Private credit is now a $2.6 trillion industry globally and Australian retail investors are increasingly looking to harvest the portfolio benefits the asset class, traditionally only accessible for institutional investors, can bring. But asset consultants and managers are split on whether wholesale clients can appropriately understand and handle the risks.
At the Professional Planner Researcher Forum, Ironbark Asset Management chief executive of investment solutions Alex Donald said private markets access for retail investors is beneficial provided that funds have appropriate product structures.
The manager recently built a “market first” private markets managed account in partnership with Russell Investments and Invest Blue, mostly investing in private equity, private debt and liquid credit.
“I understand there’s some challenges around lifting the quality of valuations and consistencies and so on, but the access to private markets I think are essential for all investors in Australia in the right structures,” he told the forum in the Blue Mountains, NSW.
He is of the view that demand for private assets will stay strong.
“There’s a lot more vibrancy in transaction volume that goes on in the in private markets, and there’s genuine diversification benefits of allocating to private markets,” he said.
“Part of it is you’re building portfolios in a world where you’ve got industry funds who are voting with their feet about whether private markets are a good thing for portfolios. They can do it in a certain structure. This community has to do it in a different structure… we all have to work out how we put guardrails and safeguards around it.
“I just think the industry, at the moment, is conflating private markets and a previous experience of liquidity [during the GFC] with what’s actually going on.”
The comments came amid heightened regulatory scrutiny over private markets, particularly private credit product distribution to retail clients.
ASIC Commissioner Alan Kirkland’s told the Researcher Forum earlier that inconsistent reporting practices around valuation in different private credit funds are hindering advisers’ and investors’ ability accurately assess performance.
The regulator has announced the second phase of its surveillance plan around private credit funds – particularly those targeting wholesale investors – with fees, margin structures and conflicts of interest firmly in focus.
DPM Financial Services consultant Dominic McCormick is critical of the recent growth in private credit and broader private market investments, particularly the rise of evergreen structured funds. The open-ended form means clients can contribute or withdraw capital periodically.
McCormick said during the panel discussion that new product structures such as evergreen funds are being marketed as easy exposure to private markets, but that could come with a compromise on return and structural safety of investments.
“You can plug them [new fund structures] in your portfolio, but they’re going into these areas without thinking about, one, valuations in the space, because there’s no guaranteed illiquidity premium at high levels of valuation… and two, the robustness of the structure. I think that’s where things could come unstuck.”
McCormick noted that some advisers, particularly in the high-net-worth space, are known to put as much as 40 per cent of the portfolio into private markets evergreen funds.
“They’ve still got another 40-45 per cent in growth assets generally. They’re thinking they’re diversified because they’ve got 40 per cent in alternatives… [but] they’ve got no, what I could call, truly diversifying, liquid alternatives,” he said.
While investors are grappling with a shrinking public market which is often considered a result of the expansion around private markets, McCormick proposed that the trend could reverse at some point as private equity funds look for exits and the initial public offering (IPO) market rebounds.
Morningstar director of manager research ratings Matt Olsen said the agency has several criteria to differentiate between good and poor private credit managers. Managers with commercial lending experience, for example, are considered favourably with their expertise in deal structure and – in worst case scenario – capital recovery.
Other factors include diversification within the portfolio and whether the manager has a good parent company entity.
“[It’s also about] what other resources do they have access to? Are they proprietary or external due diligence resources,” he said.
“From my perspective, as long as a research report is disclosing appropriately what the likely liquidity is going to be, and making comments about the underlying investments and assessing that on the way in as to how skilfully the manager manages that process, that’s what’s important in our reports.”
