Private credit markets represent a hot asset class for big investors at the moment. But they are more diverse, more heterogenous and more geographically different than you’d think. bfinance, the global institutional search firm, says the asset sub-class is attracting a lot of new interest in Australia and New Zealand.
UK-based Trevor Castledine, a senior director of private markets with bfinance in London, said on a visit to Australia last week, to speak at a specialist credit conference, that private debt strategies tended to be lowly correlated with both listed markets and other private markets. “They are floating-rate securities and therefore don’t have duration risk,” he said. “But they still offer good returns… One of the issues for asset owners, who are our clients, is whether you put them into a ‘defensive bucket’ or a ‘growth bucket’. They are actually both… and funds don’t have a bucket for both.”
The private debt market had been around in the US for a long time, he said, and had been maturing in Europe. It looked like an attractive strategy to pursue given other investment dynamics right now. Due to the universal search for yield-delivering strategies, private credit made sense in the current market.
Frithjof van Zyp (Fridge), the head of the Sydney-based Australasian office for UK-based bfinance, said that in Australia there had been four private markets searches in about the past 18 months and 10 searches in total. “With the origination of private markets, there are different deals there and different strategies used by managers,” he said. “They can either be in association with a private equity manager (sponsored) or the private debt manager can originate the deal itself.”
He said that one of bfinance’s Australian super fund clients recently allocated to real estate debt from its direct property portfolio in order to reduce its equity exposure and establish a more defensive position in the capital stack. The fund found compelling opportunities in the Australian real estate debt market from a risk/reward perspective.
He said that Australian super funds tended to be more focused on real estate debt than other forms of private debt in both the US and Europe. There was not much of a market, for an institutional investor’s point of view, elsewhere in the world.
One of the surprising characteristics of private debt as an asset class is its very low level of borrower defaults. Trevor Castledine says that, with private equity investments there is unlimited upside, but private debt is different. Private debt is more stable and more defensive, he says. For instance, the industry has been through a full cycle ending recently and the information from this is “very promising”.
“Default rates currently are extremely low, but the statistics from the last full credit cycle were very promising. With a default rate of around 0.6 per cent and recoveries of 70 per cent-plus in workout, any losses suffered were more than compensated for by the investment returns generated,” he said.
“Private loans tend to be relationship driven,” he said. “It’s not like dealing with the banks who just churn them out.”
Castledine joined bfinance in January this year, having worked, as an asset owner, for a big UK local authority pension fund and was involved in its mergers, alongside several others. Those funds had a lot of fixed income portfolios.
“Credit is in my blood,” he said. “Even though I had a remit across all the asset classes for the Lancashire County Pension Fund, we specialised in credit.” But it was difficult to provide investors with a Pan-Asian strategy, he said
– G.B.
