Private credit on rise as traditional banks retreat
Private credit providers are stepping up to take over what used to be core parts of the traditional banking business. Here are two very different examples.
In Part 2 of Stockhead’s look into the burgeoning private credit sector, we examine a stock and two listed investment funds grabbing a slice of what was once a core part of traditional banks’ business. You can read Part 1 here.
Private credit is experiencing unprecedented growth, reshaping the financial industry and offering a robust alternative to traditional bank lending.
As banks tighten lending standards and retreat from riskier ventures, private credit funds and companies have stepped in, filling the gap and providing essential capital to businesses.
Alternative assets research firm Prequin forecasts private debt AUM (assets under management) to grow at a CAGR of 11 per cent from 2022 to 2028, reaching an all-time high of $US2.8 trillion – almost doubling the 2022 figure of $US1.5 trillion.
For the latest investment news, sign up here for free Stockhead daily newsletters
Private credit has grown in popularity with potential for high returns, particularly as an alternative source of income to equity dividends and bonds.
VanEck Asia-Pacific CEO and managing director Arian Neiron told Stockhead that growth in the private credit market was an unparalleled global phenomenon.
The company earlier this year launched the Global Listed Private Credit (AUD Hedged) ETF (ASX:LEND).
“We’ve seen private credit increasingly taking over the core business of traditional banks, that is, the provision of debt capital to medium-sized companies and real estate,” he said.
Like most investments, there are risks associated with private credit, with the main loan default along with transparency as many private credit providers are not publicly listed. Experts say risk can be mitigated by investing in exchange-listed private credit funds and companies.
Of course going direct can have its benefits too.
Several ASX-listed funds and companies offer investors the opportunity to enter the private equity market. fFor instance, consider these: .
FINEXIA FINANCIAL GROUP (ASX:FNX)
Listed on the ASX in 2015 as a securities dealer/licensee, FNX has, over the years, pivoted and evolved its strategy towards the private credit sector.
CEO and director Patrick Bell told Stockhead that Finexia was targeting markets and opportunities traditionally dominated by major banks but recently abandoned.
“The banks had departments specialising in various sectors and particular specialised risks but they’re largely not there anymore,” he said.
MORE FROM STOCKHEAD: Climate tech gives planet fighting chance | ASX digital lenders focusing on client safety - Part 1 | Part 2
The company’s strategy is to become the leading private lender to Australia’s childcare sector, capitalising on growth in the sector.
“A lot of private credit businesses are specialising in particular areas so we’re specialising in childcare, but others are focused on unsecured or SME lending and agrilending,” Bell said.
“There’s a whole lot of different specialisations that sit below the larger funds, providing warehouse and funding lines to fuel these various businesses.”
Bell said growth in the Finexia Childcare Income Fund had been bolstered by several independent ratings, highlighting its unique market position.
“Our first target for the fund is to reach $100 million, and we are well on the way to that now,” he said.
“We see childcare as a significant opportunity as in the past 20 years, the childcare sector in Australia has boomed, a trend we refer to as ‘the childcare generation’.”
In addition to its childcare-focused lending, FNX also undertakes traditional private credit, including first mortgage lending against commercial and residential property for wholesale clients.
“We also have a sizeable book lending against ASX-listed equities,” Bell saids.
“For example, an insider of a company might bring us their shares, and we lend them money against those shares.”
As of the end of H1 FY24, Bell reports that FNX’s loan book was around $163 million, with funding from various sources.
“We are essentially a lending business, drawing funding from ASX-listed companies, wholesale and retail clients, family offices, and high-net-worth individuals,” he says.
Visit Stockhead, where ASX small caps are big deals
METRICS CREDIT PARTNERS
Metrics Credit Partners is considered a pioneer of listed private debt vehicles in Australia and now offers two listed investment trusts, alongside its unlisted funds.
The Metrics Master Income Trust (ASX:MXT) seeks to generate monthly income of the RBA cash rate plus 3.25 per cent p.a. (currently 7.60 per cent p.a.) net of fees from a diversified portfolio of around 300 direct corporate loans.
MXT has returned 9.48 per cent net of fees over 12 months to April 30, 2024 and 6.05 per cent p.a. net of fees since its inception on October 9, 2017.
The Metrics Income Opportunities Trust (ASX:MOT) targets a cash yield of 7 per cent p.a. which is intended to be paid monthly with a total target return of 8 per cent to 10 per cent p.a. (in each case net of fees).
In the 12 months to April 30, 2024, MOT’s total return was 10.45 per cent and since inception on April 29, 2019, it has returned 9 per cent p.a.
Metrics managing partner Andrew Lockhart said private credit was an attractive alternative to corporate bonds, hybrids, government bonds or even cash deposits.
“More conservative funds can deliver a return of around 8 per cent to 9 per cent per annum,” he says.
Lockhart says a higher-yield fund could deliver additional returns to provide a favourable alternative to investing in equities for income.
“The floating rates offered by many private debt funds also rise with official interest rates to provide a useful hedge against inflation,” he said.
“It is important to invest with a manager who has the necessary skills and experience to take the steps needed to preserve investor capital and negotiate appropriate pricing with the borrower to deliver optimal returns for investors.
“It is also important that the fund is well diversified and has a low level of exposure to any one individual loan.”
This content first appeared on stockhead.com.au
At Stockhead, we tell it like it is. While Finexia Financial Group is a Stockhead advertiser, the company did not sponsor this article.
SUBSCRIBE
Get the latest Stockhead news delivered free to your inbox. Click here
Investor Guide: Energy FY2025 featuring Peter Strachan
In this special investor guide, capital markets veteran and resources analyst Peter Strachan leads Stockhead’s drill down into the ASX energy sector.
Investor Guide: Health & Biotech FY2025
In this special investor guide, health and biotech guru Tim Boreham leads Stockhead’s deep dive into the most cutting edge sector on the ASX.