What private credit needs for the next stage of its boom
Even though it’s soaring in popularity, private credit is still thought of as wildly opaque. ASIC is now scrutinising that opacity, with chair Joe Longo warning that the regulator is worried about “protection of investors and integrity of the market”.
But the truth is that private credit “is actually pretty boring” once you get a good look under the hood, according to KeyInvest chief executive Craig Brooke (pictured, left).
“It doesn’t behave with volatility. It’s vanilla, it’s boring, it’s property backed,” Brooke told the Inside Network’s Income and Defensives symposium. “And if you think about the loan to valuation exposure you’re generally seeing 30-40 per cent equity that sits below the first-ranking mortgage as well. Ask yourself the question: when has residential property gone down by 30-40 per cent? I don’t think it has.”
That doesn’t ameliorate the need for private credit managers to be “absolutely transparent”, according to Bruce Wan, MaxCap head of research, especially with the torrent of new players entering the market.
“We’re all for sector wide transparency in this space,” Wan said. “We’ve been very open in the past with APRA about offering all our loan deals and metrics to the regulator. They said they didn’t need it – but given all the headlines these last few weeks we’re heading that way as well. I think that’s a good thing in improving transparency for the sector. The last thing you would want is some newcomer blowing up the industry, and that’s not good for any of us.”
But while there’s now more than 300 private credit managers in Australia, they rarely sit in model portfolios or separately managed accounts, Brooke noted, and advisers “need the help and need the support”.
But private credit in model portfolio isn’t “modelled well at all”, Wan believes.
“They’ll have a US component and nothing else,” Wan said. “You can do that simple exercise and say that whenever that exercise excludes private credit in places like Australia we’re probably looking at a very suboptimal outcome. Where we’ve done the work in terms of figuring out where the efficient frontiers are, we know that whatever your starting portfolio is, just by adding a little bit of private credit you’re adding returns and reducing volatility as well… There’s still a long runway ahead where you can allocate more and still be improving portfolio metrics on an ongoing basis.”
Meanwhile, some of the biggest super funds have declared their intention to materially increase their allocations to private credit, with Wan expecting that competition for pension capital will quickly increase.
“They are a little bit slower to act in terms of the majority of pension capital, and it’s important that when they do choose a manager we can deploy that capital quickly,” Wan said.
“Not to name and shame, but there’s been instances where they will issue two mandates and sort of capital is shared between the two. We’ve seen some shifting of that, and you’ll see some competition over the next couple of years in terms of not just allocation by super funds into private capital but more competition between the managers to get a bigger slice of that capital.”