Selecting the right private debt fund for clients

private debt Zenith Investment partners private credit

24 June 2024
| By Laura Dew |
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With the private debt marketplace described as a “minefield” to navigate, research house Zenith Investment Partners has shared tips to help advisers select the right fund.

Private debt is among the growing asset class of alternatives as investors seek alternative sources of income. Types of products can include corporate lending-bilateral, corporate lending-syndicated, PE sponsor-backed lending or real estate.

Advisers like the products as they generate attractive risk-adjusted returns, structural protection, and minimal mark-to-market volatility, Zenith said, but problems arise around its default risk and illiquidity.

Key considerations as to whether it will be suitable for a client’s portfolio include their asset allocation alignment, whether they are growth or defensive, and broader liquidity challenges.

Rodney Sebire, head of alternatives and global fixed income at Zenith, said: “Including a private debt fund in a client’s portfolio is complex as it involves identifying the expected risk/return, performance in negative equity environments, and alignment to the client’s growth or defensive allocation. The reliability of cash distributions and regular access to capital are key considerations. What if a manager were to freeze redemptions, would this create asset allocation imbalances and broader liquidity challenges?”

Another topic that advisers need to consider is the subject of fees as these may be higher than clients are used to paying for other assets. He said it is a topic examined by Zenith when considering a funds’ inclusion in the Approved Product List as there is no uniformity yet in disclosure practices by managers.

“Fees and costs have always been a murky topic, with many funds not subject to the RG97 fee disclosure regime. The payment or collection of fees across managers varies significantly, including the types of fees charged and the beneficiary of those fees. Managers may retain a portion of the borrower-paid margins or penalty interest. In many instances, the costs of a private debt fund exceed 2 per cent per annum, subject to the type of lending and a manager’s approach to sharing lending fees with investors. 

“This remains a key focus area for Zenith and an area where we are yet to gain complete comfort (apart from a small number of institutional quality managers that we have on our Approved Product List), noting that the universe has yet to achieve uniformity in terms of disclosure practices.”

Earlier this year, alternative asset manager HMC Capital acquired private real estate debt manager Payton Capital to establish a private credit platform, while Pengana Capital Group raised $160 million in its IPO for its Global Private Credit Trust.

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