Consolidation needed in crowded private markets sector
With an explosion of private credit managers appearing in the market, two alternative experts believe a consolidation is needed to maintain the quality of the sector.
Speaking on a panel at the ASX Financial Adviser Day on 12 June, commentators discussed the growth of private credit funds.
Research houses have already discussed how they are concerned about the high volume of private credit funds being launched, with many lacking the necessary experience and track record to be successful.
With this in mind, they believed there will be rationalisation of players in the coming years as the sector matures.
Lee Hayes, head of distribution at MA Financial, said: “There has been an explosion in the number of managers popping up. I have no doubt we will see consolidation in this space. There’s an opportunity because banks are withdrawing, but we are not a huge market, and it’s costly to run a business like this if you are employing the right type of people.
“So in the medium term, we will end up with a really great cohort of well-organised and well-capitalised managers who are lending in the way they should be.”
Fellow panellist Nick Kelly, portfolio manager at Wilson Asset Management, agreed and suggested it could go the same way as the private equity sector in Australia.
“I think we’ll see a rationalisation in this space. I saw a statistic that said there are around 300 private credit fund managers in this country, and there’s no need for that many when we have some of the most well-capitalised banks in the world.
“Private equity went through the same period. Pre-GFC there were 50–60 groups, and this went down to about a dozen and they are the high-quality ones. We will see the same rationalisation in private credit, and the ones that are left will have that workout experience and be stronger for it.”
Both flagged workout experience – the ability of a firm to restructure or renegotiate a loan to prevent a default – will be a critical differentiator between those firms that fail and survive.
Kelly said: “It’s really important in private credit for advisers to find a manager with really strong workout experience – there’s only a small number of groups in this market who have that experience. We’ve had a benign credit cycle over the last three decades; Australia didn’t experience that during the global financial crisis like the US did.
“There’s plenty of bankers out there that can underwrite a loan, but it’s a different thing to be able to roll up your sleeves and work things out when they go pearshaped, so that workout experience is really important.”
Last week, Franklin Templeton shared the '4 Ps' to help advisers understand the complexities of selecting a private markets fund which are performance, philosophy, process and people. Structural issues related to these types of funds include their liquidity, leverage, lack of transparency, concentration, and complex strategies and must be considered by advisers during their due diligence, it said.
AUTHOR
Laura Dew
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