Australian private lending giant Metrics suspends trading of three funds

Metrics Credit Partners, which manages about 40 billion Australian dollars in assets, suspended trading of three ASX-listed funds, namely Metrics Real Estate Multi-Strategy Fund, Metrics Income Opportunities Trust and Metrics Master Income Trust, before the market opened on September 28. The auditing firm KPMG adopted different processing methods for input data and probability weights when reviewing the preliminary financial reports. This led to a 12.16% reduction in the net asset value of the Metrics Real Estate Multi-Strategy Fund, a 10.08% reduction for the Metrics Income Opportunities Trust, and a 1.99% reduction for the Metrics Master Income Trust.

The main disagreement focused on the fair value assessment of unlisted commercial real estate equity investments. The net asset value of the units of the Real Estate Multi-Strategy Fund decreased from 2.53 Australian dollars to 2.22 Australian dollars, mainly due to the impact of this part of the assets. Metrics stated that during the auditing process, more attention was paid to downside risk scenarios, and the weight of unfavorable outcomes was increased. The loss provisions for loan exposures of the three funds also increased accordingly.

The rise in interest rates has changed the cost structure of the lending environment. Borrowers face increased repayment pressure and asset prices are subject to revaluation. The valuation assumptions formed during the period of low interest rates need to be reexamined in the current environment. The economic slowdown has also affected the rental income and vacancy rates of commercial real estate. Regulatory authorities have raised higher requirements for specific assets and the overall investment portfolio, which further promotes the necessity of prudent valuation.

The Australian corporate regulatory authority recently issued a warning, stating that the private credit industry has problems such as inaccurate valuations and poor governance. Non-compliant enterprises will face enforcement actions. This is the most stringent scrutiny faced by the industry in recent years. The regulatory authorities have listed private credit as a key area for supervision, and the requirements for information disclosure and risk management are increasing.

When the real estate developer Bathla Group entered the bankruptcy process, it owed 3 billion Australian dollars to about 40 lenders. This event sparked widespread concern in the market regarding the asset quality of the private equity credit industry. Metrics clearly stated that it had no connection with Bathla. However, the trust in the entire industry was affected, and investors began to re-examine the asset transparency of non-bank lending institutions.

After the auditing dispute emerged, Metrics also suspended the redemption of some unlisted underlying funds. According to media reports, its wholesale funds were estimated to have suffered about 2.6 billion Australian dollars in capital outflows in the past 12 months. Redemption restrictions are a common response measure for private equity credit funds during periods of pressure. However, this would further undermine investor confidence.

Before the suspension, the market trading price of the real estate multi-strategy fund was already far lower than its adjusted asset value. The stock market has already imposed a discount on the pricing of such funds. After the valuation adjustment, the fund needs to re-establish the anchor point for market pricing. Investors will pay attention to the final data after the audit and whether there will be further write-downs in the future. Several research institutions that previously gave positive ratings to the Metrics fund have included the related products in the review list. The downgrade of the rating may lead to the removal of these products from the wealth management platform, further affecting the inflow of funds.

In its financial stability assessment released in early October, the Reserve Bank of Australia stated that the private credit market currently does not pose a systemic financial stability risk. The bank believes that the relatively small size of this market limits the risk transmission. At the same time, the central bank pointed out that the opaque practices of some funds may expose individual investors to unknown risks. Behind the high returns of private credit, liquidity risks and valuation risks are being re-priced.