Private credit - not all funds are created equal
Private credit is one of Australia's fastest growing investment markets, and while this is opening up more options for investors, it's also important to choose a private credit fund with care. Three factors can help narrow the choice.
Private credit, in other words, non-bank lending, has been around for decades. It's attracting particular attention right now though as demand for lending and strong investor interest has pushed the Australian market past the $200 billion mark.
This growth has seen a mushrooming of new entrants to the market. On the face of it, this is giving investors looking for attractive yields and regular income, the benefit of more choice.
However, as Shelby Clark, executive director of operations at Knox Funds, formerly GPS Investment Funds, cautions, "We are seeing a rush of inexperienced companies come into private credit, and their lack of experience can put investors' money at risk."
Knox Funds has been in the market for more than 30 years, and only lends for residential property developments in the South East Queensland area. Other private credit funds are backing very different projects, some with higher risk and less transparency about how investors' money is being used.
Clark, a keen advocate for consumer education, says there are several key factors investors need to weigh up when it comes to selecting a private credit fund:
• The experience of the fund provider
• The underlying assets of the fund, and
• The security the provider has over those assets.
Experience matters
As a market veteran of more than three decades, Knox Funds recently rebranded from GPS Investments. As Shelby Clark points out, "Our name may have changed but our depth of experience hasn't."
And in a sector where so many new funds are coming on board, that experience matters.
"Every industry will experience volatility," says Clark. "What investors need to determine is whether they are choosing a fund that has dealt with volatility before, and so knows how to manage it."
John Cachia, founder and CEO of financial advice firm Thriving Wealth, believes today's cost-of-living pressures and higher interest rate environment may see more investors turn to income-producing options like private credit.
He too says it's important to look beyond the advertised yield and consider "factors such as the fund manager's track record".
Know how your money is being used
When you invest in private credit, you are essentially providing funds to be loaned to a variety of borrowers for a variety of purposes.
Clark says it's critical to understand what a private credit fund is investing in, and know what the underlying assets are.
"Investors need to be wary of underlying assets that are in a volatile market or are a current 'fad' that may not survive the test of time," she explains.
Shaun Ganguly, founder and principal adviser at Prime Years Financial Planning, agrees.
"Private credit is not a monolith, and it's absolutely vital to know what you're getting into," he says. "What are the fund's underlying assets? How does it make the money? Is it lending against property, small businesses or something else?"
According to Ganguly, "the underlying asset matters the most".
He cites the example of a first mortgage with a low loan-to-value ratio (LVR) over a metropolitan commercial property, which Ganguly says would have a completely different level of risk compared with an unsecured loan to a fledgling small business.
"One is backed by a real asset with an equity buffer behind it. The other relies on the health of the business and carries more risk," observes Ganguly. "On a risk-adjusted basis, they are chalk and cheese."
While close to half the finance provided by private credit in Australia is real estate-focused, each fund's underlying investments should be clearly spelled out in the product disclosure documents.
The catch is that some funds are more transparent than others.
Clark explains, "Knox offers six funds, all are backed by residential property developments in South East Queensland.
"Not only can investors see the projects we are funding on the Knox website, the Knox Providence Fund allows investors to choose exactly which development they would like to help fund. This gives investors next level control over what they invest in, and it's popular with people who see a suburb they are familiar with and believe will sell well."
The remaining funds, including retail options Knox Fortitude Fund and Arkus, pool investors' money across a range of South East Queensland-based property developments.
Get stories like this in our newsletters.
