Five tips for selecting 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 can 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 in investor demand.
Australian investors may be less familiar with US private credit, and there are a wide range of strategies, with different asset types, quality, structures and returns in market.
Demand for US Private Credit has enjoyed - what the US Federal Reserve describes - "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 do US private credit funds work?
As an asset class, US private credit falls under the umbrella of 'fixed interest'. But it has traditionally been a very difficult market for retail investors to access owing to the large capital requirements, or the more complex structures only available for wholesale investors.
Now, however, investors have the opportunity to add private credit investments into the fixed interest part of our portfolios via retail-focussed private credit funds.
These funds work in much the same way as regular managed funds. Investors' capital is pooled, and loaned out to a variety of borrowers in a variety of different ways (refer below).
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 9.34% 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 low volatility.
Five tips for choosing a US private credit manager
Investing through a fund can make 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 5 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 comprised within the investment portfolio supporting the product, and that you are comfortable with the underlying lending style.
The underlying portfolios will be different. They can be 'pure-play' portfolios comprised only of loans which are directly originated and bi-laterally negotiated (direct lending).
They can be hybrid portfolios comprised in part of direct lending loans, together with a mix of broadly syndicated (public), asset-backed finance arrangements, collateralised loan obligations (CLOs).
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 will often have common key characteristics: they invest in high quality assets, use structures that are simple and 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 Australian real estate 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.
Likewise Morgan Stanley, who arguably operate the best direct lending private-credit platform in North America, have managed through a number of different market cycles.
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 which offers a broad portfolio of underlying loans.
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. Seek transparency
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. Look for protection 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 offers Aussie dollar investment along with currency hedging for your invested capital.
This lets investors experience US private credit without the pronounced impact currency swings on personal capital.
The excellent yield profile and low volatility of US private credit makes this an appealing investment for a range of different investors.
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.
A description of the Target Market for La Trobe Financial's US Private Credit Fund - Class B Units can be located at www.latrobefinancial.com.au/investments/tmds. The PDS will be available on or around June 1, 2024. Financial product advice in this article is general only and does not consider your personal circumstances. Past performance is not a reliable indicator of future performance.
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