What is private credit?
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Frank Danieli
Managing Director
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發布 2024 年 5 月 27 日

Private credit is a bilateral lending arrangement directly negotiated between a credit provider/non-bank financier directly to institutional borrowers with bespoke structured terms and covenants. This is distinct from public bond markets or bank lending.

Private credit transactions are by nature proprietary, sourced with pricing and bidding uniquely structured through a tailored and specific arrangement based on the requirements of the investor (lender) and the borrower, and not transacted via a public exchange.

Capital protection and control

Generally considered a defensive asset class offering capital protection due to its position in the secured debt section of the capital structure, private credit is a floating rate asset class meaning returns are directly linked to the base cash rate. It is well-positioned to take advantage of a higher inflation/higher interest rate environment while at the same time offering a predictable income stream secured via contractual borrower agreements.

The asset class offers greater investor control and protection due to the ability to engineer the level of seniority in the capital hierarchy or security pool of the lending company or asset, depending on the type of credit. It also offers a wide range of strategies, products, and access points for all types of investors.

Private credit is gaining market share as investors seek a defensive allocation and to diversify away from public market volatility, while delivering solid risk-adjusted returns in investments that are secured, collateralised or otherwise have strong downside protection features.

Private credit market segments offer diverse investment opportunities

Private credit is a deep universe, spanning a complex and diverse spectrum of instruments, borrowers, counterparties, and asset pools across a wide array of sectors.

Private asset-backed credit

  • Asset-backed credit is financing secured by diversified portfolios of loans, assets, receivables or other collateral, typically with an originator or finance company with alignment or some level of co-investment. It finances the real-world economy and complements traditional corporate credit (or loans to companies).
  • Asset-backed credit includes non-bank lending in areas where banks are no longer competitive (due to regulation, structural or secular market forces) or an efficient provider of capital. Examples include equipment, receivables or supply chain finance, as well as specialty finance such as legal disbursement funding, and insurance premium funding. Loan facilities are typically structured providing additional credit protection to the lender.
  • Real estate credit is non-bank lending providing first mortgage loans to finance the purchase or development of Australian commercial and residential real estate. It involves contractual loans where property and/or land is used as collateral or security. This strategy aims to deliver fixed payment dates of interest and return of capital.
  • Specialty finance is lending across differentiated asset classes exhibiting unique, uncorrelated or special features typically in a senior secured or structured facility.

Corporate debt

  • Corporate debt is lending directly to companies with resilient characteristics, focused on non-cyclical industries on a senior secured or structured basis. Facilities are secured by the business and cash flow generation potential of the corporate borrower.
  • This strategy aims to lend to companies that are price makers (not price takers), with a defensible market position, sustainable or growing margins, strong financial backing and at sensible levels of leverage.

Capital solutions

  • This covers bespoke credit solutions for borrowers, including for working capital and opportunistic situations.

Growth credit

  • Growth credit is lending directly to growth-stage businesses, typically in the form of secured interest-bearing loans with fixed maturities.
  • It involves lending to companies that have a baseline of recurring revenues from a diverse client base, leverage a combination of technology and innovation to maintain a competitive advantage, and support a more sustainable future planet and society.
  • In addition to fixed returns through interest-bearing loans, the strategy seeks equity-like upside participation through additional warrants and/or other conversion rights.

What are the benefits of including private credit as part of a diversified investment portfolio?

  • Attractive yields – potential for strong, enhanced yields
  • Low correlation and resilient returns – historical returns have low to negative correlation to other asset classes
  • Regular and stable income – potential for regular and predictable income secured via contractual borrower agreements
  • Low volatility – returns are contractually agreed so generally less volatile than equities
  • Diversification – highly granular curated portfolios of loans with exposure to a wide variety of borrowers, assets, industries and geographies
  • Robust fundamentals – private markets enable a fundamentals-first mindset, focusing on borrower quality, collateral strength and the likelihood of being repaid as a lender, rather than influenced by sentiment-driven momentum trades.

The importance of avoiding losers, not picking winners

Unlike an equity investment offering unlimited upside, in a private credit investment upside is capped. The best-case scenario for a credit investor is the principal is repaid, and the investor receives predetermined interest payments over time.

In a portfolio of private credit investments, it is considerably more difficult for the failure of one investment to be masked by the success of another.

For receiving a fixed (and capped) return, a private credit investor does also generally receive the benefit of security over assets and seniority to equity holders as protection against loss. It is for these reasons that investing in credit is far more about avoiding the losers than picking the winners.

Successful credit investing requires a sharp focus on strong fundamentals with robust security, asset coverage and downside protection and the rights and controls lenders need to safeguard capital if required.

For more information about our private credit solutions, please get in touch.


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