In this inflationary environment we are continuing to see an interest from our clients in Private Credit/Debt funds. Some advisers are attracted by the low correlation to traditional fixed interest securities while for others the higher returns (an illiquidity premium) available in private debt are the key attraction. Private credit is a broad church covering syndicated corporate loans, securitisation, property debt and infrastructure lending, as well as other more esoteric segments.
Funds of interest to our clients have a return profile with a positive correlation to the RBA Cash Rate and/or senior secured loans at the top of the capital structure that offer the potential for additional protection.
From a regulatory perspective, APRA is likely to want private debt’s asset allocation classification to fall into “fixed income” for the purposes of the Your Future, Your Super performance test. As private debt is less affected by short-term market volatility and generally provides a higher yield with lower correlation to traditional fixed income asset classes it is likely to enjoy an increasing allocation in institutional super portfolios and increasing exposure in the media (e.g. this recent AFR article: “QIC’s diversified portfolio – including infrastructure, real estate, private equity and private debt – helped insulate its returns for clients in a “very challenging market”).
The increased profile of private debt is in turn evidenced in increasing exposures in wholesale investors’ portfolios.
Three quite different approaches to investing in different sectors of the private debt space can be seen highlighted below:
Short term, property backed debt
Generating yield from shorter term, commercial real estate secured debt is a growing market. Non-bank real estate secured debt, in this case for the purpose of bridging a short term funding gap, can provide exposure to a portfolio of debt facilities across a variety of stages within a commercial property’s lifecycle – from early stage site acquisition, through to completed residual stock and bridging facilities for existing commercial properties.
The GEMI First Mortgage Fund offers the opportunity to invest in a diversified portfolio of first mortgage secured real estate debt, targeting net returns of 8% p.a.
A recent video interview with the portfolio manager can be seen below.
SME Debt Capital
Australia, like the rest of the western world has seen a significant decline in Bank lending to the SME market. Non-bank entities are now the key source of funding for SME’s.
Brett Craig , portfolio manager of the Aura High Yield SME fund takes the approach of funding lenders who provide finance to this space. He says ” to date, the Fund has screened 60+ lenders and invested in 7 of the lenders. We attribute part of our performance to our proprietary due diligence processes and deal structuring / negotiating prior to capital deployment. ”
Capital is provided to those lenders through a bankruptcy remote trust to segregate the funds risk away from the balance sheet of the underlying lender. At the underlying loan level they will take directors guarantees as well as general security agreements. These senior secured loans are rarely a feature in public and government bond markets.
The Aura High Yield SME Fund aims to provide stable monthly income from a diversified portfolio of debt securities, principally issued by lenders to SME businesses in Australia.
A recent video interview with the portfolio manager can be found below.
