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Private debt asset class still strong

private debt returns

An investment research firm has identified private debt as an asset class offering investors attractive risk-adjusted returns.

Australian private debt continues to offer some of the most attractive risk-adjusted returns currently available to investors, an alternative asset ratings firm has said.

According to Evergreen Ratings chief executive Angela Ashton, stricter guidelines placed on Australian Prudential Regulation Authority (APRA)-regulated authorised deposit-taking institutions (ADIs) in recent years had led to an increasing number of borrowers seeking funds outside traditional banking sources within the domestic market, while non-ADIs had also seen more lending opportunities, resulting in a higher level of selectivity in terms of which loans to go ahead with.

“The market dynamics are supportive of attractive risk-adjusted loan pricing which presents an opportunity for a capital provider to earn excess returns,” Ashton noted.

In addition, she pointed out the continuing impact of the COVID-19 pandemic on markets meant investors seeking yield had fewer opportunities to choose from, making private debt an even more attractive option.

“People are struggling to find good sources of consistent yield. Private credit is an asset class that can help to fill that portfolio need and we are seeing more and more of these types of funds approach us for consideration,” she said.

Investors considering this asset class should also be aware not all funds investing in the sector were equal, Ashton added.

“There are important nuances in lending practices and the types of borrowers each manager targets. It’s important to understand the risk each fund is taking and to ensure you are being properly rewarded for that,” she explained.

“[Private debt is] one of the few asset classes where the skillset of the manager can actually demonstrate the ability to preserve investor capital.

“We do not believe the fundamentals of this market in Australia will deteriorate over the foreseeable future.”

In December, JP Morgan global market strategist Kerry Craig predicted alternative investments would play a bigger and more conventional role in investment portfolios to complement and support underperforming traditional asset classes over the next 10 to 15 years.

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