Higher returns on credit funds? What to weigh up

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High returns always sound appealing. We shed light on what to consider when it comes to selecting a credit fund.

Private credit is increasingly gaining traction among Australian investors.

But it's an area that often sees retail investors scratching their heads especially when it comes to knowing the returns they can expect, relative to the risk being taken.

sponsored what to weigh up when considering private credit

To provide some answers, let's start with a quick look at what private credit is all about, and why it's attracting so much attention.

A strong and growing market

Put simply, private credit involves lending by non-banks.

For a variety of reasons, the last few years have seen banks pull out of certain types of lending. The gap has been filled by private credit providers - specialised non-bank financial institutions that supply loans backed by business assets, business equity, corporate debt, commercial property or specific projects.

What many investors don't realise is the sheer scale of the private credit market.

The International Monetary Fund (IMF) says private credit topped $US2.1 trillion ($3.16 trillion) globally last year.

It's a strong market here in Australia also, estimated to be worth $188 billion at the end of 2023, up from $175 billion a year earlier.

A market of this scale provides opportunities for investors.

Investing via a managed fund

Rather than tapping into customer deposits for lending, in the way that banks do, non-bank credit providers rely on funding from investors, often via a managed fund.

The fund structure is hassle-free for investors, though there are other reasons why private credit is becoming so popular.

Along with portfolio diversification, private credit offers high returns coupled with low volatility.

However, looking at the return profiles of some credit funds raises concerns that investors may be taking on more risk than they realise.

Combining high returns with the least amount of risk

As a credit fund manager, Remara's goal is to invest your money in a way that generates the highest possible returns.

As a guide, our Private Credit Income Fund delivered 12-month rolling returns (to 30 April 2024) of 12.68%.

A key point of difference is that we achieve high returns while taking the least amount of risk.

We do this though several strategies:

1. Investing across the credit spectrum

The private credit market covers many types of loans including private company loans, loans for commercial real estate, specialty finance, and so on.

It's common for a credit fund to focus on just one area of credit.

Remara takes a broader approach, investing across the entire credit spectrum.

This gives our investors additional opportunities to diversify. And, of course, diversification is critical to managing risk.

2. Being vertically integrated

Remara owns a number of the businesses that originate the underlying credit in our funds.

This gives us a high level of control over, and management of, the types and quality of investments that underpin our investment funds.

3. Co-investing

Remara actively invests its own money into the investment products we offer to retail clients.

This is extremely reassuring for investors.

It's the equivalent of 'putting our money where our mouth is', and it means we take a razor sharp interest in the quality of the assets we invest in.

4. Being the loan originator

By owning and operating multiple stages of the credit supply chain, Remara avoids having to pay fees to external companies.

This is very different from some credit funds, where it can be common for a loan product to pass through multiple layers of structuring, each with its own set of fees, before it reaches retail investors.

This fee 'leakage' can be as much as 3% - a cost that results in lower returns for investors.

By originating our own loans, Remara benefits from economies of scale. This lowers the running costs of our funds, allowing us to achieve higher margins.

Best of all, the savings are passed onto our investors in the form of consistently higher returns.

Attracting the big end of town

One of the litmus tests of strong credit is the issue of who invests in it.

Remara's credit attracts institutional investors including the big banks, superannuation funds and global funds.

This validates the quality of the credit that underpins our funds, especially since super funds need to be highly confident of an investment before they entrust their members' retirement savings to it.

Creating a level playing field

One aspect of Remara's approach that really sets us apart is the way we provide a level playing field.

Our retail investors sit side by side with our institutional investors, paying the same fees, and enjoying the same strong returns.

So, if you're thinking of investing in a credit fund, take a good look under the hood.

Understand what the fund invests in, who else is investing, and what (if anything) drives the fund manager to really care about the quality of assets that underpin the credit fund. It can make a key difference to the security of your money and the strength of your returns.

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Andrew McVeigh is the founder and managing partner of Sydney-based investment firm Remara. He previously held positions with Brookfield Asset Management including CFO of Asia-Pacific. Andrew holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance. He has served on the CFO Roundtable and the National Accounting Roundtable for the Property Council of Australia, while serving as a Steering Committee member for the Bachelor of Accounting scholarship course at UTS. Andrew served as a board member of the Cronulla Sharks Football and Leagues Club, holding the roles of Chair of the Audit, Risk and Compliance Sub-Committee and the Property Sub-Committee.