Diversification and the quality of underlying investments must be central to any discussion about risks and opportunities in private credit portfolios, according to Nehemiah Richardson, CEO of Pengana Credit.
Richardson said the diversification potential is often overlooked in private credit discussions that centre on the Australian private credit market.
“Diversification is key to private credit investing, and the potential to fully diversify is greater in the US and European markets, where private credit plays an important role in their economies,” he said.
“It’s common to see an international manager’s portfolio with exposure to 200 to 1,000 underlying loans.
“Ideally investors will be properly diversified across geography, strategy, manager, industry, loan origination, and more.
“This is not a criticism of the Australian credit market, but an observation that it’s difficult to achieve that level of diversification across geography, industry, strategy, and origination if you only invest locally.”
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He said the banking industries behave very differently in Australia compared with the USA and Europe. “The Australian market is skewed predominantly to areas of the market where banks don’t lend and local private credit firms fill the gaps.
“Global private credit is skewed to defensive industries, including mission critical enterprise software, business services, infrastructure services, healthcare, and consumer staples.
“And within these industries, top quality managers will focus on companies with strong market positions and pricing power, flexible cost basis, low capital intensity and stable cash flows – qualities that are critical to managing downside risk,” Richardson said.
However, the key is locating long-tenured managers who have proven their ability to work through cycles, and periods of high volatility.
“The top managers have very strong origination and very large portfolios. This diversity allows them to minimise single name concentration risk and provides diverse sources of origination.
“The devil is in the detail, and within this context, it is critical investors know what they are buying.
“They need to get the information to make an informed decision on risk, reward and liquidity. If they don’t get what they need from a manager, they should pass.”
Pengana, in partnership with Mercer, has launched several different global private credit vehicles, including the TermPlus online term accounts for retail investors, the listed Pengana Global Private Credit Trust (ASX: PCX), the unlisted wholesale Pengana Diversified Private Credit Fund, and an SMA Fund.
