US private credit provides the perfect combination for investors seeking high yields, steady income, and minimal volatility. When you factor in the diversification benefits of a portfolio, it becomes evident why investor demand for US private credit is rising so quickly.
Australian investors might not have as much experience with US private credit, despite the fact that there are many distinct strategies available with varying asset classes, quality levels, market returns, and structures.
The US Federal Reserve characterizes the demand for US private credit as having experienced “exponential” expansion. The current valuation of the US private credit market is $US1.7 trillion ($2.6 trillion), which is somewhat less than the total amount of bank loans.
US private credit is categorized as an asset class under “fixed interest.” But because of the high capital requirements or the more intricate structures that are only accessible to wholesale investors, it has historically been a very challenging market for individual investors to enter.
However, investors now have the option to use retail-focused private credit funds to add private credit assets to the fixed interest portion of our portfolios.
The operation of these funds is similar to that of traditional managed funds. A variety of borrowers receive loans from a pooled pool of investors in a number of methods.
From this point on, investors have to anticipate a consistent income return, frequently with rates that are really alluring. Generally speaking, yields on US private credit have averaged 9.34% annually over the last 20 years.
The loans that support US private credit are not traded on open markets, as the name implies. This is a significant benefit since it implies low volatility for private credit funds, which is desirable for investors looking for low volatility.
Five recommendations for US private credit managers
US private credit can be easily and readily invested in by using a fund. Additionally, when new products become more popular, more managers are responding to investor demand.
This highlights the necessity of carefully choosing a manager: Transparency, skill, and expertise can provide a lot of value for investors.
It is common sense to understand the investment you are making. While some US private credit managers have a broad focus, others may concentrate on particular market niches like distressed credit.
It’s important that you understand the components of the investment portfolio that backs the product and that you feel at ease with the underlying lending model.
There will be variations in the underlying portfolios. These portfolios can be “pure-plays,” consisting exclusively of loans that are bilaterally negotiated and directly originated (direct lending).
These can be hybrid portfolios that include a combination of widely syndicated (public), asset-backed finance agreements, collateralized loan obligations (CLOs), and direct lending loans.
Everything you need to know will be explained in the product disclosure statement (PDS). Sure, it can be a long document, but it’s important to read it to make sure you are investing in a reliable source.
The following are frequent traits of good private credit managers: they have management teams with experience, they use straightforward, easy-to-understand structures, and they invest in high-quality assets.
A quality manager will, crucially, have knowledge of several market cycles. A manager who has experienced both good and bad times in the past will have the knowledge and expertise to weather the entire economic cycle.
For instance, La Trobe Financial has over 70 years of experience in the Australian real estate private loan sector. It is a heritage that enables us to apply tactics that we know are effective for investors by drawing on prior experience.
Similarly, Morgan Stanley has survived several market cycles and is likely the strongest direct lending private credit platform operator in North America.
To augment this diversification, seek out a private credit manager that provides a wide range of underlying loans.
A single loan default can have less of an effect on the credit fund’s overall results the more loans and borrowers there are.
Are you able to see the investments made with your money? The alarms need to go off otherwise.
Openness is important. It demonstrates that a fund manager is transparent and enables you to make well-informed financial decisions.
Determining if US private credit is appropriate for your needs, risk tolerance, and preferences requires careful consideration of this degree of transparency.
Investing in US private credit can be appealing. The drawback for Australian investors is the unavoidable foreign exchange risk associated with overseas assets.
Finding a US private credit manager that provides Australian dollars for investment as well as currency hedging for your invested funds is the easy fix.
Investors can now access US private loans without being significantly impacted by fluctuations in currency values on their personal savings.
Many different types of investors find US private credit to be an attractive investment because to its good yield profile and low volatility.
You can be sure that you will have access to a varied portfolio of loans that should do well in the long run if you carefully select your manager.
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