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Speaker 1: Welcome to Fear and Greed QR and A where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Alma. Earlier in the month, the Corporate Regulator

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Speaker 1: ASSEK released a number of benchmark reports on public and

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Speaker 1: private markets in Australia. Most of the interest was in

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Speaker 1: private markets, especially private credit as an asset class. Private

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Speaker 1: credit is surging worth at least two hundred billion dollars locally,

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Speaker 1: though it's a bit hard to find a definitive figure. Increasingly,

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Speaker 1: retail investors, sometimes through superfunds, are getting involved in private credit.

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Speaker 1: But is it a safe way to invest money? What

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Speaker 1: should an investor be looking for when considering private credit.

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Speaker 1: I'm joined today by ASSEK Commissioner Simone Constant Simone. Welcome

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Speaker 1: to Fear and Greed QR and A thanks.

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Speaker 2: It's good to be back with Fear and Greed.

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Speaker 1: So let's start with the basics. What is private credit,

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Speaker 1: as ASSEK defines it.

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Speaker 2: It's a great question because it is a broad church.

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Speaker 2: So private credit is the non bank clending, the direct

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Speaker 2: lending that sits outside of, as we think about it,

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Speaker 2: the prudentially regulated system. And interestingly, what that means and

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Speaker 2: how that shows up can be quite different from country

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Speaker 2: to country, market to market. In Australia when we look

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Speaker 2: at it that way, actually it's predominantly lending. Sixty percent

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Speaker 2: of it is lending into property, for example, although there

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Speaker 2: are other strands and other types of financing that fall

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Speaker 2: into private credit.

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Speaker 1: Okay, broadly, is it good or bad? Is it here

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Speaker 1: to stay? Is it something that we're going to see

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Speaker 1: alongside public markets forever? I'm just trying to get a

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Speaker 1: feel for how you view it.

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Speaker 2: It is a broad question. So what we always say

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Speaker 2: at the outset of these conversations is private credit, like

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Speaker 2: private markets, when done well, are great. They're great for

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Speaker 2: the market, they're great for investors, they're great for borrowers.

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Speaker 2: The flow of credit is really important in the economy

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Speaker 2: and at ASEK we're required to promote confident and informed

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Speaker 2: participations in the economy in financial system, so access to

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Speaker 2: investment and access to credit is really important, whether that's

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Speaker 2: private markets or whether that's on the in credit or

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Speaker 2: whether that's on the equity side. The problem is private

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Speaker 2: credit at the moment is not done consistently well. And

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Speaker 2: the work that you've outlined that you've touched on that

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Speaker 2: we've put forward. There's four important pieces in the package

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Speaker 2: of work, but one dedicated component was a surveillance report

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Speaker 2: across private credit across the practices of twenty eight entities,

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Speaker 2: which followed on from an expert report we commissioned where

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Speaker 2: we got two market experts to really dimension what we

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Speaker 2: should and shouldn't be worrying about in private credit. And

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Speaker 2: then we've got a level of depth what could we

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Speaker 2: see and did we see those concerns bearing out? So

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Speaker 2: with the kind of inconsistencies and challenges and examples of

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Speaker 2: poorer practice that we found in our surveillance report and

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Speaker 2: our broader information sweep at the moment not done consistently well,

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Speaker 2: we need to get to where private credit is consistently

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Speaker 2: done well.

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Speaker 1: So let's dig into that a little bit. There's things

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Speaker 1: like transparency, marketing fees, conflicts of interests, liquidity valuations, credit risk,

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Speaker 1: et cetera. If you go through that report, there are

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Speaker 1: lots of examples of I think you call them better

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Speaker 1: and poorer practices of those sort of in this six

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Speaker 1: or seven or eight or nine things. There generally is

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Speaker 1: this an issue about disclosure, so you can kind of

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Speaker 1: do stuff so long as you're telling your investors you're

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Speaker 1: doing it. Is it actually an issue about an industry.

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Speaker 1: It's just too young, It hasn't got the maturity to

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Speaker 1: have a proper definition of a default for example. Somewhere

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Speaker 1: in between, I love how.

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Speaker 2: I kistik for fear and greed, trying to get to

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Speaker 2: the heart of why is it fear? Is it greed?

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Speaker 2: What's driving at So there's a lot in your question,

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Speaker 2: the maturity part. Maybe I'll start at the back end.

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Speaker 2: You made a comment about the maturity of Istralian market.

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Speaker 2: That is really important. We think that and that factor

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Speaker 2: I went to straight up front the dominance of proper

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Speaker 2: lending in Australia that is important here. So again private

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Speaker 2: credit is the rise of private credit. It's grown five

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Speaker 2: hundred percent in a decade here. It's Australia is not

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Speaker 2: alone there though. Private credit is growing globally and it's

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Speaker 2: got the attention of regulators and investors globally. As we

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Speaker 2: know Tricolor First Brands Bank of England doing stress tests.

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Speaker 2: That said Australia. A unique factor in Australia is both

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Speaker 2: that property focus and actually it's not as mature a market.

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Speaker 2: So when we look at America, for example, it's a

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Speaker 2: much broader church. So private credit flows into asset backed financing,

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Speaker 2: it flows into vehicle financing such as we're just talking about.

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Speaker 2: In some of the cases we've seen, it's not as

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Speaker 2: mature in the Australian market. Now with the growth rates

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Speaker 2: we've got five hundred percent across a decade, and with

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Speaker 2: one of the greatest sources of the flow of investment

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Speaker 2: into this being the flow of superfunds and will soon

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Speaker 2: be the second biggest super fund system in the world.

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Speaker 2: Right we've got many billions under management. We know that

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Speaker 2: we need to get to that level of maturity really

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Speaker 2: quickly to support that growth rate, to support the role

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Speaker 2: private credit can play, and to support the fact that

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Speaker 2: funds are going to continue to flow within that. I

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Speaker 2: think in your question, you're asking, is this just all

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Speaker 2: about disclosure? When you break down and we laid out

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Speaker 2: a table of ten principles of what private credit done

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Speaker 2: well looks like, and actually you can extrapolate most of

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Speaker 2: them for private markets generally and absolutely transparency is a

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Speaker 2: really important part of it. But when we think about fundamentals,

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Speaker 2: we think about transparency, we think about accountability for what

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Speaker 2: this thing is and knowing who's accountable and to whom

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Speaker 2: they are accountable, which goes to things like conflicts I'll

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Speaker 2: come back to, and that sense of consistency, that expectation,

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Speaker 2: and even within disclosure, so is a range of important

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Speaker 2: principles we've called out and poorer practices on the other

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Speaker 2: side of it, and they go from management of conflicts

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Speaker 2: of interests to doing your the right liquidity and stress testing,

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Speaker 2: to the way you approach valuations as a fund and

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Speaker 2: to the way that you disclose. But even with disclosure,

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Speaker 2: which is where you went to, it's got to be

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Speaker 2: effective disclosure. So I like a really really appreciate that

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Speaker 2: you've picked up that default example. When I think about

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Speaker 2: the Private Credit Surveillance report, there's about three pages to

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Speaker 2: me that are really powerful. One is the poorer practices

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Speaker 2: and I'll touch on them more broadly. Two would be

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Speaker 2: those principles of what good looks like. That three is

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Speaker 2: at the back, towards the back that default range of

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Speaker 2: default definitions, which shows that even for something as fundamental

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Speaker 2: for credit as a definition of default, you can look

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Speaker 2: at around ten funds and go one of the funds,

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Speaker 2: you know, thirty sixty ninety days past you. That's the

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Speaker 2: sort of default situation. Another of the funds, which is

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Speaker 2: actually one of the very big ones. You're almost an

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Speaker 2: enforcement thinking about bailiffs an enforcement process before you're in default.

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Speaker 2: And so where I'm going with that is, even if

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Speaker 2: you get transparence in this idea of disclosure, it's got

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Speaker 2: to be a fea and it's got to be informed

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Speaker 2: by an industry moving to a commonality of what some

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Speaker 2: of these things mean. Right. Another example is we've seen

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Speaker 2: some bad outcomes in some product flowing into some platforms

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Speaker 2: Shield First Guardian for example. Actually within that was product

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Speaker 2: with the term investment grade rating attached. Right, So when

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Speaker 2: we see investment grade rating attached to things, and we

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Speaker 2: don't need to limit it to that, you think, well,

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Speaker 2: for many of us, triple B minus, an SMP triple

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Speaker 2: B minus. But what does that actually mean? So you

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Speaker 2: can't just be only about transparency, can't only be about disclosure.

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Speaker 2: And I think, you know, if we want to dig

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Speaker 2: a little bit more into some of the other examples

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Speaker 2: of poor practice, some that really stood out to me

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Speaker 2: they are absolutely not all about disclosure.

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Speaker 1: Okay, So I mean we are kind of running out

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Speaker 1: of time. And I also like to mention you kind

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Speaker 1: of have something to say about research houses too, which

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Speaker 1: you alluded to then, and we trust research house. We

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Speaker 1: come back to that some of those poorer practices.

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Speaker 2: Yeah, so I would say, when you look at evaluation practices,

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Speaker 2: that's pretty there's some pretty poor practice there. So there's

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Speaker 2: a page that captures that most of the funds we

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Speaker 2: review did not have effective separation between their investment committee

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Speaker 2: that approved the loans and those representatives responsible for looking

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Speaker 2: after them, what's the performance, what's the ongoing valuation? Half

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Speaker 2: of them, only half of the retail funds had proper

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Speaker 2: detailed credit policies for credit fund and half of the

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Speaker 2: wholesale ones didn't have policies governing the fair all allocation

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Speaker 2: of investment opportunities amongst different funds that they had interests in,

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Speaker 2: which really goes back to that conflicts of interest and

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Speaker 2: that fair allocation and fair treatment. And then finally, I

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Speaker 2: think you talked about liquidity and stress testing. When you

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Speaker 2: looked at the wholesale funds, only two of the eight

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Speaker 2: wholesale funds did liquidity stress testing. Now, when we see

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Speaker 2: funds that are twenty thirty billion dollars in terms of

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Speaker 2: the groups you know, coming together as a group in Australia,

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Speaker 2: these are significant mbfised non bank financial intermedia isn't in institutions. Well,

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Speaker 2: you think it's time for consistency across all those practices.

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Speaker 1: Okay, we're sort of out of time and there's so

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Speaker 1: much more to go down that pathway. I do want

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Speaker 1: to just talk about something that's over the past twenty

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Speaker 1: four hours or so Assets has done. Along with APPRA,

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Speaker 1: you've basically come out and said the super funds. Who's

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Speaker 1: three years ago under the Morrison government it was legislated,

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Speaker 1: I think was Retirement income Covenant? Was that what it's

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Speaker 1: called it there?

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Speaker 2: Years ago? Yeah?

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Speaker 1: Peace, that's right, Peace of Lord. The idea is that

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Speaker 1: a super fund doesn't just have to look after a

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Speaker 1: person as they're saving. It's also as they're dissaving, as

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Speaker 1: they're drawing down and they need you know, they get

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Speaker 1: to sixty five or whatever they are, and they need

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Speaker 1: a plan going forward. And what you're sort of saying

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Speaker 1: is that the super funds aren't doing a very good

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Speaker 1: job at that. Is that right?

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Speaker 2: Absolutely, Although what we would say is it's getting better.

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Speaker 2: Right in the past it's been not very good at all.

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Speaker 2: It's getting better, but there's inconsistency to use that term

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Speaker 2: again and the gap is widening now. It shouldn't necessarily

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Speaker 2: have needed a piece of law three years ago to

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Speaker 2: say that actually entities super funds who are there to

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Speaker 2: provide retirement services support for people in their retirement, So

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Speaker 2: looking after funds so they can spend them and have

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Speaker 2: a good retirement, participate in retirement, which is the purpose

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Speaker 2: of the system. Shouldn't necessarily have needed a law. But

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Speaker 2: there has been a law in place for three years

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Speaker 2: and it's pretty simple. It says that super trustees are

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Speaker 2: required to help those members their members to have a

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Speaker 2: retirement strategy, and it needs to look at risk, it

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Speaker 2: needs to look at access to their money, and it

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Speaker 2: needs to look at return classic stuff for fear and

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Speaker 2: greed audience. Right, So that's been in place for three

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Speaker 2: years and consistent with our mandate and what people would

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Speaker 2: expect of us, we have come back to that year

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Speaker 2: after year to see how the industry is going, and

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Speaker 2: we've worked lockstep with APPA in that regard. In terms

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Speaker 2: of the trend and where this is heading to. It's

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Speaker 2: getting better and this year we find it in some

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Speaker 2: pockets is getting materially better, but in some pockets it's

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Speaker 2: just really incremental improvement and change. And so the gap

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Speaker 2: is widening. And when you think about this, in the past,

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Speaker 2: folks have talked about a silver tsunami of retire Actually,

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Speaker 2: we think that's old language. Now. What it is now

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Speaker 2: is it's here constant waves of retirees. So at the

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Speaker 2: moment we've got one and a half million people in

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Speaker 2: retirement needing access to retirement services. In the next decade

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Speaker 2: it'll be two and a half million. That's well more

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Speaker 2: than the population of Perth. So it is time for

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Speaker 2: trustees to consistently again that word, consistently put retirement at

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Speaker 2: the heart of their strategies and then follow up and

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Speaker 2: follow through on that. So members are supporting retirement. They're

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Speaker 2: not just super trustees and not just investment vehicles. They're

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Speaker 2: retirement and member services vehicles.

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Speaker 1: Okay, both of these topics we've discussed simone, Super is

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Speaker 1: at the heart of them. Now it's obvious in the latter,

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Speaker 1: but even in the former and in the report you

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Speaker 1: talk about retail investors via super being involved in private credit,

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Speaker 1: and that might be totally indirectly. But super is they're

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Speaker 1: kind of like the kings of.

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Speaker 2: The castle, or you may call them that. I call

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Speaker 2: them trustees, and I call them trustees of other people's

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Speaker 2: money who had aired provide retirement services and members services

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Speaker 2: and ensure they can participate in their retirement. So yes,

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Speaker 2: superannuation is the idiosyncratic, the dominant idiosyncratic factor about Australian markets. Absolutely.

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Speaker 2: And when you think about a country that will soon

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Speaker 2: have the second biggest pension system in the world but

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Speaker 2: the fifty fifth biggest population, we have a very big

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Speaker 2: amount of SUPER and it's only going to grow when

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Speaker 2: you think about that in twelve and a half percent. Now,

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Speaker 2: as we say in our report, you know there's four

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Speaker 2: pieces in it of work that have come together, including

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Speaker 2: an overarching report which identifies this idiosyncratic factor in Australia.

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Speaker 2: Private markets are growing globally. Public markets are potentially flat

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Speaker 2: lining globally also. But what's different here is super. It's

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Speaker 2: a really good thing if done well, and an important

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Speaker 2: part of it, if done well, is on the investment

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Speaker 2: side and asset allocation side. Those of us at Apparanastic,

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Speaker 2: all of us in the system trustees of course, most importantly,

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Speaker 2: we keep doing our job. You know, this is a

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Speaker 2: system that's continuing to mature as we get folks moving

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Speaker 2: into retirement, as their need for services increases, as the

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Speaker 2: funds under management, the scale of these entities only increases

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Speaker 2: the risk around member service delivery and around retirement service

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Speaker 2: delivery as well continues to grow. And that's where our

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Speaker 2: SIS really been focused. So we've got important part to

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Speaker 2: play in understanding markets, in holding trustees to account for

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Speaker 2: their responsibility to markets and not just members. We've also

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Speaker 2: got a really important role though, in making sure that

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Speaker 2: trustees live up to their brief and what their customers

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Speaker 2: expect when it comes to service delivery.

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Speaker 1: Simone, thanks for talking to Fear and Greed.

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Speaker 2: Great thanks for having Michel That.

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Speaker 1: Was Asset commissioner at Simone Constant. If you've got something

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Speaker 1: you'd like to know, send through your question via LinkedIn, Instagram,

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Speaker 1: Facebook or at Fearinggreed dot com todau. I'm Seanaelmer and

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Speaker 1: this is Fear and Greed Q and DA