A wealth manager has recognised allocations to private credit in an investment portfolio can play different roles, but in order to benefit from this multifaceted characteristic of the asset class individuals need to have a good understanding of their situation.
“One of the things we continue to highlight to investors is that the risk profile [of private credit] is different depending upon where you sit in the capital structure,” Metrix Credit Partners managing partner Andrew Lockhart told attendees of an industry briefing he held recently.
“For those investors who are looking for private credit to play a defensive allocation as part of a portfolio decision, then obviously investments in senior secured debt in a well-diversified pool can act to lower investment risk and provide a greater degree of stability around investor capital.”
“[On the other hand], investors who are looking for equity market replacements might be more interested in moving towards higher-yielding debt and subordinated or mezzanine debt or debt where the manager also participates in equity upside through warrants or options or acquiring an equity interest directly.”
Lockhart also took the opportunity to dispel any investor concerns over recent discussions as to the perceived risk levels associated with allocations to private credit.
“I think there has been a lot of inconsistent commentary in the press, particularly in relation to the idea that there was this wall of insolvencies pending and private credit was exposing investors to this undue, unnecessary risk of credit loss,” he said.
“But when we look at the data across the market, the largest areas of insolvencies has been in the construction sector and it’s primarily smaller contractors where their business is [worth] less than $10 million.”
He pointed out the insolvencies came about due to increased construction costs, which meant any fixed-price arrangements these contractors entered into were unable to be honoured.
“But that is very much at the small end of the market,” he suggested.
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