The report, by financial regulator the Australian Securities and Investments Commission (ASIC), has uncovered patchy risk management practices and fee gouging in the rapidly expanding private credit sector.
The private credit market - or lending outside of banks - has an estimated worth of $200 billion in assets under management and continues to grow, ASIC found.
It said private credit lending accounts for about 70% of all loans currently outstanding in Australia.
It is particularly prevalent in providing finance for Australian real estate ventures, many after being knocked back by banks.
What the regulator has found
ASIC has been conducting what it calls a "surveillance" review of 28 private credit funds, including listed, unlisted, retail, and wholesale funds.
It found the sector has boomed over the past 18 months driven, in part, by the increasing size of Australia's superannuation pool looking for investment diversification and increasing yields.
It also fills the gap when the regulated banking sector declines to provide loans for higher-risk ventures, particularly real estate developments.
Everyday Australians are also being increasingly drawn into the sector through increased retail investor participation in private investment products.
Their other major exposure is via their superannuation funds.
Super risk in unregulated sector
Some of Australia's biggest super funds are currently allocating up to a quarter of their assets to unlisted assets, such as privately funded infrastructure, private equity, and private credit.
The APRA report has raised some serious concerns about such investments, including the the private credit sector's possible underreporting of defaults and bad loans.
The sector as a whole reports relatively low levels of default, ASIC notes, generally ranging from 0-6% of their loan book.
However, APRA found the term 'default' was defined differently for different funds, as was the term 'loan security'.
APRA said it was concerned private credit fund reporting may not be providing investors with a true reflection of non-performing fund assets.
Unclear interest rates, fees, risk
The report found only four of the 28 funds it investigated had published information about their interest rates.
Less than half had written impairment and default management policies in place, prompting concerns risk is not being properly managed across the market.
Only two retail funds quantified the interest earned from their assets and fees, and disclosed what they would retain as a management fee in their product disclosure statements.
Other ASIC concerns included weak governance, poorly managed conflicts of interest, questionable valuation practices, and inadequate stress testing.
Could I lose super through my fund investing in private credit?
It is the job of super fund trustees to do due diligence and risk management of their private capital investments.
Regulation of the superannuation industry falls under another regulator, the Australian Prudential Regulation Authority (APRA).
See also: SMSFs vs retail & industry super funds
But, as ASIC points out, it is more difficult for regulators and investors to clearly identify risks in the private capital market.
It also said rapid growth in the market in recent years has also seen new entrants lacking experience in good and bad credit cycles.
It is their untested performance during a downcyle that has the potential to impact financial markets more broadly, ASIC warns.
The report also noted as the market grows, more global private credit managers are entering the Australian market alongside a rising number of domestic managers, intensifying competition for both funds and assets.
Despite its many concerns, ASIC acknowledged private credit was good for the Australian economy, borrowers, and investors, but only if done well.
So, what is being done?
ASIC said it is already responding with a range of regulatory responses through compliance and enforcement action under current regulations.
It said it will give the sector a chance to regulate itself but will continue to monitor the market to protect consumers.
ASIC's "roadmap" for 2026 will particularly focus on private credit funds involved in real estate lending and those providing finance to retail clients.
It said it will use its investigations to highlight the need for key legislative reforms, particularly for managed investment schemes.
This would be in the interests of investor protection, increased transparency and competition in the sector, and to better align with international standards, ASIC said.
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