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Private Credit and the demographic tailwind

 

Private Credit and the demographic tailwind

In this week’s video insight, I discuss the Baby Boomers looming retirement, and the importance of ensuring financial stability. With rising property costs and the need to replace lost income, finding reliable investments is essential. I highlight private credit as an option, offering the potential for returns with lower volatility. By diversifying investments, retirees can enhance their income, providing financial security throughout their retirement years. Additionally, I address how rising property prices impact young people, making it harder for them to afford homes.  

Transcript: 

Hello, I’m David Buckland and welcome to this week’s video insight.  

Over the balance of this decade, I’ll be joining the Baby Boomers who will be over 65 years of age, and extended longevity means my peer group should, on average, live to around 85 years of age. Ensuring one doesn’t go backwards financially for that approximate 20-year period of retirement is the conundrum. 

When retiring, the first thing most people contend with is the loss of remuneration, and how we are going to replace those earnings with relatively reliable investments.  The second thing that we may want to consider is how do we assist our children or grandchildren, given the biggest asset in most people’s lives – their home – currently sells at such a high multiple relative to average income. 

I offer a simple example of my first property – purchased in my mid-20s and paying around three times my pre-tax income. I had relatively little savings at the time, and no debt. That same property today would cost someone of similar age at least 14 times their pre-tax income. Apart from their possible HECS bill, they must save hard (or get assistance) just to get a deposit, and even if they are lucky they are already “behind” my generation by 11 multiples of their pre-tax income in this example. 

One asset class worth considering for those heading towards/ through the retirement door is Private Credit. Generally, it has achieved equity like returns, which have typically averaged an annual 9 to 10 per cent, assuming reinvestment of dividends, over the long-term – but without the considerable volatility of up and down markets (i). 

The Aura Private Credit Income Fund, for example, which is designed for wholesale investors, celebrates its 7th anniversary at the end of July 2024, and has delivered investors an annualised return of 9.64 per cent, assuming reinvestment of the monthly income. Assuming the investor banked the average monthly income of 0.77 per cent since inception (1 August 2017), the average annual return would have been 9.24 per cent. And the volatility has been low, with a monthly income range of 0.60 per cent to 0.93 per cent, and the unit price returning to $1.00 after each of the 82 monthly payments, to date (ii).   

Montgomery helped introduce the Aura Core Income Fund (ACIF) in October 2022. Over the first eleven months of Fiscal 2024, the monthly income payment for the ACIF has averaged 0.624 per cent (or 7.48 per cent per annum assuming the monthly income is banked), with a monthly range of 0.57 per cent to 0.66 per cent (iii). This Fund is positioned further up the collateral stack, meaning it has a greater “margin of safety”. 

So, here’s my thesis for the cash component of the portfolio, based on the data above. I have assumed a 12-month term deposit currently earns 5.0 per cent. On say $2 million, that means Investor A receives $100,000, paid in 12 months. 

Investor B uses some Private Credit and could, for example, put 60 per cent or $1.2 million (of the $2.0 million) in a 12-month term deposit earning $60,000, paid in 12 months; 15 per cent or $0.3 million in the Aura Private Credit Income Fund earning an average 9.24 per cent per annum or $27,700, paid monthly; and 25 per cent or $0.5 million in the Aura Core Income Fund earning an average 7.48 per cent per annum or $37,400, paid monthly.   

In this example, Investor B receives $125,100 over the year, a 25.1 per cent uplift in yield on Investor A, who is 100 per cent invested in 12-month term deposits. Pleasingly, $65,100 or 52.0 per cent of that income is now paid monthly – or an average $5,425 per month – whereas Investor A receives the entire interest income at maturity in 12 months. 

It is important to note, that the Aura Private Credit Income Fund and the Aura Core Income Fund do not have the same level of capital guarantee as an Australian Bank issued Term Deposit and therefore is of higher risk for the higher return. 

That’s all I have time for this week. Make sure to follow us on Facebook and X.  

(i). Elroy Dimson, Paul Marsh, Mike Staunton; Credit Suisse Global Investment Returns Yearbook 2021 Summary Edition; March 2021 

(ii).  Returns from the Aura Private Credit Income Fund is based on data from 1 August 2017 to 31 May 2024.  Past performance is not a reliable indicator of future performance. 

(iii). Returns from the Aura Core Income Fund is based on data from 1 July 2023 to 31 May 2024.  Past performance is not a reliable indicator of future performance. 

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. 

INVEST WITH MONTGOMERY

Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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.

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