Credit set to spur the economic recovery
This week, The Inside Network held its inaugural Credit Masterclass event, a deep dive into the intricacies and characteristics of the fast-growing domestic and global credit market. During the day-long session, leading advisers and asset consultants covered every aspect of the credit and less traditional fixed-income sector in detail, ranging from its role and diversification benefits for portfolios, key trends in the industry and the most important due diligence considerations.
During the day, delegates heard from a range of experts including asset consulting firm JANA, specialist private debt lender Metrics Credit Partners, diversified credit group CIP Asset Management, asset-backed lender, Alceon/Freehold and mid-market specialist Epsilon Direct Lending. Each of these sessions will be covered in more extensive detail in the coming weeks, with some of the more powerful takeaways coming from the thought-leading table discussions.
Throughout the day, it became extremely evident that credit warranted significantly more attention from advisers and portfolio managers than ever before. The Australian listed debt market has struggled to gain any traction for many years, unlike its counterpart in the US, however, the continued retreat of the major banks is offering what may be the most powerful tailwind of any point in the last decade. Small and medium-sized private companies, the true drivers of the Australian economy, continue to be starved of capital, but non-bank lenders are finally filling the gaps.
Investors are naturally drawn to the excitement of purchasing equities, with the potential upside unlimited: everyone dreams of finding the next ten-bagger. The result in many cases is that 90 per cent of advisers’ and investors’ time is spent analysing this part of their portfolio alone. Fixed income and credit components have traditionally been given little consideration and tend to be ‘set and forget’ parts of the modern portfolio, yet with markets near all-time highs, diversification has never been more important.
Credit may actually demand significantly more due diligence and consideration than equities in 2021 and beyond, yet the access to high-quality research is limited. The diversification benefits within the asset class are significant and perhaps broader than those in equities. It begins with country and sector diversification, expanding into diversification across rating bands as well as the entire capital structure itself, from secured to unsecured, senior, preferred, asset-backed and many other options, each with their own unique risk-reward profiles.
Obtaining research on private (as opposed to publicly issued) debt is difficult to come by, however, a number of up-and-coming agencies have seen the opportunity, leveraging their experience and expertise to offer due diligence for advisers and investors. Once such group is Evergreen Ratings, launched in 2020, which recently delivered and rated both the Wentworth Williamson Stable Income Fund and the Freehold Debt Income Fund, among many others.
The firm’s founder and CEO, Angela Ashton, says that in recent years, with authorised deposit-taking institutions (ADIs) facing more onerous regulatory guidelines, the domestic market has seen more borrowers seeking funds outside traditional banking sources. “The market dynamics are supportive of attractive risk-adjusted loan pricing, which presents an opportunity for a capital provider to earn excess returns,” Ashton says.
“We do not believe the fundamentals of this market in Australia will deteriorate over the foreseeable future,” Ashton says.