The private credit cockroaches eating our rich-listers

It was shaping up to be a diabolical year for Sydney Swans chairman Andrew Pridham, even before he had to get to grips with the suspension of key players ahead of the AFL’s finals season.

The asset management giant Pridham co-founded, ASX-listed MA Financial Services, was getting smashed by nervous investors fretting if it was the next private lender saddled with loans to a failed developer like bankrupt pub tsar Jon Adgemis, or collapsed home builder The Bathla Group.

Investors recalled the prophetic words of J. P. Morgan boss Jamie Dimon, who warned – after similar collapses in the US last year with heavy exposure to private credit – that “when you see one cockroach, there are probably more”.

There was no hiding these concerns from Pridham. As the Swans crisis unfolded, he was also bracing for MA Financial to announce limits on investor withdrawals from a fund with exposure to private credit. The move would protect the fund from having to sell assets to meet investor redemptions, but it sent MA Financial shares plunging.

The share rout took Pridham’s personal losses on his MA Financial shares to more than $93 million this year, despite the firm’s record half-year result in August and the fact that less than one-third of its private credit lending was exposed to real estate.

MA Financial chief executive officer Chris Wyke had to wear a $46 million loss on his stake. And while former Collingwood president and MA Financial chair Jeff Browne may be ruing his team not making the AFL finals, at least his loss on the shares stayed below the million-dollar mark.

This week, an MA Financial real estate fund revealed more than 30 per cent of its loans by value had been in default for at least 30 days as of July 31.

As Wyke told Bloomberg last month, private credit investors need to start asking pointed questions about how secure their loans are if the borrower runs into trouble.

“In the real estate credit space, I think investors now should be, and are indeed asking the question, if I’ve lent against real estate, where do I sit in the capital structure?” Wyke said.

“Am I senior secured, or am I mezzanine? The outcomes and the rights vary tremendously depending on the type of investment.”

The fact that MA Financial is publicly listed on the sharemarket means it provides a rare glimpse into just how hard Australia’s rich-listers are being hit as the nation’s booming $200 billion private credit sector finally comes unstuck, thanks to two collapses that indicate just how indiscriminate some of the lending has been.

Yet MA Financial is not the only listed company taking a pasting from its exposure to private credit.

Centuria Capital Group almost halved its market value in the past three months over its exposure to the failed Bathla group as a lender.

But a lot of private credit exposure lies with unlisted entities such as CVS Lane Capital Partners, which is backed by Melbourne’s Liberman dynasty and features former PM Julia Gillard as a board member. CVS was recently forced to suspend redemptions at one of its funds due to the fallout from its Bathla financing.

Gemi Investments, another private credit operator backed by wealthy investors, was reportedly put up for sale last year just before hospitality high-flyer Adgemis was declared bankrupt – Gemi had significant financial exposure to his failed pub empire.

Private credit – the practice of fund managers raising money from investors and lending that money directly to borrowers – took off after the global financial crisis forced banks to curb their loans to riskier clients, such as property developers.

The higher interest rates on these higher-risk loans attracted money from wealthy investors and super funds chasing bigger returns, despite warnings from the corporate regulator.

Long before Bathla’s collapse put the spotlight on private credit, ASIC had warned of the risks in the sector, repeatedly.

Rapid growth in lending, opaque fees, inconsistent practices between firms, and a flow of superannuation money into private credit all raised concerns about the dangers building up.

About half the private credit loans in Australia are in real estate finance, the regulator has found, and many of these loans are riskier than what banks would be willing to finance.

ASIC commissioner Simone Constant pointed to several signs that private credit was facing a test even before Bathla’s collapse.

These signs included rising default rates, fewer investors putting capital into the sector, and some funds needing to limit investor redemptions to stay afloat.

“It’s not a stress event, and it’s not a crisis, but certainly it’s a test,” Constant said.

She said a key priority for the financial markets regulator had been to push private credit firms to have credible valuations of the assets against which they were lending money.

“You need the valuations to be solid, so there’s fair treatment of investors,” Constant said.

Aware of the potential risks, some astute and wealthy backers are still choosing to stick with the sector.

Ian Macoun, the CEO and founder of Pinnacle Investment Management, has continued to back Australia’s largest private credit provider, Metrics Credit Partners, after blasting comments from critics in February as “uninformed, ignorant and stupid”.

In May, Pinnacle paid more than $100 million for a further 6.8 per cent stake in Metrics, taking his asset management firm’s stake in the private lender to 35 per cent.

“We continue to have enormous confidence in the ongoing domestic and international growth of Metrics, particularly as more investors recognise the benefits that can be delivered by experienced, highly diversified and large-scale private markets managers,” he said.