Nuances of Australian Private Credit

Investors enter 2021 with a sense of relief mixed with concern.

Portfolio returns and liquidity positions have somewhat recovered from the initial angst caused by COVID-19. However, equity market valuations and volatility make for uneasy allocations, and aggressive action from central banks means the expected returns for cash and traditional fixed income portfolios are well below typical return targets.

Private Credit: Onshore vs Offshore

With most funds allocating offshore, there is a dearth of capital deployed locally. In addition, most banks are unable to extend credit beyond certain tenor and credit constraints – the bank disintermediation process started here remains in place. This means capital is more likely to be deployed locally more quickly and earn higher returns for risk than available offshore.

In this webinar co-hosted with IFM Investors‘ Hiran Wanigasekera and James McKinlay, we examined the market for local (Australian) private credit, and discuss the portfolio construction considerations for investors.

Transcript (with timings)

3:30    The Australian capital market is structured quite differently to other markets, and as such, the private credit opportunities here are driven by different factors.

4.24    How does insurance fit into this sector?

5.07    Australian tax policies encourage a different kind of investing.

5.47    What are the investable sectors within private credit, and how do these differ?

7.06    Corporate lending alone can be split down into several sub-categories with different focusses.

8.38    IFM have stated their net zero target, so how does that work within the debt context?

11.16   ESG Case Study on the higher education sector, breaking out the E, the S and the G. Are they equally relevant?

14.44  Is private credit the same as distressed? Does it overlap? What are the differences?

16:17  Where are Australian investors interested across the whole credit spectrum?  Given the environment over the past year, is there more interest in distressed?

17.50  Onshore vs offshore private credit – why would an Australian investor consider local? With the current market inefficiency, where would you find value?

20.18  Private credit markets have huge growth potential, particularly in APAC – but where is the best IRR?

21.11   Private credit – is it fixed income or alternatives? Defensive or growth?

22.45  Fund managers vs banks – why would investors choose to work with one over the other.

24.03  Property is often thought of as an equity position – how do you manage that within a credit portfolio? How does the cyclical nature of property fit?

27.29  How do you measure performance and what benchmarks should be used?

32.30 Equity market returns have been great over last 6-9 months but yield is low – how does this compare? Should you be looking for a premium over equities for your credit portfolio?

34.08  What’s the approach to tracking bad loans and can you be aggressive on these in the Australian market? How do you get the best outcome?

36.10  Covenants have advantages over a covenant light structure, and are in many ways preferred.

37.32  How do you price risk for the ‘S ‘in ESG? The broad nature across industries makes this a little more difficult than, say the ‘E’.

41.27   Inflation vs disinflation, what’s the impact on credit markets?