Interaction between private credit and super funds is ‘opaque’, says APRA

APRA is preparing to launch a stress test to reveal potential “contagion sources”, having found that the interaction between super funds and private credit is “opaque”.

Earlier this week it was revealed that AustralianSuper has written off a $1.1 billion investment in US-based education software Pluralsight, after the latter entered a restructure amid its quick financial deterioration.

Speaking to Super Review after The Australian Financial Review broke the news that the fund has written off over $1.1 billion in equity and loans tied to Pluralsight, AustralianSuper’s Mark Hargraves said the fund remains committed to private equity.

“AustralianSuper remains strongly committed to private equity as it has been the top-performing asset class over five and 10 years for the fund, delivering 10 per cent and 12 per cent, respectively, for members,” the head of international equities and private equity said.

While Hargraves insists AustralianSuper is not intimidated by the higher risk profile of private markets, Australian Prudential Regulation Authority’s (APRA) deputy chair Margaret Cole says the interaction between private credit and super funds is “opaque”.

Cole noted that funds, which are constrained in their ability to directly take on leverage because investment risk is passed through to their members, tend to veer away from niche areas of the private market.

“This means that while funds have some private credit investments, they are still seeking some level of safety rather than more speculative, niche areas of private finance; and the exposures they do have are low in terms of overall portfolio allocation,” Cole said.

“The interactions between all these participants, including banks, non-banks, and super funds, however, is opaque. This is a central driver for APRA moving towards cross-industry stress testing, to better explore any potential contagion sources and gaps in the regulatory framework.”

APRA plans to launch its first financial system stress test in 2025, Cole confirmed.

The regulator is also in the final stages of a deep dive review of asset valuation and liquidity management practices for a cross section of large and mid-size trustees with material exposure to unlisted assets.

“We are closely focused on how trustees are meeting the requirements set out in APRA’s superannuation prudential standard SPS 530 Investment Governance, and the associated guidance, both of which have been revised recently,” Cole said.

Moreover, in November this year, the regulator is due to implement a data collection that includes strategic allocation.

Last week, the Australian Securities and Investments Commission (ASIC) announced it will prioritise reviewing the growth of Australia’s “opaque” private markets, with chair Joe Longo highlighting the heightened risk to market integrity as investor exposure increases.