Jon Adgemis’ pub implosion highlights that not all private credit is the same

Retail investors have more to lose when they buy into the private credit’s safe image and the collapse of Jon Adgemis’ overpriced pub empire has exposed some unpalatable facts.

Private credit fuelled Jon Adgemis’ spending spree, but not all private credit is the same. Picture: NCA NewsWire/David Swift

The spectacular $1.5bn implosion of Jon Adgemis’ pubs empire is unfolding just as market regulator ASIC is considering whether it needs to play a bigger role in overseeing Australia’s private credit market.

Will these losses be a turning point for private credit? Not a chance.

However, the Adgemis blow-up will add momentum to get greater protections in place around retail money playing in the private-credit market.

Today’s retail private credit is yesterday’s high-octane debenture or mortgage funds, and these have been around long before the global financial crisis. However, they are increasingly being swept up in the private credit mania. And between retail and big investors, there is a fundamentally different risk dynamic.

In this case, it was a clutch of retail-focused mortgage funds that were used to fuel Adgemis’ stupefying acquisition spree of overpriced pubs.

The difference is the institutional cash can sit as dry powder for as long as it needs to and is not under the same pressure to be deployed immediately. When the right loan is matched with the duration and risk appetite of the fund, lenders can draw on irrevocable commitments to fund that loan.

Jon Adgemis’ pub empire has imploded leaving almost $1.5bn in debts. Picture: David Swift

Smaller retail investors have been promised interest payments from the day their cheque is deposited. This means the retail credit funds are on the hook to find a deal – any deal – to start the payments.

High-flyers like Adgemis are all too happy to give them a story to back. But as history shows, these commercial property deals are the first to go when the economy slows.

Adding to the funding mismatch sitting in retail funds, investors have an escape clause through redemptions. However, as they’ve found here, the redemption door can slam shut suddenly when the going gets tough – which can come as a shock to retail investors.

Sydney-based private Gemi Investments is among those to have frozen redemptions due to its exposure to Adgemis.

The size of the private credit pool in Australia is estimated to be running in excess of $200bn, and is growing at a breakneck rate as super funds and other big investors keep allocating more. This is starting to supplant traditional bank lending for business loans.

There are also private credit funds like those operated by Oaktree or KKR, set up with the mandate of going right up the risk curve, like refinancing struggling companies. But the institutions going into these funds know exactly what they are buying and the risk (and reward) which comes with it.

Another way to look at it, particularly in the retail private credit space, is these are the loans that banks didn’t want to touch in the first place.

During the height of the Sydney pub boom, one “big four” bank chief executive described to The Australian the valuations being put on the properties as simply “crazy” and his risk team had run a review to make sure the bank was nowhere near the frenzy.

As ASIC pushes ahead with its private credit review, the big end of town will command the numbers. But the focus should be on how retail investors are lured into the market with the promise of high returns and no risk.

This will be more urgent as big players like BlackRock are exploring ways to open up institutional private credit to retail investors.

That’s the thing which needs to be fixed; retail investors need to know that are not buying the security that comes when names like industry super funds, the Future Fund, Macquarie and Blackstone are making their big bets on the private credit.