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Home>Events>Fixed Income and Private Credit Forum>Private Credit Forum
2024>Ultimate test for private credit investors is yet to come 

PRIVATE CREDIT FORUM 2024


ULTIMATE TEST FOR PRIVATE CREDIT INVESTORS IS YET TO COME 


L-R: Aleks Vickovich, Jessica Melville, Seamus Collins, John Lucey and Matthew
Turner
Simon HoyleMay 2, 2024 | 1.20pm
Save Article


Even as asset owners increase allocations to private credit, investors have been
warned that the ultimate test of the asset class has yet to come. 

The Investment Magazine Private Credit Forum on Tuesday has heard that a
proliferation of lenders in the private credit space might or might not indicate
the asset class is in a bubble, but what’s not in doubt is that their skills
will be tested if things start to go wrong. 

“Private credit as an asset class being talked about in articles and at
conferences is probably in a bubble, but in the asset class itself you’re still
getting rewarded for the risk you’re taking,” Resolution Life chief investment
officer John Lucey said. 

“At the end of the day this is lending. It’s been around a long time, and as
long as you’re getting rewarded for the risk you’re taking, then my view is
you’re not in a bubble, it’s just a different characteristic of the actual
lenders that are taking advantage of the opportunities. 



“One thing about lending is it’s very easy to grow a lending business, and to
put money to work. You’re giving out money. The trick is getting it back, and I
think in Australia, that’s probably a little bit untested around some of the
newer funds that we’ve seen pop up, or some of the super funds that are setting
up internal structures, and the like. 

EMERGENCY RESPONSE 

ICG Australia head of Australian senior debt Matthew Turner said that when
things start to go wrong with a borrower, a private credit manager must “test
for a few things really quickly”.

“You make sure the borrower got cash; you work out how long it’s got cash for;
and then you get advisers and into those businesses very quickly,” he said.

Turner said a manager must be “prepared to use all of the tools in your kit bag
to, in the first instance, negotiate a sensible outcome for all parts of the
capital structure”.

If that doesn’t work, a manager must “sit on boards, work with management teams,
structure up short-term and long-term incentive plans to get management into the
businesses and run them”, Turner said.

“That’s critically important. And I don’t think we’ve seen that from the market
yet.”

Mine Super chief investment officer Seamus Collins said that in some respects,
while private credit is attracting a lot of attention and in some quarters is
thought of as a “new” asset class, in reality “this is repackaging a very old
asset class”. 

“At the end of the day, everyone knows the risks,” Collins said. 

“We talk a lot about credit spreads, and whether you’re getting rewarded and
whether, because when you get too much money chasing [opportunities] that’s when
you’re going to start to not get the reward for risk. 

“You’re alive to that, you’re alive to the other areas where people start to
compete, on covenant structures and underwriting quality and those kinds of
things.” 

Collins said private credit managers generally can be “a bit more nimble, a bit
more targeted” than traditional banks, which are “kind of lending to the whole
economy”. 

“What we like is they’ll dive into specific thematics, or opportunities, where
they just see dislocation mismatch,” he said. “And they’ve been quite effective
at that.” 

Collins said Mine Super has about 4 per cent of its assets invested in private
credit with plans to grow,  

“We’re still adding through to that up to around five to 6 [per cent],” he
said. 

“We’ll top out then at around $700 million. And at that point, it’ll essentially
be fully regenerative. We’ll get cash flows and we’ll be recycling, and that was
one of the real decision drivers. 

“We like that with private credit – that kind of five- to seven-year certainty
on the capital recycling [and that it’s] immediately accretive on day one. At
the time, it was reasonably well benchmarked against Your Future Your Super,
which we felt it was pretty important to us because we had some historic
underperformance against the regulatory benchmark that we needed to address.” 

SELECTIVE PARTNERSHIPS 

Collins said assessing private credit managers isn’t only about the returns they
might generate, but is also about “at the back end, when something goes horribly
wrong, how good is their workout? How good is their restructuring?”. 

 “Generally speaking, workout and restructuring comes with scale, institutional
depth and institutional maturity,” he said. 

“Generally speaking, scale has been important to us in that selection process.” 

While working with asset management firms is common for asset owners investing
in private credit, AustralianSuper head of mid-risk portfolio strategy and
research Jessica Melville said the fund is in the process of internalising that
capability, which initially grew out of its internalised infrastructure and real
estate capabilities. 

“When we started to internalise and started to do more [infrastructure and real
estate] transactions direct, we had brought in people who knew how to do
transactions, had done so in previous organisations, and also had some debt
experience,” she said. 

“Some of the first deals that we did were actually on the infrastructure debt
side, and that was as a function of interfacing with that market. We recognised
that was clearly an adjacent capability and started to look at what it would
look like to start to build out a real asset debt strategy.” 

Melville said the first step in any internalisation of management capability
starts by working with a partner.  

“We’re not so naive or arrogant to think that we can start and internalise on
day one,” she said. 

“We’ve worked with selected partners in Australia, Europe and the US to work
alongside them. We start to think about internalisation in terms what part of
the value chain we want to internalise – what makes the most sense to us.” 

Melville said it’s clear the opportunity set in private credit is much larger
outside Australia than in it, and AustralianSuper’s allocation of resources and
pace of internalisation will mirror that.  

“Origination, underwriting and asset management is 100 per cent internalised in
Europe,” she said. 

“The US is the newest office in the Australian super suite of overseas offices.
It’s been up and running for nearly three years now so we’re much earlier in
growing out that capability, notwithstanding that we do have a decent part of
our loan book there. 

“Australia will always be a part of the portfolio, but I think the extent to
which we internalise that will be a function of how much of our team we can
actually have based here in Australia. The decision as to how much we
internalise will be driven by do we need more resources in Australia versus
overseas and, ultimately, the opportunity set.” 



private credit, Jessica Melville, resolution life, Aleks Vickovich,
australiansuper, Seamus Collins, ICG, John Lucey, Matthew Turner, Mine Super

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WE ALSO RECOMMEND

PRIVATE CREDIT FORUM 2024


BUBBLE WON’T BURST JUST YET FOR PRIVATE CREDIT


Home>Events>Fixed Income and Private Credit Forum>Private Credit Forum
2024>Ultimate test for private credit investors is yet to come 


PRIVATE CREDIT FORUM 2024

PRIVATE CREDIT FORUM 2024


BUBBLE WON’T BURST JUST YET FOR PRIVATE CREDIT

Macroeconomics Advisory chief economist Stephen Anthony has predicted that the
good times for private credit will continue for another 12 to 18 months for
asset owners but said that the economy is “in a bubble” and the asset class is a
byproduct of that.
Darcy SongApril 30, 2024

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