Harbour spins out private credit portfolio as a stand-alone fund

The private credit portfolio, which accounted for about 7% of the assets within the Harbour Income Fund, has now been spun out into a stand-alone fund which has been established so that it can be distributed to retail clients, although Harbour isn’t doing so currently.

The seed money for the new fund contains 93 loans, which have delivered a consistent cash rate plus 4%.

Harbour director and senior credit analyst Simon Pannett says there has been some interest from advisers but his company doesn’t want to make it available on an investment platform yet.

Pannett defines private credit as any lending that’s not in bond format.

Harbour has originated some of the loans itself through established relationships, while others are originated by third parties – Pannett says private credit is very relationship-driven.

“What we’re not doing is running around being bankers and having one-on-one relationships with small businesses or looking for business that way,” Pannett says.

Sometimes, banks will present deals on loans that they want to get off their books and occasionally investment banks will offer deals, he says.

Liquidity management is a major issue which Harbour manages by ensuring that investors understand the nature of the fund, but it does offer monthly liquidity.

While private credit assets aren’t liquid and Harbour wouldn’t normally try to sell them, because they are self-amortising, they tend to generate significant amounts of cash, which while it varies is generally above 20% of the assets.

The typical duration of loans tends to be between three and six months. The lending is secured and arrears have been “really modest” and representative of those reported by Equifax.

“We’re very rarely first loss” and it’s usual for the security to have some residual value.

“You’re not going to get a big ding, say 10%, out of the portfolio.”

Pannett says Harbour has steered away from riskier lending – although borrowers generally don’t have credit ratings, they tend to be the equivalent of “BB+” with strict limits on anything the equivalent of “B.”

His company steers away from anything too cyclical and he sees lending on plant and equipment, which tends to be a very “solid” lending exposure, and asset finance as the main opportunity – while Harbour has made some property loans, they’ve been “reasonably modest.”

Pannett says Harbour is aiming to “give people confidence and trust in a product so that steers you away from anything too risky.”

The lending is overseen by a credit committee and, given the type of lending, it requires more legal resources, so Harbour’s fee on the product is 83 basis points, higher than it would normally charge on fixed interest.

Harbour does have a few local competitors, some run by “really skilled people, but they’re relatively new and are struggling to raise capital, Pannett says.
As the private credit market develops, Pannett says it’s eventually likely to become a component of KiwiSaver funds and potentially may become part of advisers’ toolkits