Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Private debt serving up a spectrum of benefits for investors
With inflation remaining high, interest rates on the rise, equity markets rolling over and bonds underperforming, private debt has quickly become a popular alternative investment asset, trailing only private equity and venture capital in volume.
Australian private debt is one of the few asset classes that delivers on three key benefits when placed in a portfolio. Attractive risk-adjusted returns, capital stability and diversification.
Metrics Credit Partners managing partner Andrew Lockhart (pictured) spoke with Zenith at a ‘Meet the Manager’ event recently, where he discussed the advantages of using private debt and its yield generating abilities.
“Investors are seeing the benefits of diversification in their portfolio,” Lockhart said. “We’ve structured a range of funds that are designed to cater to the defensive part of a portfolio and equally we’ve designed funds that can be an equity market replacement.
“The underlying loan assets are floating rate,” he continued. “So as the base rate increases the total return to the client increases, unlike bonds where duration has had an impact on the capital value of the bonds and investors have experienced negative returns.”
As stated by Lockhart, private debt has the unique ability to generate attractive risk-adjusted returns while diversifying away from traditional asset classes such as bonds and equity. Because of its illiquidity, income from private debt is usually higher and a lot more reliable, priced well above fixed income while experiencing a lower volatility of returns as investments are not as readily marked-to-market.
“In our asset class, as interest rates rise it immediately flows through to investors in the form of a higher total return. Shorter dated exposures reduce investors exposures to credit risk and the risk around market movements,” he explained.
“It also drives increased liquidity across funds which gives us the opportunity to lend to companies to charge fees to those companies, which becomes an important source of uncorrelated income to the client as well.”
In Lockhart’s opinion, private debt has better access to information and can provide better capital stability through an economic downturn.
“Generally private debt has better access to information,” he said. “Our borrowers provide us with details forecasts to allow us to understand and complete due diligence assessment around the risk of lending to the company.”
“A bond investor looks for a macroeconomic event that creates a short-term trading opportunity, whereas with private debt loans aren’t tradable. The decision is made based on credit fundamentals.”
Lockhart highlights the fact that many fixed income investments don’t deliver the safe haven and downside protection they once did.
“Private debt has a low correlation with other major asset classes, including growth assets such as equities and property, as well as other fixed income products such as bonds, providing excellent diversification opportunities.”
