Watchdog warns private credit amidst Bathla troubles

PRIVATE credit funds are being warned to shape up or face the wrath of the corporate regulator after it confirmed a formal investigation into collapsed developer Bathla Group.

The private credit-backed builder was a cautionary tale about the poor practices rampant in the private credit sector, despite repeated calls to fix dodgy valuations, complex structures and insufficient disclosure, ASIC commissioner Simone Constant said.

She confirmed the watchdog had begun a formal investigation into the conduct of Bathla, as ASIC released its latest surveillance of the private credit sector on Tuesday.

ASIC was also making inquiries in relation to private lenders but had not yet begun any formal investigation, she said.

Many of the poor practices around fees, disclosure, distribution and conflict-management -  identified by the regulator's first private credit report a year earlier - remained.

"We've seen pockets of improvement and, indeed, we've called out some better practice in this report but,in a consistent and comprehensive way, we haven't seen the improvement," Constant said.

The review of 24 wholesale and retail private credit funds, together responsible for $18 billion in assets under management, found complex and opaque structures were rife.

§ Bathla collapse exposes complex borrowing structures

The collapse of Bathla, owing $3.4 billion to creditors, was a "concerning and dark case study" of why those practices needed to be rooted out, Constant said.

Bathla's borrowing structure of more than 500 special purpose vehicles, with more than 40 private credit lenders, resulted in varying competing interests, exacerbating fees and risks, she said.

Of 22 funds surveyed, only two passed on the full economic benefits of interest earned and borrower fees to investors.

§ Final warning before enforcement action in 2027

Given rising interest rates and slowing economic growth, it was urgent the sector addressed practices that were not up to scratch, Constant said.

"They will come under real stress and pressure, given the economic climate and the credit climate we now find ourselves in," she said.

Constant said it was ASIC's final warning to funds before 2027, when the regulator will shift to enforcement action.

ASIC has already issued six interim stop orders since September, including two notices to private credit firm Angas Securities, over its ties to Bathla.

The regulator alleged on Monday that Angas had failed to disclose its exposure to the Western Sydney-based developer to investors and the risks that arose from its holdings.

But Angas executive chairman Andrew Luckhurst-Smith said the fund had little exposure to Bathla and had lost no money from its loans to the developer.

Luckhurst-Smith blamed a transcription error in a document Angas provided to ASIC for giving a false impression about the size of its exposure to Bathla.