Private credit in focus: What ASIC's warning means for managers

In June 2026, the Australian Securities and Investments Commission’s (ASIC) issued a clear warning to private credit managers ahead of year-end valuations and financial reporting, highlighting concerns around valuation practices, governance arrangements and the adequacy of disclosures provided to investors.

ASIC signalled that as market conditions become more challenging, firms will be expected to demonstrate that valuations appropriately reflect underlying asset quality and that key assumptions are supported by evidence.

The concerns highlighted in the notice are consistent with themes emerging from ASIC's surveillance activities and reporting, including REP 820 and REP 821, where governance frameworks, valuation methodologies and the supportability of key judgements have been identified as areas of focus.

After a prolonged period of growth, the sector is now entering a more challenging phase. Higher interest costs, more selective refinancing markets and growing pressure on borrower cash flows are beginning to test the assumptions underpinning portfolio performance.

At the centre of ASIC's message is concern that reported performance may not fully reflect changing credit conditions. This reporting cycle may be the first significant test of whether portfolio valuations fully reflect changing credit conditions.

Valuation sits at the core of this shift. While often treated as an accounting exercise, valuation in private credit is ultimately a credit judgement. Where borrower cash flows are under pressure, refinancing pathways are uncertain and structures increasingly rely on amendments or capitalised interest, asset values cannot remain static. In these circumstances, maintaining valuation discipline becomes important.

However, borrower stress is not presenting as an immediate default cycle but emerging in an uneven way. Covenant waivers, amendments and ongoing lender support can mask underlying performance issues, with risk more likely to crystallise through liquidity events than abrupt failures.

What we're seeing across portfolios

Across recent portfolio reviews, consistent themes are emerging:

• Valuations lagging current conditions, particularly where updates are based on historical or infrequent review cycles
• Increased reliance on refinancing and asset realisation, rather than self-liquidating cash flows
• Use of amendments, waivers and capitalised interest to manage underperformance
• Delayed or inconsistent impairment recognition, with provisioning not always reflecting underlying risk

• Concentration risk amplifying outcomes, with a small number of exposures driving overall performance.

These factors can result in headline positions appearing robust, while underlying credit risk is materially more sensitive.

Early indicators of deteriorating credit quality

The challenge for private credit managers is not identifying stress once a borrower defaults but recognising deterioration early enough to act. In the current environment, investment committees should consider whether existing monitoring frameworks remain sufficiently forward-looking. Key indicators may include:

• Deterioration in forecast cash flow coverage or liquidity runway, even where covenant compliance remains intact
• Increased reliance on refinancing, asset sales or sponsor support to achieve repayment outcomes
• Growing frequency of covenant waivers, amendments or maturity extensions
• Increased use of capitalised interest, payment deferrals or other forms of payment relief
• Independent reviews identifying weakened trading performance or declining debt service capacity
• Emerging sector-wide pressures affecting multiple exposures within a portfolio.

The objective should be to identify changes in credit quality before they become valuation, impairment or recovery events.

Liquidity may be the earliest sign of stress

While credit quality remains fundamental, many stressed situations are likely to crystallise through liquidity events rather than immediate defaults. Increasing reliance on refinancing, asset realisations and lender support means liquidity pressure is often emerging well before formal impairment indicators. As a result, liquidity metrics are becoming an increasingly important component of effective portfolio monitoring.

The role of portfolio construction

Periods of market stress can expose weaknesses in portfolio construction that may not be obvious in more favourable conditions. Concentrated exposures, correlated sector risks and refinancing events can amplify performance outcomes when conditions deteriorate. Understanding these dynamics is important for managers seeking to preserve portfolio resilience.

The importance of strong governance

Governance remains the primary control point. Boards and investment committees need to actively challenge assumptions, ensure valuations remain supportable and adopt a forward-looking approach to credit risk.

As regulatory scrutiny increases, governance, valuation supportability and reporting consistency are likely to remain key areas of focus. These same areas are also expected to receive increasing attention from auditors and assurance providers as private credit portfolios move through a more challenging credit cycle.

How BDO can help

As scrutiny increases, managers may benefit from independent perspective on portfolio performance, valuation practices and governance processes. Our Financial Services and Special Situations teams support private credit managers and lenders to identify emerging risks early. Organisations that proactively review portfolio performance, valuation assumptions and monitoring frameworks will be better positioned to navigate a complex credit environment.