The move from Viridian and CFS to provide personal advice in a scaled manner highlights a growing willingness within the industry to fix its own problems in lieu of waiting for the government.
Private markets are worth around $14 trillion globally, ASIC believes. It’s not sure, and that uncertainty hints at the wider problem – private markets, and their effect on public ones, is still largely a mystery.
The three priorities of a robust private credit purveyor
Alongside the advent of managed account platforms and the influx of exchange-traded funds onto the market, the growth of private credit is one of the most impactful developments in the investment universe so far this century. Together with private equity, private credit has become a giant lever for capital allocation that doesn’t involve big banks and their often-inhibitive practices.
Such is that growth, however – domestically the industry has grown from $30 billion to $200 billion since 2017 – that some question the risk parameters of the sector. While no investment is without risk, KeyInvest chief executive Craig Brooke says the truth is that private credit is typically majority secured and property backed, which means investors are getting their return for at a remarkably low level of risk.
“By investing at the top of the capital stack, investors are receiving a particular premium for what is a lot of the time short duration and a slight level of illiquidity,” Brooke said during a recent interview with The Inside Network.
Some might query capital protection across the private credit landscape, he said, but that’s generally the first priority of a provider.
“For many, many years we’ve been known in Australia as a provider of capital guaranteed products and we’ve found that the managers we’ve worked with are incredibly good at preserving capital,” he said. “They’re very good at considering what the security is that they’re holding on behalf of the end investors, and in the event of something going wrong they have a right from a first mortgage point of view to step in. So capital preservation is absolutely number one.”
The second priority, he explained, is making sure investors receive a robust stream of income.
“In terms of income, you can generally see a monthly return. Some providers give a quarterly or half yearly, or even a return at the end of the actual investment demand a monthly income return, something that is stable, secure and somewhat boring,” he said.
The third plank of good private credit provision, Brooke said, is project diversification. While the building industry that property relies upon has had its struggles, he explained, there are ways to fortify a private credit portfolio of assets that alleviates risk.
“There’s over 3,000 developers in building and construction that have filed for bankruptcy this year, and there’s lot of reasons for that,” he said, noting that labour and costs have contributed. “There are three things that are on our mind. Make sure you’re not lending to a first time developer… the second is that they’re structuring the transaction and not creating an issue from a cashflow perspective… and the third is the regularity that the particular private credit manager deals with that builder – you want an ongoing, frequent relationship.”
