Private Credit is Emerging as a Strategic Income Class
Private credit is providing solid returns attracting an explosion of investor interest according to reports in the national press.
Private credit means investing in loans made by non-bank lenders that can cover a range of purposes and borrowers. A fund manager such as Angas Prime raises money from investors and doesn’t use debt, so there is zero gearing. That is very different to a commercial bank, where the loan book will be dozens of times bigger than the bank’s equity. The flip side is that taking out a private credit loan is almost invariably much more expensive than borrowing from a commercial bank.
So why are borrowers flocking to private credit lenders like Angas Prime?
After the global financial crisis, banking regulators forced commercial banks to beef up their balance sheets, requiring them to back their loans with more equity. Consequently, it became far more profitable for Australian banks to lend for residential property because they didn’t have to set aside as much equity on their balance sheets. Many banks all but abandoned some parts of the commercial lending market.
Spotting a huge, and growing, opportunity, private credit groups have filled the gap. Often staffed by the same experienced credit teams from the big banks who were then twiddling their thumbs, they got backing from investors with the prospect of outsized returns relative to the risk. The result: EY estimates the Australian private credit market grew from $35 billion in 2016 to $109 billon by the end of 2022. Foresight Analytics estimates non-bank lenders control about 50 per cent of the US market for commercial real estate loans. In Europe it’s about 25 per cent, whilst in Australia it’s around 10 per cent, but growing strongly.
So, what’s the attraction for investors like you?
Exposure to first mortgage lending plays two roles in an investor’s portfolio. First, to provide income. Second, to minimize any correlation to variable assets like shares. In other words, to be a defensive asset. In terms of low correlation to shares, the word “private” is the critical part. Unlike corporate or government bonds, private loans are not normally traded on public markets, which makes them far less volatile because there is no day-to-day repricing, the fancy name for which is “mark-to-market risk”.
The other attraction is loan security. For example, when Angas Prime lends to a property developer, a mortgage will be taken over the project, including the land. Angas Prime requires a loan-to-valuation ratio between 60 per cent and 70 per cent. That means if the deal goes pear-shaped and the property is repossessed, there is normally a good buffer before investors lose any money.
There’s a lot to like about investing in private credit, but it pays to do your homework. Remember to read the TMD and disclosure documents to make sure the product is right for you.
YOU’RE BETTER OFF WITH ANGAS.