Private credit, a smart choice
In this week’s video insight, I discuss the compelling features of the Aura Private Credit Income Fund. The fund has outperformed the stock market with zero volatility, providing a 9.64% compounded annual return over seven years, with no negative months, including during the COVID pandemic. The fund lends to small and medium-sized businesses in Australia, leaving a $400 billion opportunity left by big banks, while offering a diversified loan book and no lock-up period. I also highlight the first-loss structure that provides additional security for investors.Transcript:
Hi, I’m Roger Montgomery from Montgomery Investment Management, and I wanted to join you today to talk about what I found compelling in the Aura Private Credit Income Fund.
When I first looked at the track record of the fund, I was a little taken aback.
Not only had the fund outperformed the stock market, but it had done so with, wait for it, zero volatility. That’s right. Unlike the stock market, which swings up and down at times, this fund has never had a negative month since its inception, including during COVID and the pandemic disruptions associated with it. So, here’s a fund that’s been running for seven years, has produced a return of 9.64% compounded per annum, delivered monthly income, and has never missed a month. It sounds too good to be true.
What does it do? Well, it lends money to small and medium-sized corporates in Australia. Now, immediately, you might think that’s incredibly risky – and I did as well. But things have changed from fifteen years ago. Before the global financial crisis (GFC), if you had invited me to lend to small and medium-sized corporates, I would have said you’ve got rocks in your head. Quite simply, the only businesses we would be able to lend to were those the big banks had rejected.
But post-GFC, thanks to regulation, banks now require a lot more capital for certain types of lending, making those particular types of loans less profitable and more labor-intensive.
Consequently, they’ve pulled back from lending to small and medium-sized corporates.
This has created an opportunity of about $400 billion in Australia, which represents the gap between what small and medium-sized corporates in Australia would like to borrow and what’s available to them from the big banks. And this has occurred at precisely the same time that baby boomers are heading toward their late seventies and eighties – exactly when regular monthly income becomes more valuable.
Now, the features of this particular fund that make me more comfortable include the following: Number one, unlike other funds that have a concentrated book of large loans, the Aura Private Credit Income Fund has about thirteen thousand smaller loans spread across roughly forty different industries and subsectors of the economy. Next, there’s no lock-up.
Some funds lock you in for six months, twelve months, or maybe even longer – but this fund doesn’t.
Many other funds have long-term loans, so if the worst-case scenario transpired, such as a major economic recession, and every investor wanted to get their money out at the same time, the fund would be gated. In other words, the ability to exit the fund would be controlled by the fund manager.
If a fund has a concentrated pool of large, long-term loans, say two- or three-year loans, it could take two or three years before you get most of your money back.
Seventy-five percent of the loans in the Aura Private Credit Income Fund, at the time of this recording, have a term of less than three months. Finally, the last feature I like about this fund, which gave me great comfort, is the unique relationship between the investor in the fund, the fund itself, and the originators of the loans. These are the businesses the fund is partnered with to identify and approve those loans. The originators need to put up equity capital into the loan book as a “first loss” piece.
What that means, quite simply, is that if there is an adverse event in any of the loans, the originator of the loan is required to put their capital at risk first to cover those losses before it affects investors in the fund. And finally, let’s talk about that track record again.
Private credit is gaining a foothold in many investors’ portfolios.
It’s the topic du jour.
Consequently, there’s a plethora of new funds launching with no track record at all. This fund has a seven-year track record, returning 9.64% per annum after all fees. Now, there’s a lot more detail, but this is really a high-level discussion of the features and benefits to explain why I found this fund so compelling.
I hope you dig a little deeper, find out more about the fund, and I look forward to answering your questions. If you have any, feel free to call or email us. We’d be delighted to help. I look forward to talking with you again soon.
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 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 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).
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.
