The 14 issues prompting SQM Research’s ‘Watch’ on | Australian Markets

Having positioned the non-public credit sector on ‘watch’, SQM Research has listed the issues which underpinned its controversial choice.

And one of these issues has been listed as “dubious marketing strategies involving advisers”.

As properly, SQM Research managing director, Louis Christopher famous that over the previous 12 months the firm had screened out roughly 20 fund choices with the non-public credit sector, the bulk of which have been in wholesale.

“We are taking this precautionary measure in response to increased issues observed in the sector and in response to recent announcements by our financial sector regulators. This action doesn’t necessarily mean that a fund rated by SQM will be automatically downgraded or placed on hold. However, it is viewed as a necessary step to ensure appropriate oversight of an asset class that has been growing in relevance and size over recent years,” Christopher stated.

“We have an expectation that wholesale funds provide the same transparency as retail funds. On that front there is no question there has been a rapid increase on wholesale fund offerings which we think has been driven in part by a rapid increase in the number of Australians who now qualify as a sophisticated wholesale investor/high net worth individual; the threshold of which is still set at $2.5 million dollars in net assets or a gross income of $250,000 per annum.”

SQM stated issues it had noticed with growing frequency have included.

Lack of transparency on who debtors truly are.

▪ Questionable categorisation of asset holdings (illiquid/liquid/fixed income/convertible equity/equity).

▪ Lack of transparency on sub fund holdings.

▪ Lack of transparency on group financials.

▪ Highly leveraged steadiness sheets.

▪ Overall insufficient disclosure within info memorandums

▪ Information memorandums that give an excessive amount of latitude to the supervisor in phrases of asset allocation weights.

▪ Elevated Loan to worth ratios, calculated on finish of completion developments.

▪ Vertical and horizontal associated get together buildings (similar Trustee, Responsible entity, Custodian, development/real estate company divisions connected) which will give rise to aconflict of curiosity.

▪ Increased loan arrears and an growing frequency of refinancing of current loans that have been scheduled to be exited.

▪ Sizeable rate of interest margins not being handed onto traders.

▪ Lack of independence at board/ investment committee stage.

▪ Dubious advertising methods involving advisers.

▪ An growing quantity of merchandise being supplied with a mismatch between acknowledged liquidity and the underlying liquidity of the loan belongings.

The formal assertion by SQM stated that it wished to emphasize that the issues “are not endemic within the sector but do appear with more frequency within wholesale funds and in particular, new fund products offered to the market”.

“Some of these issues have been observed beyond the private credit sector,” the analysis home stated.