Five tips to select a US private credit manager
Here are five qualities to look for when choosing a US private credit manager.
Investors looking for the trifecta of strong yields, regular income and low volatility may find the answer in US private credit. Add in the benefit of portfolio diversity, and it's easy to see why US private credit is experiencing rapid growth.
Aussie investors may not be familiar with US private credit. In simple terms, it involves non-banks lending to US corporations.
Demand for this type of lending has enjoyed what the US Federal Reserve describes as "exponential" growth. Today, the US private credit market is valued at $US1.7 trillion ($2.6 trillion), just below the total for bank lending.
How does US private credit work?
As an asset class, US private credit falls under the umbrella of 'fixed interest'. This has traditionally been a difficult market for retail investors to access owing to the large capital requirements.
Now, however, each of us has the opportunity to add fixed interest to our portfolio via a private credit fund.
These funds work in much the same way as regular managed funds. Investors' capital is pooled, and loaned out to a variety of borrowers.
From here, investors can expect to receive a regular income return, often with very attractive yields. As a guide, over the past 20 years, yields on US private credit have averaged around 9.4% per annum.
As the name suggests, the loans underpinning US private credit are not traded on public markets. This has a real advantage as it means private credit funds experience low levels of volatility - a big plus for investors seeking capital stability.
Five tips for choosing a US private credit manager
Investing through a fund makes US private credit a simple and accessible investment. And with rising popularity, we are seeing more managers meet investor demand through new products.
This brings the need to select a manager with care: Skill, experience and transparency can add considerable value for investors.
Here are five tips on how to select a US private credit manager:
1. Look under the hood
It always makes sense to know what you are investing in. Some US private credit managers can be broad based, others can focus on niche areas of the market such as distressed credit.
What matters is that you know what's under the hood, and are comfortable with the underlying lending style.
The product disclosure statement (PDS) will explain everything you need to know. Yes, it can be a lengthy document but it's worth reading to be sure you are investing in an asset you have confidence in.
2. Invest in experience
Good private credit managers invest in high quality assets, use structures that are easy to understand, and have skilled management teams in place.
Importantly, a quality manager will have experience spanning different market cycles. A manager with a track record including the good - and not-so-good - times will have the skills and experience to weather the full economic cycle.
La Trobe Financial, for example, has been in the private credit market for over 70 years. It is a legacy that allows us to draw on past experience, and implement strategies that we know work for investors.
3. Know there is strength in numbers
Part of the appeal of US private credit is the diversity it brings to a portfolio.
This diversity can be further enhanced by looking for a private credit manager with a portfolio of underlying loans that number in the hundreds.
The greater the number and diversity of loans and borrowers, the less impact a single loan default can have on the overall outcomes of the credit fund.
4. Is the manager transparent?
Can you see where your money is being invested? If not, the alarm bells should start to ring.
Transparency matters. It shows that a fund manager has nothing to hide, and it lets you make an informed decision about where you are putting your money.
This level of transparency is a key building block to decide if US private credit is right for you, your needs and your appetite for risk.
5. Is your investment protected from exchange movements?
US private credit can be an attractive investment. The catch for Aussie investors is that international assets inevitably bring foreign currency risks.
The simple solution is to look for a US private credit manager who uses currency hedging. This lets investors experience US private credit free from concerns about the impact of currency swings on personal capital.
The excellent yield profile and low volatility of US private credit makes this an appealing investment for individual investors and self-managed super funds. Choose your manager with care, and you can be confident of accessing a diverse portfolio of loans that should perform well over the long term.
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