Advisers with high-net-worth (HNW) clients may see better returns with private credit but must take care to understand what they are investing in, said Evergreen Consultants director and founder Angela Ashton.
Speaking at the Professional Planner 2023 Researcher Forum, Ashton warned of exposure risks to niche private credit managers.
Allocating a percentage of private credit to a HNW’s portfolio or model is “significantly larger” than say a big four banks’ exposure to equity funds, she said.
“You’re betting on four or six guys with five to ten percent of your portfolio, that’s a completely different proposition and you need to think about the risk that that represents,’’ she said.
“Of course, you’re going to use good people, but that doesn’t stop you from understanding what they’re doing, and I think it would be remiss of a group like us, or any investor, not to understand more deeply what’s going on.”
Researchers have a “never ending” task of keeping on top of private credit products for advisers with HNW clients, she said.
Koda Capital chief investment officer Norman Zhang, who recently moved from his CIO role with legalsuper, said while private credit was a “very exciting” asset class, there were risks with having a single manager operating a large allocation in any HNW portfolio.
Advisers needed to understand portfolio construction, such whether loans are syndicated or whole, the latter giving them more control on documentation.
“The biggest risk is you get something like a Genesis Care, which goes into liquidation, and manager doesn’t know how to lead or be a heavy participant in a workout situation,’’ Zhang said.
“Provided that you can do that, and the manager has a good track record in investing well and going through a few workout situations… that helps. Having a deeper market also helps.”
Zhang said private credit markets are much deeper offshore.
“It’s not just senior security, you can go into mez (mezzanine), you can go into asset-backed elements, so you can spread your risk a little bit more as well,’’ he said.
“Deep research is key in this asset class, because once you’re in you can’t really get out because there’s no liquidity.”
Aura Group director of private credit Brett Craig said the asset class was still nascent in Australia compared with offshore markets.
Just 11 per cent of private lending was done outside the banking sector in Australia compared with 90 per cent in the United States and 60 per cent in Europe, he said.
This meant, investors needed to focus on private credit managers with the right experience in their subsector.
“Most of this lending has been done in banks for hundreds of years,” Craig said.
“People are just taking certain niches out of the banks and providing that into market.”
It was incredibly important for managers to have control over documents and structuring transactions in private credit to “set the guardrails”, he said.
“Next year, we’re going into it with a with a relatively bleak outlook – we’ve had a central bank trying to tighten demand across an economy,’’ Craig said.
“If you haven’t set your guardrails and things do start to happen next year, what protections have you got in place to get your investors capital back?’’
