‘Dislocation’ in investors’ understanding of private credit
With research houses raising concerns about the suitability of private credit funds for retail clients, a fund manager has acknowledged greater transparency is needed to protect investors.
Last month, Money Management wrote how research houses were concerned about the number of private credit funds launching to the market recently given their lack of transparency and illiquidity.
While much of the money going into this asset class comes from superannuation funds and institutional investors, a growing number is coming from high-net-worth individuals seeking higher returns without the volatility of the stock market, particularly as more people reach the sophisticated investor threshold.
Private credit occurs outside of typical bank lending and funds set a minimum investment amount, which can be as high as $250,000. This money is lent directly to large organisations or real estate developments. Returns for investors, which are typically higher than from public funds, are then generated from the interest payments on the loan.
This is causing concerns as to whether these investors who are chasing returns truly understand the risks of the asset class, how they are structured, and the potential for them to lose money.
Paul Miron, co-founder and managing director of Msquared Capital, said: “I not only recognise, but also strongly advocate for, the need for additional scrutiny in the sector. I firmly believe that transparency and accountability are not just important, but absolutely crucial for the long-term success and stability of the secured private credit market in Australia.”
He agreed the funds may not be suitable for all types of investors, especially for those who are seeking the fund for their returns with only a limited understanding of how they work.
“However, greater regulation will not resolve the lack of investor understanding on the part of some investors. Investing in private credit is isometrically different from investing in and understanding shares.
“There is an apparent dislocation in market knowledge; some investors merely chase double-digit returns without asking some fundamental questions regarding the quality of assets that back the investment, while others are more experienced and know the key areas to focus on.”
He said it is crucial for advisers and investors to look “under the bonnet” of a private credit fund manager to ensure they understand the complexities of the portfolio and find those managers who have a robust and disciplined process.
AUTHOR
Laura Dew
Recommended for you
International equity ETFs have recorded their third consecutive month with net inflows above $1 billion, according to Betashares, for advisers looking to capture this growth in client portfolios.
For advisers considering their clients’ fixed income allocations, VanEck research has detailed which elements of fixed income and credit have performed the best since the start of 2024.
There is a role for advisers to include capital securities in portfolios to provide diversification within clients’ fixed income allocations, according to fund manager Wellington Management.
BlackRock’s iShares fixed income ETFs have reached US$1 trillion in assets under management across the globe, a year after the global bond ETF industry hit US$2 trillion.
