Investors need to check experience of private equity managers

Speaking at a recent Morningstar conference in Sydney, Keenan said he’s heard that there are about 200 private credit managers operating in Australia now.

“If too much money goes to one particular sector, it creates too much competition and spreads do grind in,” Keenan said.

“When you’re lending, it’s always about risk-adjusted returns, it doesn’t matter what it is,” he said, adding that “in credit, sometimes it’s good to say no.”

What investors should be looking at is “do they have the skills and resources to get through the cycle and negotiate whatever’s thrown at them,” Keenan said.

“If 200 credit managers is the number, I’m not sure they all have the skills.”

Keenan noted that after the 2021/22 years when fixed interest was effectively delivering zero returns, “we’ve got our defensiveness back” and that even through recent volatility, his firm has been able to deliver positive returns.

“You don’t need to take a lot of risk to get good returns.”

Andrew Lockhart, managing partner at Metrics Credit Partners, said that “it’s about the skill of the individuals running funds.”

But just because it’s relatively new that retail investors have been able to access private credit, and we haven’t yet been through a full cycle, doesn’t mean that those running funds don’t have the right skills to manage through the cycle.

Credit management has been occurring inside banks “forever and a day” and most of those running funds have been through multiple cycles over decades.

“I don’t think there’s anything that I see on the horizon that would suggest to me that’s likely to impact the credit quality or performance of our funds,” Lockhart said.

About 85% of Metrics’ lending is alongside banks and he’s not seeing any shortage of opportunities to deploy capital “in a sensible way.”

However, some investment products may be overly concentrated and deliver poorer returns to investors.

“It’s important to undertake the necessary due diligence around the exposures they’re investing in,” Lockhart said.

He thinks there will be increasing demand for asset lending because banks are less keen on providing warehousing facilities to back those wanting to securitise into residential mortgage-back securities.

“From our perspective, that opens up a whole lot of new opportunities” to provide finance to small to medium sized businesses and consumers.

Morningstar data showed about A$11 billion flowed into private credit funds in the year ended March compared with just over A$4 billion into global bonds, less than S$4 million into diversified credit and less than S$3 billion into unconstrained fixed income.

Lockhart said that the Basel accords on banking regulation has created more opportunities for private credit and that has been a structural change and he expects demand for private credit will continue to increase, both from borrowers and from investors.