Regardless of which name you know it by, private credit, may just be the most popular asset class of 2020. The concept of private debt is straightforward, it involves lending money to private rather than public or ASX-listed companies. Almost every reader of this newsletter will have made a fixed income or bond investment at some point. Your term deposit, at its most simple, is a ‘loan’ to a bank, for which you are paid interest as a ‘reward’ for your risk.
The concept of private lending is identical, however, both fund managers and investors themselves are increasingly becoming the ‘bank’. The business model of banks is simple; raise funds cheaply (at cash rates) and lend them out at a higher level. Their profit equates to the net interest margin or the difference between what they pay and receive, typically around 2.0%. Private lending effectively allows investors to access some of this margin.
Wide ranging changes to the regulatory environment of the banking sector after the GFC have resulted in most Australian banks heavily reducing their loans to the corporate sector, but specifically, private businesses; think Visy for example. Rather they have focused on what they know best, which is lending with residential property as security. This has spurred incredible growth in the private lending market which has really come to the fore during COVID-19, with some estimating it is now a $2.8 trillion market.
Whilst there has been a flood of investment opportunities, including those targeting ‘wholesale’ investors for direct loans, few products have been made available to retail investors until now.
CIP AM, previously known as Challenger Investment Partners, manages $20 billion in the sector with experience spanning over 15 years. The group recently opened their Credit Income Fund to retail investors, after focusing solely on managing institutional capital. The 22-strong investment team is tasked with delivering a return of Bank Bills plus 3% per annum and doing so via primarily investment grade opportunities.
The fund, which has been rated ‘Recommended’ by research house Zenith, will invest into both public and private debt investments but only those with a floating or variable interest rates. Rather than offering daily liquidity, which can result in poor investor decisions during crises like March 2020, the fund targets monthly liquidity, which gives management the confidence to seek the best long-term opportunities available.
According to Head of Investment Strategy, Fixed Income, Pete Robinson, the strategy will seek to deliver “low cross-sectoral correlations and relatively short spread duration while seeking to identify attractively priced but hard to access opportunities in less liquid markets”. This can be translated to having diversity across the broad sectors of the economy and not being at risk of losses should interest rates rise in the coming years.