Private debt continues to offer attractive returns

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Australian private debt continues to offer attractive risk-adjusted returns and, according to Evergreen Ratings, remains an asset class with one of the most attractive risk-adjusted return profiles.

Evergreen chief executive Angela Ashton said while Australia Prudential Regulation Authority (APRA) regulated authorized depository institutions (ADIs) face stricter macroprudential guidelines, more borrowers are in the domestic market looking for funds outside of traditional banking sources.

“Market dynamics support attractive risk-adjusted credit pricing that allows a financier to generate excess returns,” said Ashton.

“Interest rates are at all-time lows and stock dividends have decreased over the past year due to the impact of COVID-19.

“This creates a situation where people struggle to find good sources of constant yield. Personal loans are an asset class that can help meet these portfolio needs and we are seeing more and more of these types of funds approaching us.

“However, not all of these resources are created equal. There are important nuances in lending practice and the types of borrowers each manager aspires to be. It is important to understand the risk any fund takes and to ensure that you are adequately rewarded for doing so. ”

According to Ashton, private debt could be an attractive asset class because of the private debt premiums, but it was also one of the few asset classes where managerial skills could actually demonstrate the ability to preserve investors’ capital. Have an extra cash by getting a loan.

Evergreen searched for personal debt premiums from a variety of sources, including:

  • Illiquidity premium, ie the compensation required for the debt security not being able to be traded on a stock exchange;
  • Complexity premium required for analyzing private market deals and structuring adequate risk mitigation; and
  • The supply / demand premium created by playing at the lower end of the market, where there is less competition.

Subsequently, the alternative investment rating firm gave Global Credit Investments’ Commercial Finance Fund, which invests in the sector and provides senior commercial credit facilities backed by physical and financial assets, a “Commended” rating.

Ashton said the GCI fund included a number of risk hedges, including taking senior collateral for all of the borrower’s assets, setting up a special purpose vehicle to house all collateral, and requiring the borrower to make an initial loss provision.

“The fund is based on a very strong investment philosophy and a track record to date. Combined with GCI’s investment processes, this is a good sign of future performance, ”she added.

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