Myth: Private credit does not perform well in disruptive economic conditions
In this short video I was joined by Brett Craig, Director at Aura Credit Holdings, our partner in private credit to discuss a common myth that private credit does not perform well in disruptive economic conditions. With some private credit funds being relatively new, and not having experienced a full economic cycle, we dive deeper into this topic.
You can watch a full 13-minute video on myths surrounding private credit here.
Transcript:
Roger:
Brett, another myth; these funds don’t perform in poor economic conditions. I mean, it’s probably the most common accusation that’s levelled at these funds. They haven’t been through a full economic cycle. It’s worth pointing out there are some funds that are relatively new, your wholesale fund is seven years old, and you’re an ex-banker. There are some of these funds that are much younger and aren’t run by bankers. That’s not the case for you. What’s your experience in tougher economic times, and what’s the experience of the fund?
Brett:
The fund ran through the whole COVID experience. So obviously, that was an extremely disruptive time for every business in Australia and more broadly, globally.
We also had a technical recession at the back end of 2022. Granted, not a deep one; however, it was a technical one. Through that time frame, our fund performed well. The lowest monthly distribution was 60 basis points.
So, no, we still maintained a one-dollar value, even during that trough in economic conditions. And I remember out of COVID, we had something like four million people unemployed. The low point was a 60-basis point repayment that month?
Brett:
That’s correct. And you mentioned I come from a banking background, we look at risk in a very bank-like way. When we’re looking at our underlying portfolios, we’re using long time frames of data to stress test our portfolio. So, as an example, we’re currently using over 50 years of bank and non-bank data in the stress testing of our portfolios. So, whilst we haven’t run through a deep and extended recession as a fund, we explore those downside scenarios with deep and long historical data.
Roger:
And I’ve been asked this question by several people: presumably, we would see a recession coming and if we saw a recession coming, number one, investors could redeem if they wanted to, if they were nervous, they could do that. And alternatively, you’re managing who the money is re-lent to as it’s being paid back. As you’re recycling that capital, presumably, you’ve got a methodology for deciding whether to extend further credit. How do you go about assessing that?
Brett:
Right now, is a really interesting case study. We’re seeing lenders with a lot of applications coming through; however, the approval rates have gone down because the borrowers are not necessarily meeting our criteria. So, we filter at the front end, and that’s a frustrating time for the lenders. They’re inefficient in their approval rate right now, however, that’s enabling us to retain a high-quality book.
Learn more about the Aura Private Credit funds here, or call us on 02 8046 5000.
Disclaimer
The Aura Private Credit Income 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)(Aura Group).
This information is for wholesale or sophisticated investors only and is provided by Montgomery Investment Management Pty Ltd (ABN 73 139 161 701, AFSL No. 354 564)(Montgomery) as the authorised distributor of the Fund. An investment in the Fund must be through a valid online application form accompanying the Information Memorandum.
The information provided is general in nature and does not take into account your investment objectives, financial situation or particular needs. Before making an investment decision you should read the Information Memorandum and (if appropriate) seek professional advice from a licensed financial advisor to determine whether the investment is suitable for you.
Montgomery and Aura Credit Holdings Pty Ltd (ACN 656 261 200, CAR 1297296) (Aura Credit Holdings), who is the Investment Manager of the Fund 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.
Aura Group has entered into a Distribution Partner Agreement (Distribution Agreement) with Montgomery to distribute the Fund to its client base. Montgomery may receive a share of the fees you pay as well as potential equity in Aura Credit Holdings.
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.
