Not all private credit is created equal 

Advisers have learned to ask a private credit manager for the loan-to-value ratio. Alan Greenstein, CEO and Co-Founder of Zagga, makes the point that the ratio is only as reliable as the valuation sitting underneath it, and that a valuation is a choice rather than a fact. 

“Two different valuers could give you two completely different valuations on the same piece. You can ask for a fire sale valuation. You can ask for a marketing valuation to sell it at best price. You can ask for an as-is valuation and an as-if valuation. You get what you ask for, so you have to be careful what’s underneath there,” Greenstein says. 

Zagga lends against Australian property, predominantly on the eastern seaboard. The firm has been operating for more than 10 years, manages around 1,000 investment entities, with over $1.5 billion funds under management and has invested in excess of $3 billion. 

Where the money is going 

Investors in Hong Kong, Singapore, Korea and Japan had historically felt lukewarm about Australian senior secured real estate credit. They believed the market did not price it for the risk, with yields too low for what it asked them to take.

That judgment has reversed, and Greenstein says the same money is returning precisely because it now reads the asset class as a defensive holding and is willing to accept a lower yield for the security. 

The reasons are the ones that rarely change. Australia holds a triple A sovereign rating. Regulators oversee its lending market closely and, for unregulated commercial loans, the market favours the lender unusually well.

Enforcement runs through possession and a public auction rather than through years of litigation. Behind that sits the demographic tailwinds and housing arithmetic.  

With a national population at circa 28 million against an official ambition of 37 million by 2050, triggering a dwelling shortfall he estimates at more than 250,000 and a government target of 1.2 million new homes. The banks are not filling the gap, which is what has given non-bank lenders their run. 

The market has grown accordingly, with Australian private credit assets at around $224 billion and expanding at about 9 per cent a year, inside an Asia Pacific market compounding at 12.5 per cent. 

Not one asset class 

Greenstein’s central argument is definitional, and he makes it knowing it has been unpopular in some quarters.

“Not all private credit is created equal.”

The value of the property under a registered mortgage repays real estate private credit. The cash flow of a business repays corporate private credit. Neither is inherently better, but they are distinct categories within the broader private credit asset class, with different risk drivers and responses to market conditions.  

A portfolio holding both has two exposures rather than one doubled. Within real estate credit the same applies up the capital stack, from senior secured through stretch senior and mezzanine to equity, each carrying a materially different risk profile. “Private credit is not risk-free. You cannot lend money without taking risk,” Greenstein says. 

What to ask 

The list of questions he proposes for investors and adivsers is unglamorous and mostly about process.  

How does the manager originate deals? What security does it hold and how realisable is it? What are typical loan-to-value ratios for that asset type? How experienced is the credit team writing the loan? How does the manager monitor risks, what governance sits over them, how does it manage problem loans, and what recovery experience does it actually have?

Concentration belongs on the same list, since a book can cluster by borrower, by asset type or by postcode without looking concentrated on the cover page. 

That last point is where the valuation question comes back. An as-if-complete valuation on a partly built project is a forecast of what the finished asset will be worth, and the developer administrations of the past year have shown how quickly a registered first mortgage turns into a slow workout rather than a clean recovery.  

Enforcement being simple in Australia is not the same as recovery being quick or whole. The reasons a valuation proves optimistic tend to arrive at the same time as the default.

The returning offshore capital cuts in a similar direction. Money arriving in size and content with a lower yield eventually competes away the premium that justified the allocation.

Greenstein’s central thesis is that the market is working through something ordinary rather than something broken.

“We’re not in a crisis. We’re in a cycle,” he says.

Cycles sort managers before they sort asset classes, which is why the answers given before the money goes in tend to matter more than the yield printed on the fact sheet.