Jamie Dimon recently warned, ‘When you see one cockroach, there are probably more,’ specifically referring to growing risks in the private credit sector. Recent blow-ups and global warnings on leverage, disclosure and valuation show how small cracks can spread.

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Australia’s private-credit market has grown fast, and that’s mostly a good thing. It provides an alternative to bank funding, supports mid-market borrowers, and gives investors a source of income when traditional fixed income feels thin. But fast growth always brings shortcuts, and in private markets those shortcuts tend to hide in the footnotes. Numbers that look sturdy from across the paddock can prove fragile up close.

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Earlier in 2025, ASIC released a discussion paper on Australia's evolving capital markets, prompting extensive industry feedback. Many submissions highlighted gaps in disclosure, valuation challenge and governance across private credit and other non-public markets. Several months later, ASIC released Report 814 – Private credit in Australia (REP 814), directly responding to those submissions. Around the same time, ASIC also published Report 816 – Accounting for your super: ASIC's review into the financial reporting and audit of super funds (REP 816), which, while focused on superannuation funds, reinforced similar themes around valuation and audit quality. Together, they send a simple message: the issue is not complexity, it is transparency. When risk is not fairly represented, investors cannot price it properly – and that is the fault line ASIC wants to close.

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And that sets up the question this piece answers: where exactly do the gaps lie, and what should investors and managers do about them?

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What ASIC Found

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ASIC sees a two-speed market: large institutional pools with strong governance and independent valuation processes, and a looser perimeter where oversight is more trust than testing. The market is estimated around $200 billion, roughly half property-backed, and even that figure required stitching together imperfect data. That, in itself, is a finding.

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The February discussion-paper submissions converged on a familiar set of weak spots: fee opacity, thin valuation challenge, related-party risks and internal “investment-grade” labels with little external validation. When ASIC followed up with REP 814 and REP 816 later in the year, those same concerns were effectively echoed and formalised. REP 816 also noted that auditors often leaned on management marks without robust sampling or challenge.

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The takeaway is not to “ban private credit”; it is to lift the standard so that both income and risk are transparent and fairly represented. ASIC does not want to curtail the market, but it does expect it to mature, and to demonstrate that maturity before the next downturn tests it.

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The attention has not just come from regulators. Wealth advisers tell me they are now fielding calls from clients asking whether their portfolios are already run to the standards ASIC expects. The signal is landing, and it should not be ignored.

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Where the Gaps Sit and Why They Matter

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ASIC’s reviews show that opacity is not isolated. It turns up across the core plumbing of private credit, and it affects wholesale offers as much as retail-adjacent ones. The good managers are usually forthcoming. They welcome questions and help researchers understand the details behind their portfolios. But ASIC’s analysis found enough examples of managers who fall short of that standard, which is why the regulator’s message has resonated. Opacity was not confined to isolated issues; it appeared across several critical areas shaping investor outcomes.

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Fees. Charges often reach beyond the headline. If a loan-by-loan breakdown takes weeks to produce, that delay speaks volumes. REP 814 observed that the total level of manager remuneration is often difficult, and sometimes impossible, to quantify. Borrower-paid fees and loan rollovers can serve valid purposes, but without transparency investors cannot judge whether they reflect sound decision-making or fee-driven behaviour. For instance, rolling a loan may create new fees while postponing loss recognition, which flatters short-term returns and obscures true performance.

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Yield. The spread between what a borrower pays and what an investor receives is shaped by more than administration. Fees, leverage costs and expected losses sit in the middle. Without a clear, loan-by-loan yield breakdown, investors cannot tell where value is added and where it leaks. Yield should be a map, not a slogan.

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Ratings. Ratings need to prove they measure risk, not market it. Most credit labels rely on internal frameworks, and calling an internal grade “BBB equivalent” does not make it so. Independent validation and evidence of rating migration are often limited. Because most private credit portfolios are loan backed, managers should apply a banking-style discipline that tracks credit migration in real time, with watch lists and arrears monitoring to keep assessments current and meaningful.

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Valuations. Valuations should move with credit reality. When a borrower’s quality deteriorates, the mark should fall, and if warranted, an impairment should follow. Without strong independent challenge, marks can lag. REP 814 initially found it “surprising” but then later was more direct calling it “inconceivable” that some managers reported no impairment history. It is almost as if the authors grew more frustrated as they worked through the data! I jest... somewhat... but this highlights a clear fairness problem: early redeemers exit at inflated prices while remaining investors bear the correction, should it crystallise. The better managers already apply this as standard banking discipline.

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Related parties. Lending to affiliates, cross-tranche exposures and asset transfers are common. They are legitimate only if pricing and decision rights are truly at arm’s length. One real example of a conflict handled well says more than a policy.

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Liquidity and Disclosure. REP 814 also raised concerns about liquidity management, warning of potential misalignment between investor expectations and reality when redemptions are gated during stress. The report found portfolio disclosure often superficial - aggregates rather than detail on concentrations, credit migration, and asset quality that investors need to assess risk.

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For ASIC, these are not abstract governance debates. They are fault lines where outcomes can diverge sharply from expectations, especially when markets turn. That is why transparency in process, and diligence that tests it, matter.

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The So-What

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Private credit is not broken, but some pockets still lack transparency and rigour. REP 814 and REP 816 set new benchmarks: verification, independence and honest disclosure are now the baseline, not the bonus. Verification is not compliance; it is an edge.

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For investors and advisers, this is the filtering brief. In meetings with managers, look for daylight rather than documents: can they clearly explain the path from borrower payments to investor returns; can they walk you through fees and who receives them; can they describe how internal ratings change through a cycle; can they show how valuations are independently challenged; can they explain related-party decision rights with a concrete example. Do they disclose detailed portfolio metrics - rating bands, migrations, arrears, expected losses, and liquidity terms, notably in stressed markets. The good managers already operate this way in due diligence and after investment. ASIC’s analysis shows enough do not, which is why the quality of the conversation matters.

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If you are working through an adviser, press them on how they validated these points, not just whether they asked the questions or collected the policies.

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Trust but verify. Good due diligence does not end at the checklist; it looks for evidence that the process works in practice, including examples of when it held up well and when it was tested. The best managers will welcome that scrutiny because transparency builds confidence, not tension.

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And if a manager deflects or delays on these questions, that tells you something too. Which brings us back to where we started: admire the gift horse, but make sure you look at its teeth.

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‍Michael Sommers

Founder & Principal Consultant, Redholme Advisory

msommers@redholmeadvisory.com.au

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‍Disclaimer

This article is intended for wholesale investors as defined under the Corporations Act 2001 (Cth) and is not intended for retail investors. The information provided herein is for general informational purposes only and does not constitute financial, investment, or professional advice.

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