Private credit has attracted more scrutiny from the press and regulators than almost any other private asset class amidst an upswing in interest from both allocators and managers.
Some of the unease might stem from the fact that private credit isn’t “bonds or equities”, according to LGT Crestone Wealth Management CIO Scott Haslem, but there are also a huge and growing number of managers in the space, and not all of them are excellent.
“I think there is an immense amount of dispersion in managers and manager skill,” Haslem told the Investment Magazine Fiduciary Investors Symposium in the NSW Blue Mountains.
“When we analyse the performance of our traditional managers across bonds and equities… you do get rotation of top quartile, bottom quartile. I think in private markets generally and private credit specifically, you do tend to find that the best managers remain the best managers, which means a lot of people are getting exposure to not the best managers, and their experience is underwhelming.”
Then there’s the fact that defaults – while unpleasant to deal with – are “part of the process” in private credit investing, the risks of which can be somewhat ameliorated by selecting managers that have the resources to work them out. And there’s confusion, too, about structure versus quality.
“[A loan can be] senior, but that doesn’t mean it’s not BB,” Haslem said.
“Senior just means where you are in the capital structure. It doesn’t necessarily reflect the underlying quality of the asset that you’re in. And most private credit is high yield, and I think that’s where there can be lack of communication from managers, [that] this is what you’re investing in; I think that’s part of the unease and poor experiences that some people have had in the space.”
But big institutions are naturally better equipped to navigate the unique private credit landscape than the flood of retail investors pouring into it, according to Steve Gamerov, head of diversified portfolios at MLC.
“With our scale we are setting up separate accounts, and thereby can define the parameters, the guardrails, the segments we want to go into, the loan to value ratios, the interest coverage – all those risk parameters,” Gamerov said.
“Make sure we do have enough senior security, make sure there are tight covenants in there. That’s critical…and it’s very different to a retail investor who’s coming into an ETF product where that sort of transparency is just not going to be there. We have transparency on each and every loan item.”
But if there is media scrutiny about the rapidly growing private credit market, it’s probably a positive for the investors considering allocating to it for the first time, said Andrew Fisher, Australian Retirement Trust (ART) general manager of portfolio management and resilience
“You’re seeing increased retail participation in the area, and I think it’s a good thing that you’re seeing increased publicity and more people trying to raise awareness,” Fisher said.
“And we might think we know the risks reasonably well in the room here, but perhaps we also have a bit of responsibility then to engage in this debate and see that education level lifted across the broader financial sector. It’s not just an institutional asset class. If it’s going to become increasingly available to wholesale and retail, what role do we all have to play in helping bring that education level up?
“There’ll be headlines, but if people are talking about it it’s better than if they’re not. If something does go wrong in the sector, even if things go well for [super funds] there can be implications for us. It’s a growing sector of the market, and I can’t think of anything bad about the news flow.”
ART put “many, many hours” on its submission to ASIC on private markets, and also opted to make that submission publicly available while most other super funds have kept their own submissions confidential.
“[We should be] talking about the asset class, educating our members about it,” Fisher said.
“If you think about the hybrids market going away, I think that’s going to push more retail investors who are seeking yield into other parts of the market, and this could be one of them. I think we just need to be talking about the space.”
