Andrew Lockhart, managing partner of Metrics Credit Partners, told SMSF Adviser that a key attraction of private debt is that it aims to provide capital stability through the economic cycle.
“Rising inflation and official interest rates have helped to bring private debt into the mainstream of investment classes as investors seek to avoid the turbulence of public markets. The risk of a global slowdown is now also testing investment strategies,” he said.
“Many investors are again looking beyond equities and fixed income to weather the economic uncertainty in a way that reduces capital volatility and maintains a reliable income.”
Mr Lockhart said Australian private debt is among the few asset classes that offer both capital preservation and attractive risk-adjusted returns.
Most loans in the Australian private debt market are senior secured loans, affording protection to lenders under Australian laws. This safeguard empowers lenders to recover interest, principal, and fees from a borrower’s assets.
He continued that the asset class was previously only available to wholesale investors. However, in recent years, select opportunities have become available to self-managed super funds and other self-directed investors in the Australian market.
According to ATO statistics, around 17 per cent of Australian SMSF capital is invested in cash and term deposits, while listed shares account for 28 per cent of total estimated SMSF assets.
“For investors reliant on income from their portfolio, switching into bank deposits may be the first thing they think of, but while this may be a well-worn path, it isn’t necessarily the best strategy for all trustees,” Mr Lockhart said.
“While money in the bank does provide security, term deposits deliver lower returns that are fixed and don’t keep pace with inflation.”
“There is a lot of interest in private debt from the SMSF sector, particularly from investors who don’t want volatility but want to generate an acceptable return. Private debt has been able to deliver the stability in capital that investors are looking for.”
“Some people think private debt is not transparent and don’t quite understand it. But loan losses by banks over the past few years have been negligible – less than 0.1 per cent – and private debt funds are exposed in the same way,” he said.
“As a lender we want to know that the company to whom we are lending has sufficient capital to service their debt. The greater risk is borne by the shareholders in a company, not lenders.”
