Private Credit Funds: Risks and Opportunities in the Australian Market

Private credit funds in Australia heavily feature real estate, making them susceptible to property market downturns, according to Atlas Funds Management chief investment officer Hugh Dive. However, Pillemer believes that bilateral loans to stable mid-market corporates in the US and Europe offer more favorable opportunities.

These mid-market companies are less likely to default on their loans, providing healthy returns of around 5-6% above base rates. Despite the increased returns, there are risks involved, such as borrower defaults and limited transparency due to the non-trading nature of underlying loans.

While default cycles are cyclical and not always indicative of a recession, investors should be cautious, especially with high-profile short sellers warning of suspect companies obtaining large amounts of debt. Selecting a reputable fund manager is crucial to mitigate risks during a default cycle.

Liquidity is another key risk for investors in private credit, as seen during the COVID-19 pandemic when share prices of listed funds became volatile. Metrics Credit Partners managing partner Andrew Lockhart recommends a maximum allocation of 5% to private credit in a balanced portfolio.

The Future Fund, for example, allocated 10.7% of its portfolio to the credit sector, including private credit. Investors can access private credit through listed or unlisted funds, but should prioritize experienced management teams with strong credit skills and relationships with corporate and private equity buyers.

With banks retreating from lending markets, there are opportunities for investors in private credit, but caution and due diligence are essential to navigate the risks associated with this asset class.