ASX funds and companies opening new doors for investors in private credit

Private credit is an increasingly growing asset class, forecast to grow at a CAGR of 11% from 2022 to 2028
Funds manager Pengana launching the Pengana Global Private Credit Trust on the ASX
VanEck Australia launched the Global Listed Private Credit (AUD Hedged) ETF at the start of 2024

Private credit has become a rapidly growing alternative asset class catering to companies seeking capital and investors seeking income.

According to the International Monetary Fund (IMF) private credit – also known as private debt – operates outside traditional bank lending and public debt markets and is “becoming an increasingly important and interconnected part of the financial system”.

The IMF says private credit emerged about 30 years ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets.

The private credit companies and funds earn returns through interest payments on the loan, offering investors potentially higher income than term deposits or equities.

“Institutional investors such as pension funds and insurance companies have eagerly invested in funds that, though illiquid, offered higher returns and less volatility,” the IMF says.

Alternative assets research firm Prequin forecasts private debt AUM is forecast to grow at a CAGR of 11% from 2022 to 2028, reaching an all-time high of US$2.8tn – almost doubling the 2022 figure of US$1.5tn.

Private credit came to prominence particularly after the Global Financial Crisis (GFC), which ran from around 2007-2009, as increased banking regulations saw the traditional lenders having to retreat from offering loans to the corporate sector.

While there are risks associated with private credit, with the main being loan default. Private credit providers, like banks, assess borrowers and monitor loans.

Transparency is another issue with some private credit providers not on public exchanges, less liquid and transparent with experts saying one way to manage this risk is by investing in exchange listed private credit funds.

So just what are some of the ASX listed funds and companies focused on the private equity market?

Pengana Capital Group (ASX:PCG)

The funds manager is launching the Pengana Global Private Credit Trust (ASX:PCX) with PCG co-founder and CEO Russel Pillemer saying it offers “unprecedented access” to the highly sought after global private credit sector.

“PCX is a diversified global private credit listed investment trust that solves the challenges of investors wanting access to returns that are characteristic of the high performing asset class,” he says.

Pillemer says the trust is targeting the strong returns associated with highly rated global private credit loans, which includes the payment of a 7% per annum cash distribution yield paid to unit holders monthly.

PCX is being delivered in association with Mercer, one of the world’s largest investment consultants.

Pillemer says global private credit in context to PCX can be summarised as individually customised non-bank loans made to mid-market companies typically with earnings of US$50-$250 million.

“PCX is made up of over 2000 underlying mid-market loans delivered by a range of highly rated managers making PCX the most diversified global private credit fund on the ASX,” he says.

Pillemer says the rise of the private credit sector has provided fantastic opportunities for investors to achieve outsized risk adjusted returns from an asset class characterised by low volatility and low loss rates.

He says while global private credit has been popular in many institutional portfolios in recent years it has not been so among Aussie retail investors.

“This is due to significant barriers to entry for retail and even wholesale investors,” he says.

Pillemer says among these challenges are being able to identify high-quality managers with a proven ability to manage private credit portfolios, the high minimum investments required, currency risk and lack of liquidity.

“PCX has been carefully constructed to address the obstacles historically associated with global private credit investing,” he says.

“It is hedged back to Australian dollars to mitigate the risk of currency fluctuations.”

“Listed on the ASX it will provide a single access point for investors as well as the potential for daily liquidity.”

One of the unique characteristic of PCG’s listed private credit fund is an off-market quarterly buy back scheme offering unit holders the opportunity to sell out at net asset value (NAV).

Pengana Credit CEO Nehemiah Richardson says that the intention of the group is to deliver a product for investors that offers favourable risk-adjusted returns, with strong defensive characteristics.

“The LIT space has been associated with vehicles trading at discounts to NAV in recent years, which Richardson says would negate what the team at Pengana is trying to deliver its investors,” he says.

He says by implementing a quarterly buy-back offer at NAV, PCG believes its unique approach should avoid unit holders having to sell at a discount when they want to liquidate their holdings, with the knowledge that they have a quarterly option to sell at NAV.

The offer period for limited units in PCX will open on May 20, 2024 and closes on June 6, unless fully allocated sooner. The fund expects to start trading on the ASX on June 20.

VanEck Australia

The fund manager launched its Global Listed Private Credit (AUD Hedged) ETF (ASX:LEND) on January 31, 2024 with the ETF available to trade on the ASX from February 2.

The dividend yield of the LEND portfolio is currently 9.87% and according to data to April 30 LEND has a one-month total return of 1.57% and three-month total return of 5.52%.

LEND gives investors exposure to a portfolio of 25 of the largest globally listed companies involved in private credit.

The ETF aims to provide investment returns before fees and other costs which track the performance of an index calculated by LPX Group with returns hedged into Australian dollars.

VanEck Asia-Pacific CEO and managing director Arian Neiron says globally, private credit transactions are diverse, across many sectors and with a larger pool of borrowers.

LEND Index sector breakdown

Source: VanEck

Neiron told Stockhead growth in the private credit market is an unparalleled global phenomenon.

“We’ve seen private credit increasingly taking over the core business of traditional banks, that is, the provision of debt capital to medium-sized companies and real estate,” he says.

“However, given the smaller scale of the Australian market, private credit transactions here are concentrated to real estate and this limits sector diversification.”

Australian Private Credit LIT sector breakdown

Source: VanEck

Neiron says an advantage of investing in an ETF like LEND is it offers exposure to private credit but mitigates the ‘manager pick’ risk.

“Indices allow investors to see the performance of a proxy global private credit or proxy global private equity exposure,” he says.

“They provide an indication of the overall health of the markets and we have seen this play out over the past few years, indices have provided a good guide as to the direction of many private assets, such as those owned by large superannuation funds, when they are revalued to the current market price.”

Neiron says the choice between public or private markets has profound implications. He says in public markets, liquidity and transparency provide immediate price adjustments but also expose investors to volatility.

“Conversely, private markets can offer higher returns due to less competition and the illiquidity premiums, but require a long-term investment horizon, have less frequent price feedback and limited liquidity.

“We think innovations in indexing and ETFs are changing this dynamic.”

Neiron says irrespective of which market you invest, diversification remains key.

“Diversification by names, sectors and managers,” he says.

“Because of the disparity of returns among managers in private markets, we would argue manager diversification is more important in private markets.

“And that is where ETFs are helping investors to access those opportunities.”