Nehemiah Richardson,
Global private credit can play a bigger role in diversifying Australian investment portfolios, as sticky inflation and the prospect of yet more rate rises continue to eat into returns.
This is the view of Nehemiah Richardson, CEO of Pengana Credit, who said global private credit was being used by institutional investors to provide valuable diversification and the ability to roll with interest rate movements. “It’s no secret institutional investors are attracted to global private credit, partly due to the ability for this asset class to provide some cushion against interest rate fluctuations.
“Global private credit securities are predominantly floating rate, so reset either monthly or quarterly as interest rates move.
“Floating rate securities are very attractive as the rate move preserves the value of capital. So while there is no perfect hedge for inflation, a floating rate is a significant insulator.”
He said these investments provide significantly wider diversification opportunities than private credit in Australia. “Global private credit securities are more diversified given the structural retreat of banks from very large market segments, like the corporate mid-market in the US and Europe, resulting in a very large universe of available lending opportunities.
“The key to success in this asset class is ensuring quality of the underlying loans and this is where quality private credit managers come in.”
Mr Richardson said Australian wholesale and retail investors need more options to diversify their portfolios with income-producing investments that have low volatility and correlation to traded markets. “Inflation is eroding the value of cash and term deposits. Liquid credit assets can be quite volatile, particularly when central banks move base rates as quickly as they have over the past 12 months. Bonds that trade suffer when rates go up, unless they are floating rate.
“Global private credit adds diversification, capital stability and return-generating potential.”
He said global private credit portfolios often comprise hundreds of different securities. “There’s opportunity to diversify across regions, non-cyclical industries, maturities, and strategies.
“Importantly, investors have protection from defaults. The lender has significant information on the borrower, which translates to contractual protections that allow the lender to intervene early if a company’s performance starts to deteriorate.
“While this is a general characteristic, it can be particularly handy in uncertain economic environments.”
The Pengana Diversified Private Credit Fund recently opened to wholesale investors and will target a total net return equivalent to the RBA cash rate plus 8%. Mr Richardson said they were working on providing access to retail investors shortly. “It’s obvious why institutions find this asset class attractive, and local retail investors should also benefit from this asset class.”