Private credit has emerged as a favoured asset class this year with funds being offered by the likes of managers such as Hamilton Lane, Metrics Credit Partners and Payton Capital. Other fund managers such as GQG and HMC Capital have made strategic acquisitions to break into the space.
According to Schroders, 40 per cent of Asia-Pacific advisers said they want to increase their allocation to the asset class.
Benefits of the asset include their diversification purposes, strong income generation and protection in a rising rate environment.
But Pitcher Partners has urged caution and due diligence when it comes to making an investment due to the illiquid nature of the investment and their opaqueness.
Christian Golding, executive director, said: “The risks and benefits of private credit funds can be likened to buying a used car sports car – it can offer great performance but fail to do your research and it could deliver a boot-full of headaches.”
A further concern is the questionable quality of the underlying loans which can be difficult to value and be negatively affected in the event of a macroeconomic shock.
“While default rates on the loans within these funds have been subdued, there is a risk that if the economic conditions become tough, some credit funds may be reluctant to call out their bad loans. Instead, they may prefer to renegotiate terms with their borrowers to avoid a crisis in confidence among investors, which would be more damaging to the fund’s reputation.
“When it comes to valuing their loans, although private credit funds generally follow accepted accounting principles, however the rules for asset valuations are complex and can be inconsistently applied. Therefore, valuations could become even more precarious if a macroeconomic shock prompts widespread reassessment of asset values.”
Their complexity has also caught the eye of the regulator, with ASIC announcing in August that driving transparency in the space is a strategic priority as it believes their opacity presents a risk to market integrity.
Earlier this year, Money Management wrote how research houses are concerned about the number of private markets funds being launched by early-stage players who are seeking to capitalise on demand.
Louis Christopher, managing director at SQM, said: “There are too many fly-by-night managers, everyone wants to get in on it, and you see this type of thing at the end of a cycle. It rings alarm bells and we have had to reject some funds. There are some good operators who have previous experience in the space, but it is becoming competitive, and we are concerned some managers are raising funds very quickly.
“Advisers need to be careful about investing in these types of funds because they are illiquid assets. There is a real danger they can become problematic.”
