Brett Craig introduces private credit and the Aura Core Income Fund
In this video, Brett Craig and Roger Montgomery introduce private credit, the opportunity it offers for stable monthly income while seeking to preserve capital, why SMEs seek funding outside of the main banks, where the Aura Core Income Fund invests and how it makes a return for investors.
TRANSCRIPT
Roger Montgomery: I’m Roger Montgomery from Montgomery Investment Management. And with me is Brett Craig from Aura to discuss the Aura Core Income Fund. The core income fund extends to retail investors access to small and medium enterprise loans that were once only available to sophisticated and high-net-worth investors. Brett, thanks for joining us.
Roger Montgomery: Private credit, it’s traditionally the domain of high-net-worth and sophisticated investors, as I said in my introduction. How would you explain it to a retail investor?
Brett Craig: Private credit is lending that sits outside of the regulated banking system. So it’s quite prevalent in the Australian market.
Roger Montgomery: Investors might be nervous that banks aren’t providing loans. Does that make them riskier? Why are the banks pulling out or not that excited about this space?
Brett Craig: There are a few reasons the banks are sort of stepping back from smaller loans. One being there’s some change in regulatory capital requirements where they have to hold more capital against a specific loan. Another one is the speed of access to capital. So we are seeing that in the fintech-enabled lending space loans can be turned around in 48 hours. Whereas with the banks, it can take up to six weeks to provide a credit decision.
Roger Montgomery: So it sounds like for the banks it’s not only capital-intensive, it’s also labor-intensive, which is less profitable for them.
Brett Craig: That’s correct. They do have a distinct preference to larger value loans.
Roger Montgomery: How does this fund work? How does the Aura Core Income Fund work?
Brett Craig: A specific example would be a business owner, so in the retail space, looking to borrow some money to purchase stock for say the upcoming Christmas season. They will go to one of the loan originators that we work with, request a loan. They will be credit assessed. If approved, that loan originator will need the capital. That is where we’ve used the fund’s capital to provide that lending to that underlying retailer. As that loan goes through its life, that retailer will have to pay principal and interest down. Those principal and interest flows come back into the fund.
Roger Montgomery: Brett, the banks don’t find SME lending attractive because it’s both capital and labor- intensive. That opens up the space for you to provide those loans. But typically, what types of SME businesses will you be lending to?
Brett Craig: We look at a diverse range of businesses, and we target different sectors depending on what’s happening in the macro environment. So if you look at our SME fund, which is the wholesale strategy, we have exposure to farmers, wholesaling businesses, a small amount of construction through there, and also the service sector. So we provide capital to legal disbursement funding businesses as well. So for us, it’s about having a diversified pool of exposures across a wide range of geographies to spread risk.
Roger Montgomery: The Aura Core Income Fund is a new fund.
Brett Craig: Yes.
Roger Montgomery: But you’ve been doing this for five years.
Brett Craig: Yes.
Roger Montgomery: Tell me about the experience from lending to these SME businesses through the Aura High Yield SME Fund.
Brett Craig: We’ve been able to provide stable capital to our investors since inception. So the SME fund’s been running for five years. Our net asset value, so the price of each unit, has been retained at a dollar throughout the life. And we’ve returned north of 9% to investors since inception. Now, what I would say about that SME fund is it is a slightly higher-risk fund than the core income fund. Each fund will participate in different sectors of the capital stack. So we are pitching the core income fund as a lower- risk strategy than the SME fund, but using the same investment principles.
Roger Montgomery: The Aura High Yield SME Fund has generated very attractive returns and monthly income over the last five years. But the core income fund has a different target, doesn’t it?
Brett Craig: That’s correct. So given it’s a lower-risk strategy, it also comes with a lower return. Within the core income strategy, we’re looking at a cash plus 3.5 to 5.5% target return. In this market, we’re looking at a target return between 5.35 and 7.35% based on the current cash rate. So at 1.85% at the time of filming.
Roger Montgomery: Take me through how a borrower who pays their interest and principal back, where that money goes and how investors in the Aura Core Income Fund receive it.
Brett Craig: Each borrower will pay on their contracted frequency. So they’ll pay their principal and interest back through into a trust which we control that owns the loan exposures. From that point, the loan originator will take out their margin for managing those loans, and then money, both the principal and interest, will be paid back to the Aura Core Income Fund. From that point, we pay out distributions to investors on a monthly basis. So investors will have the option to either take income on a monthly basis or to have that income reinvested on that monthly basis.
Roger Montgomery: The Aura Core Income Fund has several objectives. What are those for investors?
Brett Craig: There’s four key objectives to the Aura Core Income Fund. Two relate to access. Firstly, access to the private credit market, access to our specialist knowledge that we’ve gained throughout the management of the Aura High Yield SME Fund. From an investment perspective, we are looking at providing a stable capital base and consistent monthly returns to those investors via a diversified pool of exposures in the private credit space.
Roger Montgomery: Brett, the Aura Core Income Fund is a new fund, but the Aura High Yield SME Fund has been going for five years. Talk a little bit about how much has been written in that fund over the last five years.
Brett Craig: We’ve managed over half a billion dollars of loans in that strategy since inception.
Roger Montgomery: Brett, thanks for your time today.
If you would like to learn more about the Aura Core Income Fund, please visit the fund’s web page to learn more: Aura Core Income Fund
You should read the relevant Product Disclosure Statement (PDS) 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).
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.
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 a valid paper or online application form accompanying the PDS. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.
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.
Where information provided by Brett Craig, Portfolio Manager of the Fund, consists of General Advice, this is provided as an Authorised Representative (AR No. 001298683) of Montgomery.
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.
