La Trobe Financial: $11b locked up in frozen funds highlights the hidden risks in private credit

More than 100,000 Australian investors have $11 billion in three frozen La Trobe Financial funds that the corporate regulator believes may have made high-risk loans to property developers that were marketed as safe bets.

On Monday, the firm’s chief investment officer, Chris Paton, told investors in its property-focused Australian credit fund there was little to worry about, even though the asset manager has cut off access to the website used by clients to access their investments.

“I want to reassure our investors that your investments with La Trobe financial remain safe and under our careful stewardship,” Mr Paton said. “Each of our products our supported by high-quality granular loan assets within highly diversified portfolios that are built with conservatism at their core.”

ASIC’s decision late last week to shut off new investments in three funds operated by one of the best-known private credit managers is a blow to an industry that stepped in a few years ago to offer loans after the big banks were forced to cut back lending.

Mainly retirees, seeking returns of 6 to 10 per cent, have invested more than $200 billion into private credit funds, which concentrate on loans to property developments, which are notoriously volatile.

Mr Paton assured investors their interest payments would be paid on time. “These portfolios are designed to perform across the cycle and perform they have for investors for over 35 years,” he said.

Mr Paton added that the underlying La Trobe funds continue to operate and pay income as normal, although trading in the ASX-listed La Trobe Private Credit Fund remained suspended on Monday.

Advisers unconvinced

On Monday outgoing ASIC chairman Joe Longo declared the industry must lift its standards or prepare for regulatory intervention.

Andrew Wielandt, a DP Wealth Advisory financial adviser, said the private credit industry was too complex for regular investors, who might not understand the high degree of risk to deliver returns as high as 9 per cent after fees.

“At a high level, ASIC’s report is right calling out the concentration risk in real estate and construction, and I think it’s also heavily exposed to hospitality,” he said.

“A lot of it comes back to ‘is this an appropriate product for retail investors?’ I think there’s less value in fees for private credit and alternative structures versus ETFs (exchange traded funds).”

Warning

ASIC has warned on the risks about two La Trobe funds that lend to Australian business borrowers on the basis their advertising may not be consistent with the regulator’s requirements.

The La Trobe Australian Private Credit Fund 12-month markets a 6 per cent annual return to investors, and the La Trobe Australian Credit 2-year fund advertises a 6.1 per cent return net of fees, which stand at nearly 2 per cent per year for both funds.

“These products are not bank deposits,” ASIC said in its statement. “The rates of return are not guaranteed and are determined by future revenue of the pool of assets that comprise the account.... and there are conditions around withdrawals.”

The regulator is also concerned that the funds are being represented or advertised as low-risk in ways that helped them quickly gather more than $11 billion from depositors seeking returns nearly 50 per cent higher than a standard term deposits.

A separate ASX-listed La Trobe US Private Credit Fund that boasts of a 6.85 per cent annual return was also suspended. ASIC warned the fund inadequately discloses the assets it owns “involve an above average amount of risk and volatility or loss of principal.”

Poorer practices

ASIC said ongoing surveillance found some of the poorer practices in private credit today are potentially inconsistent with financial services laws, including the requirement to provide financial services efficiently, honestly, and fairly, while avoiding misleading or deceptive statements.

“While the report highlights some encouraging practices, it also reveals concerning behaviours that fall short of market expectations and more importantly that are inconsistent with existing financial services laws,” Mr Longo said.

The three La Trobe funds are subject to 21 day closing orders unless revoked earlier, with its investment platform offline until a resolution. “Our team are working feverishly to bring it back online as soon as we can and we appreciate your patience,” Mr Paton said Monday.