This month ASIC released a surveillance report as part of their investigation into private credit. This report called out poor practices in the industry, providing a useful guide that investors can use to assess the quality of private credit managers. In this month’s What We’re Watching we benchmark our own processes against ASIC’s guidance.
Apologies in advance for yet another piece on private credit governance but with ASIC releasing another report on private credit and highlighting that private credit will be an enforcement priority for 2026, we couldn’t ignore the topic.
The results of the surveillance were informative and while we are comfortable that none of the poorer practices identified apply to us, we want to maintain our position as a leader in pushing for better governance practices when it comes to private credit. As such we’ve benchmarked our approached against ASIC’s reporting and highlighted action items where we can do more to keep investors informed and ultimately help make the private credit market more sustainable for all investors.
We welcome any feedback from investors or even interested readers about their views on what we can do to build more confidence in the private credit market.
| Principles | Poorer Practices | Better Practices | CIM’s approach |
|---|---|---|---|
| Fund disclosures and transparency Investors have access to timely, transparent information about portfolio strategy, exposures, risks and fees, enabling comparisons | Unclear investment strategies Vague description of fund assets Poor quality and variability in reporting to investors | Clear and effective disclosure of fund strategies and loans Comprehensive reporting to investors Clear explanation of key terms (eg. LVR) | Monthly reporting Extensive Comprehensive commentary on performance and positioning including discussion of material contributors to or detractors from performance and changes in investment strategy Clear description of fund strategy, target returns and risk profile Stratification of key variables including asset class, credit rating, liquidity profile, ESG rating Disclosure of underlying portfolio yield, duration, rating, spread duration, private credit allocation Minimal use of terminology. LVRs only on completed assets (i.e. no construction asset LVRs) Action items following ASIC report: Expansion of reporting to include share of unrated assets, level of seniority and industry exposures. Greater explanation of how ratings are obtained – internal credit ratings are based on methodology of established rating agencies and are independent of investment team |
| Marketing and distribution Design and distribution practices are fair, transparent and appropriately targeted for investors | Aggressive marketing- mass communication or incentives offered Unbalanced risk description Potentially misleading marketing Frozen fund continued distribution Inadequate wholesale client classification Characterisation of risk Portfolio allocation – core or major allocation Distribution conditions – inappropriate or non-existent | Effective disclosure of investment risks – should be medium or higher risk Portfolio allocation – satellite or minor allocation Tailored distribution conditions | Credit income fund TMD aligns with ASIC better practice: Suitable for a minor or satellite allocation (up to 25%) Risk rating of medium (SRM of 3) Distribution conditions that require personal advice for retail investors Other CIM funds are not available to retail investors. Marketing review and signoff procedures are in place to ensure materials are not misleading. Action items following ASIC report: None identified. A thorough review of the CIF TMD was undertaken in response to La Trobe and RELI DDO stop orders. No concerns with the TMD were identified. |
| Fee and income transparency Fees and income structures are fair and transparent, giving investors and borrowers a clear view of total costs | Retention of loan origination and other fees (e.g. loan extension, restructure or roll-over fees) Failure to pass on default fees Failure to disclose substantial fees and income | Passing on income Fee and income transparency | All fees paid to the benefit of the fund, not to the manager. This includes loan origination, extension, restructure, roll-over, early pre-payment and default fees). All management fees are fully disclosed in the PDS Action items following ASIC report: None identified |
| Governance and conflict management (1) REs and trustees act as stewards of investor capital, ensuring that their decisions are fair and in investors’ best interests. | Minimal RE oversight- reliance on manager to self-report Limited RE engagement with underlying funds Weak oversight by a related trustee | Active communication with fund trustees RE committee oversight of performance and liquidity | RE is Fidante Partners FPL, a related entity to CIM. Conflict is identified, managed and disclosed. FPL is RE for c. 45 different funds acting as RE for CIM funds as well as Fidante Affiliates including other private market strategies include those managed by Ares and Apollo. Fidante Office of the RE is a management committee that assist in managing day to day matters and provides governance oversight for the operation of Fidante funds. Members of the OORE are independent of the CIM business and investment committee. Fidante RE Compliance Committee meets quarterly to consider risk and compliance matters for Fidante’s managed investment schemes. Four members, three independent non-execs from other APRA regulated boards within the Challenger Group. Fidante Board meets quarterly or more frequently as required to receive updates from the Compliance Committee, assess risk and compliance matters (incidents, breaches, complaints, regulatory contact, risk reviews, audit reviews), review fund performance (incl. stress testing and fund liquidity) and review financial adequacy. FPL is part of the level 3 APRA regulated Group and benefits from Challenger Group oversight including Executive Risk Management Committee and Group Risk Committee. More information on the RE process is available here: https://www.fidante.com/au/risk-management Action items following ASIC report: We understand that many managers champion the benefits of an independent RE model. Our view is that an independence is not a sufficient condition for the RE to act effectively as a steward of investor capital (we discussed this issue in: https://www.challengerim.com.au/what-were-watching-the-blurry-line-between-co-dependence-and-independence/) What is more important is that the RE is suitably experienced and qualified to fulfill its obligations plus has effective controls in place to ensure that they have oversight of the operations of the fund manager and act as safeguard against many of the questionable practices that ASIC has identified. As a large organisation subject to oversight from multiple regulatory agencies our view is that Challenger is able to maintain the necessary operational independence whilst ensuring that there is effective oversight and control. As such, we do not anticipate making any material changes. |
| Governance and conflict management (2) Structures, processes and people promote sound decision making, compliance and accountability. Conflicts of interest are identified, disclosed and effectively managed or avoided. | Retention and non-disclosure of revenue from loans under management NAV- and GAV-based management fees Non-disclosure of related party transactions Conflicted allocation decisions Debt and equity investments overseen by the same investment committee Poor COI record-keeping Underdeveloped operational policies Inadequate allocation policies | Clearly documented COI arrangements Independent committees Related party transactions and COI approvals Disclosure of related party transactions | Specific policies address conflicts of interest and related party transactions (RPTs). RPTs require a minimum of divisional director signoff and disclosure to affected parties. CIM maintains an allocation policy to ensure fair and equitable treatment across clients and to minimise the risk of being in positions of conflict. CIM does not invest in debt and equity of the same transaction. This can only occur via restructure where the investors that held the debt continue to hold the restructured equity. No cross trading between funds with the exclusion of seeding funds at inception which is disclosed to investors and subject to RPT signoff. CIM’s investment committee requires at least one Senior Credit Representative (which are not members of the CIM team) to form a quorum. The IC is chaired by a member of risk not a member of the investment team. CIM does not retain any revenue from loans that is not disclosed to investors with management fees based on NAV. Action items following ASIC report: None identified |
| Valuation practices Valuations are fair, timely and transparent with robust governance | Absent or incomplete valuation policies ‘As if complete’ construction loan valuations and loan-to-valuation ratio (LVR) Opaque valuation practices Practices not addressing provisioning and impairments Infrequent valuations Valuation review only in response to credit triggers Misaligned valuation frequency for master and feeder funds | Monthly valuations and unit pricing Transparent valuation policies Valuation and impairment disclosure | Fair value approach where valuation of private assets is based on estimate of where that asset would be sold in arms’ length transaction between willing buyer and willing seller. Valuation reflects credit risk of underlying asset as well as movements in market credit risk (i.e. if public market spreads widen by 200bps, this is reflected in private valuations). Valuations of private assets updated daily based on market credit spread movements, monthly based on rating changes or observed trading activity. Operationally independent valuation committee meets monthly. No overlap between investment team and valuation committee. Valuation is the same across all funds. Operationally independent credit risk function will cap valuation at estimated recovery value where default is likely (CCC rating or lower). Material valuation adjustments disclosed and discussed extensively in client reporting. Valuation process clearly disclosed in client reporting, asset consultant reports and in marketing materials. No construction asset LVRs. Valuation process subject to annual external audit. Action items following ASIC report: None identified. Whilst not external, the valuation function is independent of the investment team and subject to external oversight. Valuations reflect both market and idiosyncratic risk factors and are driven by a credit rating assigned by the operationally independent credit risk function. |
| Liquidity management practices Liquidity risk is effectively disclosed and managed, avoiding structural mismatches with fair redemption terms aligned with portfolio liquidity | Absent stress testing No liquidity policy Side letters with unequal redemption rights and distribution rights | Liquidity plans and frequent stress testing Clear explanation of potential liquidity risk impact | Liquidity stress testing forms part of the RE regular review process. Funds designed to match redemption terms with underlying liquidity profile of the assets All assets scored based on expected liquidity Liquidity profile disclosed in investor reports for Credit Income Fund Clearly defined strategies for managing liquidity All investors treated equally with respect to redemption rights. Action items following ASIC report: None identified |
| Credit risk management practices Credit risk is effectively managed across loan origination, portfolio construction, monitoring, impairment, default and repayment | Limited credit assessments No internal credit risk rating or scoring process Poor record-keeping Poor disclosure of unsecured lending risks Nature of security unclear Default reporting not comparable No default management policy Potentially misleading ‘protection’ mechanisms | Detailed credit assessments Enhanced due diligence for development loans Ongoing credit monitoring Exposure and LVR limits LVR benchmark disclosure Proactive portfolio monitoring Internal ratings review Daily default management meeting Reporting to investors | Detailed credit rating process conducted by Credit Risk Management (CRM) team which is independent of CIM reporting through to the Chief Risk Officer of Challenger. Rating process based on established rating agency methodology CIM funds do not engage in construction or land lending Ongoing monitoring with rating reviews conducted at least annually for internally rated loans CRM team responsible for leading any restructure or workout with specific delegations in the event of stress CRM team will assess loans which are likely to default for impairment, capping valuation at recovery value where appropriate. MSPL fund disclose level of seniority Default definition aligned with rating agency definitions of default Defaults reported to investors including providing information on performance impact and valuation No transfers of defaulted loans. Action items following ASIC report: None identified |
On behalf of the team, thanks for reading.
Pete Robinson
Head of Investment Strategy – Fixed Income | +61 2 9994 7080 | probinson@challenger.com.au
For further information, please contact:
Linda Mead
Senior Institutional Business Development Manager | T +612 9994 7867 | M +61 417 675 289 | lmead@challenger.com.au |