SQM Research has heightened its vigilance over the private credit sector, placing it on a formal Watch.
This increased oversight is in response to emerging issues within the sector and recent regulatory updates from ASIC and APRA.
“We are increasing our active monitoring of the sector on existing ratings,” SQM Research said, indicating a strategic shift to enhance governance focus and preliminary due diligence.
This decision for heightened oversight follows ASIC’s recent focus on the private credit market’s risks, which, as stated by ASIC Chair Joe Longo, include potential systemic vulnerabilities untested by past financial crises.
Although the bulk of SQM’s current ratings—encompassing approximately 70 private credit funds and $33 billion in managed funds—are not expected to change immediately, there remains a possibility for downgrades or discontinuations within the next year.
SQM has identified several transparency and governance issues becoming more prevalent, particularly in wholesale funds. These include opaque borrower identities, questionable asset categorisations, and inadequate disclosures which could potentially mislead investors.
The firm has noted an increase in practices that may compromise investor trust, such as excessive leverage, related-party transactions, and irregularities in fund management statements.
In response to these challenges, SQM Research advocates for enhanced regulatory frameworks to safeguard investor interests.
Louis Christopher (pictured), managing director of SQM Research, underscored the importance of robust governance to prevent adverse outcomes.
“As our financial regulators have stated in recent months, there is a clear link between weak governance and poor outcomes for investors,” Christopher said.
He said that while no immediate crisis is anticipated, the necessity for heightened diligence is paramount to ensure sector stability and protect investor assets.
As the private credit sector continues to grow, SQM Research’s proactive approach aims to ensure it remains a viable and trustworthy avenue for investment.
By addressing potential vulnerabilities early and reinforcing standards, SQM supports the sector’s sustainable development while prioritising investor security and trust.
