Private Credit Firms Use Their Own Funds for Borrowing

Several of Australia's largest private credit firms are borrowing from their own listed debt funds to access low-cost capital for business operations, raising concerns around transparency and investor confidence. About $80 million has been lent by managers including Metrics Credit Partners, Gryphon Capital and Qualitas to their own entities using vehicles originally designed to fund external borrowers such as property developers.

Private credit funds listed on the ASX have collectively raised over $7 billion, giving investors an opportunity to access non-bank lending markets. Fund managers primarily use these trusts to issue loans for property developments and business financing. Recently though, some of these firms have started using their own funds. Loan descriptions have gradually shifted from covering capital raising expenses to more general corporate purposes. This trend has drawn increased attention from regulators watching for governance gaps and potential conflicts of interest within private markets.

Metrics, the largest of these firms with $20 billion in assets under management, has borrowed $58 million from two of its funds - the $2.4 billion Metrics Master Income Trust and the Metrics Income Opportunities Trust. These internal loans carry interest rates between 4% and 6%, which are far lower than rates extended to external borrowers. As a result, they offer a cost-effective way to meet internal funding needs. Metrics Credit Holdings now ranks among the trust's top five debt exposures in dollar terms.

While these manager loans are disclosed in fund documents, their changing purpose has raised eyebrows. Initially meant for fundraising, they now also support general working capital and broader business goals. Although independent responsible entities govern the trusts, some market observers say there is a lack of clear boundaries when fund managers also become borrowers.

Qualitas and Gryphon Capital have applied similar internal loan arrangements, though they say the loans are capped and only used for launch-related expenses. Qualitas has borrowed $15 million from its $970 million fund while the Barings-owned Gryphon has drawn $5.8 million. All firms involved maintain that the terms are on an arm's-length basis. Still, critics argue that using funds raised from investors to financially support the fund managers themselves creates uneasy optics.

These practices are surfacing at a time when Australia's corporate regulator is stepping up scrutiny of the fast-growing private credit sector, which EY estimates to be worth nearly $188 billion. The regulator's recent reviews are placing greater emphasis on how valuations are determined, how potential self-dealing is managed and whether investors receive adequate protections. While fund managers defend their approach as efficient and aligned with industry standards, both regulators and investors appear increasingly focused on ensuring transparency, especially when fund managers begin lending money to themselves.

Source: Australian Financial Review, Investment Council, Mill Soakley