and marks at par until default. Uncertainty about what your neighbour can do is the fuel. Rules with lead time remove it.

On housing: supply financed by money that can evaporate in a quarter is not supply security. It is a pipeline with a tripwire attached. If the price of durable construction finance is that the money has to be locked up for as long as the building takes, that is not a cost. That is the product being honestly specified for the first time.

What uplift looks like when it is written down

Three things, and they are not exotic. Redemption terms matched to the maturity of the underlying loans, so that open-ended monthly liquidity against multi-year construction debt is simply not available to retail. Independent valuation on a fixed cycle, with mandatory disclosure of arrears, loan extensions and interest that has been capitalised rather than paid in cash — the three places where a deteriorating book hides. And concentration disclosed in every periodic statement: largest borrower, largest project, as a share of the fund.

None of that stops anyone lending to developers. All of it means investors know what they own before they have to decide whether to be first out the door.