Commentary from Paul Miron, Managing Director and co-founder of Sydney-based private credit provider Msquared Capital, on the importance of transparency in the private credit market.
“As the secured private credit market increases in popularity in Australia, it is evident that the sector is experiencing growing pains. The media is rightfully waiving red flags and highlighting that the loan book quality of certain fund managers is deteriorating with growing arrears, a lack of transparency, excess fees. Some commentators are urgently calling for the regulation of the sector, given the increasing potential of risk to investors’ capital.
“As the co-founder and Managing Director of Msquared Capital, I not only recognise, but also strongly advocate for, the need for additional scrutiny in the sector. I firmly believe that transparency and accountability are not just important, but absolutely crucial for the long-term success and stability of the secured private credit market in Australia. However, greater regulation will not resolve the lack of investor understanding on the part of some investors. Investing in private credit is isometrically different from investing in and understanding shares. Investors need to understand the various types of loans to which their capital is exposed; not enough appreciation is given to the risk of capital when investing in second mortgages and lending to specialised sectors such as construction, pubs, land, and other non-income-generating assets.
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“There is an apparent dislocation in market knowledge; some investors merely chase double-digit returns without asking some fundamental questions regarding the quality of assets that back the investment, while others are more experienced and know the key areas to focus on.
“The property market is likely at an inflexion point; debt is growing and private credit as a sector has not been tested since the GFC. Being close to the ground, I believe there is no doubt that some investors will lose money, unknowingly, because their capital has been exposed to far riskier investments than they realised. Conversely, experienced investors who understand the sector and conduct thorough research have the potential to outperform long only funds while enjoying all the defensive benefits of private credit. I encourage investors to look ‘under the bonnet’ and ask some detailed questions. Those who do will find private credit fund managers who are disciplined, have robust credit processes and offer a superior risk/reward ratio.”
