10 reasons to consider private credit
Fifteen years ago, many of my friends were in their early to mid-fifties. With retirement still a long way off, and living their best lives, the volatility of the stock market was something to be endured, if not salivated over, because it was the price to pay to create serious wealth.
That belief remains true today. There exists a contract between the long-term wealth creation provided by the stock market – especially smaller capitalisation companies – and the associated volatility.
If you want to create serious wealth, you need to own a successful business (a look at Australia’s rich lists confirms this – among the wealthiest Australians you won’t find an employee who has saved their money in a bank account). The stock market allows investors the opportunity to own a slice of some of the country’s most successful enterprises, which are platforms for wealth creation over the long term.
But not everyone wants to ride the ups and downs of the stock market. Now, fifteen years later, as they near their 70th birthdays, some of those same friends are seeking alternatives, a way to preserve their wealth and enhance their income without being asked to stomach the vicissitudes of Australian and global equity markets.
Enter private credit funds, such as the Aura High Yield SME Fund or the Aura Core Income Fund. Both funds invest in a diversified portfolio of small to medium-sized business loans.
Investing in private credit (also known as private debt) is increasingly considered a prudent strategy for those seeking diversification and consistent returns.
Meanwhile, advisers, researchers and consultants – those who provide important advice on portfolio construction – are recognising this emerging asset class. The benefits of consistent monthly income and uncorrelated returns, and the important economic role private credit plays in supporting Australian businesses, cannot be ignored.
When considering private credit what are its features and benefits?
- Consistent cash flow: A primary appeal of private credit investments is the consistent cash flow they can provide. Most private loans, especially to mid-sized businesses, have regular interest payments. This is in contrast to equities, which may or may not provide dividends and can be subject to volatile price swings.
- Secured assets: Many private credit investments are secured by tangible assets. If a borrower defaults on their loan, the lender may have a claim to certain assets as collateral. In contrast, equity investors are positioned at the bottom of the capital structure, meaning they are the last in line to receive any remaining assets in the event of bankruptcy.
- Protection from volatility: The private credit market is less correlated with public investment market swings than equities. This means that during periods of stock market turmoil, private credit portfolios can act as a ‘cushion’, reducing the overall volatility of an investment portfolio.
- Reliable returns: Private credit offers reliable returns based on interest rates set out in loan agreements. This contrasts with equities, where returns are highly dependent on company performance, market perception, and broader economic factors.
- Contractual obligations: Whereas returns from equity investments depend on company performance (in the form of dividends or stock appreciation), returns from private credit returns are typically contractually obligated. Borrowers are legally required to make interest and principal payments.
- Diversification: Incorporating private credit into a portfolio allows investors to achieve greater diversification. It’s another asset class, with a different risk and return profile compared to equities, that can work to balance out portfolio returns over time.
- Higher yield potential: In the current low-interest-rate environment, many investors are struggling to find attractive yields. Private credit can offer higher yields than traditional bonds or other fixed-income assets, given its bespoke nature, the direct relationship between investor, manager, originator and borrower, and the link to corporate lending.
- Direct relationship with borrowers: The direct relationship between private credit lenders or originators and borrowers, allows for more flexibility in loan terms, better monitoring of the loan, and more efficient negotiations should a borrower face financial difficulties.
- Less competition and more opportunity for due diligence: Unlike the equity markets, which are saturated with analysts and institutional investors, the private credit space often has less competition. This may currently allow for more attractive pricing (yields and returns) and the opportunity for patient and in-depth due diligence.
- Increasing market and maturity: Over the past decade, the private credit market has matured significantly. With this maturation comes better infrastructure, more data for making informed decisions, and a larger number of experienced participants, making it a more viable investment option for many.
Private credit, with its unique set of risks, may only be suitable for a portion of an investor’s portfolio. Yet, its potential for consistent monthly returns, protection against the volatility of public markets, and diversification benefits make it a compelling alternative or complement to equities in a well-balanced investment portfolio.
Disclaimer
Find out more about the Aura Private Credit Funds
You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.
Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.
The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230).
You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through the online application form. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.
The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).
Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.
Montgomery, ACH and OMIFL do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
