Key Takeaways
- • Asset allocators continue to deploy capital into private credit, now estimated at $US2.5 trillion globally and roughly $200 billion in Australia, even as high-profile collapses such as Bathla Group, Tricolor and First Brands Group have drawn scrutiny to the sector, according to a roundtable hosted by Investment Magazine with PGIM.
- • Panelists warned that a flood of capital has compressed returns and loosened underwriting standards, with Genium's Chris Lioutas saying financial engineering is being used to lift returns back to 8-10 per cent.
- • Retail investors accounted for an estimated 13 per cent, or $US280 billion, of private credit assets by 2025, mostly through BDCs, per the Bank for International Settlements, raising liquidity mismatch concerns.
- • Software loans, exposed to AI disruption, have driven retail redemption pressure in the US, forcing some funds to gate, while the IMF estimates one-fifth of direct-lending loans sit in software.
- • Participants agreed quarterly independent valuations should be standard, but disputed what 'independent' means, with Zurich's Yile Chen noting that manager-provided shadow ratings undermine independence.
Summary
Private credit continues to deliver for asset owners even as a series of collapses has put the sector's transparency, governance and risk management under a harsh spotlight. Speaking at a Conexus Private Credit Under the Spotlight roundtable hosted by Investment Magazine in partnership with PGIM, Michael Jones, managing director and head of PGIM Australia private credit, said "it's only the bad that gets publicised," adding that institutional deployment shows the asset class will remain attractive. The sector has grown to an estimated $US2.5 trillion globally and roughly $200 billion in Australia as investors sought yield and diversification in a once-low rate environment. Collapses including Sydney property developer Bathla Group and US companies Tricolor and First Brands Group have raised concerns about risks within the sector.
Panelists said abundant capital has intensified competition for deals. Chris Lioutas, co-chief executive and CIO at Genium Investment Partners, said there is too much money chasing too few quality assets, producing lax underwriting and weaker credit quality. Linda Cunningham, head of debt and alternatives at CBUS Super, said wealth capital has forced managers to deal, and CBUS reviewed about 40 deals last year but closed about 12. Retail demand for liquidity from an illiquid asset class was also flagged; the Bank for International Settlements estimates retail held about 13 per cent of private credit assets by 2025. Anthony Tsingos of Frontier said retail investors lack the scale for adequate due diligence.
Concentration risks were a major theme. Software loans, which may be disrupted by AI, have been a key driver of US retail redemptions, and the IMF estimates one-fifth of direct-lending loans are in software, with exposure possibly exceeding half of net asset value for some leveraged vehicles. In Australia, Cunningham and Colonial First State's Robert Graham-Smith cautioned about property concentration, with Graham-Smith noting CFS therefore focuses its private credit strategy offshore. AMP's Kunal Kotwal highlighted healthcare vulnerabilities exposed during COVID.
Transparency and structure were central to due diligence discussions. An ASIC-commissioned review found disclosure quality varied widely. CBUS does not invest in pooled vehicles, while Zurich's Yile Chen favours separate mandates or fund-of-one structures. Graham-Smith said CFS uses well-structured evergreen funds, stressing they are not wealth vehicles and offer no 5 per cent quarterly liquidity. Genium advises treating quarterly-redemption evergreen products as five-year lockups, a stance Lioutas said some managers dislike. Lioutas also said some wholesale managers had not provided basic information despite multiple non-disclosure agreements.
Valuations were flagged as a priority. Jones cited surprises in valuation approaches and quarterly magnitude of changes, while Chen said he had not seen a fully independent valuation. Aware Super's Leo Yang noted some managers hold loans at cost unless formally impaired. Julia Humphries of Australian Retirement Trust said regulators want to avoid surprises and expect gradual markdowns. ASIC cited the Bathla collapse in underscoring the need for governance, oversight, disclosure and accurate valuations.
Panelists said abundant capital has intensified competition for deals. Chris Lioutas, co-chief executive and CIO at Genium Investment Partners, said there is too much money chasing too few quality assets, producing lax underwriting and weaker credit quality. Linda Cunningham, head of debt and alternatives at CBUS Super, said wealth capital has forced managers to deal, and CBUS reviewed about 40 deals last year but closed about 12. Retail demand for liquidity from an illiquid asset class was also flagged; the Bank for International Settlements estimates retail held about 13 per cent of private credit assets by 2025. Anthony Tsingos of Frontier said retail investors lack the scale for adequate due diligence.
Concentration risks were a major theme. Software loans, which may be disrupted by AI, have been a key driver of US retail redemptions, and the IMF estimates one-fifth of direct-lending loans are in software, with exposure possibly exceeding half of net asset value for some leveraged vehicles. In Australia, Cunningham and Colonial First State's Robert Graham-Smith cautioned about property concentration, with Graham-Smith noting CFS therefore focuses its private credit strategy offshore. AMP's Kunal Kotwal highlighted healthcare vulnerabilities exposed during COVID.
Transparency and structure were central to due diligence discussions. An ASIC-commissioned review found disclosure quality varied widely. CBUS does not invest in pooled vehicles, while Zurich's Yile Chen favours separate mandates or fund-of-one structures. Graham-Smith said CFS uses well-structured evergreen funds, stressing they are not wealth vehicles and offer no 5 per cent quarterly liquidity. Genium advises treating quarterly-redemption evergreen products as five-year lockups, a stance Lioutas said some managers dislike. Lioutas also said some wholesale managers had not provided basic information despite multiple non-disclosure agreements.
Valuations were flagged as a priority. Jones cited surprises in valuation approaches and quarterly magnitude of changes, while Chen said he had not seen a fully independent valuation. Aware Super's Leo Yang noted some managers hold loans at cost unless formally impaired. Julia Humphries of Australian Retirement Trust said regulators want to avoid surprises and expect gradual markdowns. ASIC cited the Bathla collapse in underscoring the need for governance, oversight, disclosure and accurate valuations.
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