Private credit loans to real estate – including development and infrastructure – are estimated to be the largest sector of Australia’s private credit market. In its Report 814: Private Credit in Australia (REP 814), released in September 2025, ASIC identified both strengths and shortcomings in private credit, signalling an opportunity for the industry to raise its standards. This article highlights the key areas for improvement and identifies better compliance practices for funds engaged in real estate lending.
Need to know
- ASIC’s Report 814 identifies common weaknesses in private credit fund practices with a focus on funds engaged in real estate lending.
- Conflicts of interest and insufficient investor disclosure are key areas of concern.
- Funds should review and enhance compliance frameworks to align with ASIC’s expectations.
Background
Private credit has grown rapidly in Australia. Most of the private credit funds are unregistered managed investment schemes with wholesale and institutional investors. These unregistered schemes generally have less oversight than registered managed investment schemes with retail investors.
Within the Australian private credit market, loans to real estate (including development of real estate) forms the largest sector. The underlying real estate assets also have less regulatory oversight with respect to valuation and historical performance in comparison to other assets such as securities. To gain better insight into the growing private credit sector, ASIC commissioned REP 814 to provide an overview of the key issues and identify better practices.
The release of REP 814 fortuitously dovetails with the end of the consultation process for Consultation Paper 385 Proposed update to RG 181 Licensing: Managing conflicts of interest (CP385). CP385 proposes updates to Regulatory Guide 181 AFS licensing: Managing conflicts of interest (RG181).
The proposed RG181 includes useful guidance for licensees to implement adequate systems to manage conflicts of interest which arise wholly, or partially, in relation to activities undertaken by the licensee (or a representative of the licensee) in the provision of financial services as part of the financial services business of the licensee or the representative.
Both REP 814 and CP385 provide key insights and guidance into compliance practices that should be adopted by private credit real estate funds.
Key Issues identified by ASIC
REP 814 identifies a range of priority and secondary issues within the private credit space. Of these issues, conflicts of interest and insufficient investor disclosure present key regulatory concerns for licensees.
Conflicts of interest
Conflicts of interest arise when there are competing financial interests, personal interests, business or related party interests (whether direct or indirect) or competing loyalties and obligations. Accordingly, conflicts of interest can arise in a variety of operational areas.
Relevantly for private credit real estate funds, a conflict of interest may arise in circumstances where certain fees retained by the manager of a private credit real estate fund incentivise the manager to undertake actions that continue to generate such fees rather than actions that will result in higher returns for investors in the fund. For example, a manager who receives an origination fee for originating loans (which is not passed on to the fund) may be incentivised to continue to originate loans for the fund. This could result in the assets of the fund consisting of too many loans or low-quality loans. Because these origination fees are not passed on to the fund, the investors are not compensated for any increase in risk as a result of the loan origination by the manager.
Valuations of loans or underlying real estate assets that are performed ‘in-house’ by a fund manager (or its related party) are likely to result in a conflict of interest, as the remuneration of the manager (or the wider corporate group) may be impacted by the loan performance. As a result, the valuation may take a more optimistic view rather than a true valuation which reflects a lower value.
Related party transactions are also a source of conflicts of interest. Relevantly, private credit real estate funds which lend to related party developers are likely to encounter a conflict of interest with respect to valuation of the underlying property asset, fees, loan interest rates and loan terms. Conflicts arising from related party transactions may also occur in circumstances where a related fund takes an equity interest alongside the fund’s debt interest in the same asset.
REP 814 also highlights that some funds treat investors differently (such as different fees, access to certain loans and preferential liquidity). It is well established that a trustee of a fund has a fiduciary obligation to treat investors in the same class equally and investors in a different class fairly. However, ‘side letters’ and other special offers may result in investors in the same class being treated differently and investors in a different class unfairly. Such side agreements are not uncommon in the industry and are permissible in certain circumstances. For example, where appropriate disclosure of the possibility of such different treatment is made to all investors in the relevant offer document.
Insufficient investor disclosure
Investor disclosure generally occurs through the initial investor offer document (such as an information memorandum or loan memorandum) as well as regular updates provided to investors over the life of the fund.
REP 814 notes that the fees of private credit real estate funds tend to be opaque or difficult to understand. Some funds fail to disclose the total level of manager remuneration, which can make it difficult for investors to adequately compare different funds.
For example, Manager 1 may only receive a management fee from the assets of Fund A, and treat all other fees charged to the underlying borrower as assets of Fund A. Conversely, Manager 2 may have a much smaller management fee from the assets of Fund B, but will retain other fees and charges which are paid by the underlying borrower. Because the total remuneration of Manager 2 is not disclosed, investors are not aware of the total amount of fees which are retained by Manager 2 and not passed on to Fund B. Although it may appear as though Fund B has lower management fees, in reality, Fund A may provide greater value to investors by treating all fees charged to the underlying borrower as assets of Fund A.
Further, private credit real estate funds may use SPV entities to act as the lenders. These SPVs may then retain a portion of interest from the loan which is not passed through to the fund. Accordingly, investors may not be aware that the credit risk is higher than what has been disclosed as the borrower is being charged a higher interest rate than what is being paid (and disclosed) to the fund.
Many private credit real estate funds do not provide regular investor reports to update investors on the performance of the fund. REP 814 outlines that some areas of investor reporting can be unclear or insufficient to inform investors of details they should know about their investment. This is particularly relevant to the valuations provided to investors as part of these updates. For example, valuations in the construction and development sector can lead to confusion and distortion, depending on what measure of LVR is used. Similarly, commercial and office real estate valuations are sometimes valued on a gross rent rather than a net effective rent basis, producing distortions in value.
Best practices for licensees
Both REP 814 and the proposed draft RG181 include useful guidance for private credit real estate funds to improve their management of conflicts of interest and investor disclosure. We consider that the following steps can be implemented by licensees to uplift their compliance standards.
Conflicts of interest should be managed by:
- a detailed conflicts of interest policy, which is regularly reviewed and updated;
- conflict of interest registers and reviews;
- review of remuneration and fee incentives to ensure fair, efficient and compliant remuneration;
- approval requirements for related party transaction, including whether those transactions are on an arm’s length basis;
- preventing or limiting the use of ‘side letters’ or special offers to some investors within the same class of units (and ensuring appropriate disclosures are made in the relevant offer document to all investors of the possibility of such different treatment);
- appropriate disclosure of some conflicts;
- use of independent third parties for loan valuations and asset valuations; and
- independent compliance oversight.
Investor disclosure can be uplifted by:
- ensuring that all fees and remuneration received by the manager of a fund are disclosed to investors, including quantification of such amounts;
- quarterly detailed disclosure of loan and portfolio information to investors; and
- undertaking verification of disclosure documents.
Get ahead
ASIC has called for the private credit sector to lift its standards in order to follow expert observations on better practices and is likely to continue with enforcement action in this area. Hamilton Locke and our allied business Source can provide a range of key services, from compliance audits to legal review and advice to help you to meet the regulatory requirements.
For more information, please contact Erik Setio and Annabelle Muskitta.
