In our recent webinar with the Australian Shareholders Association, Dean Weinbren, Managing Executive of TermPlus, introduced investors to the fast-growing world of global private credit and how TermPlus provides access to this institutional-grade asset class.
Key Highlights:
• What is private credit?
Private credit is one of the oldest asset classes in the world. To put it simply, it’s lending. To be more specific, private credit refers to non-bank lending.
• Where did private credit come from?
One of the primary catalysts for the explosive growth of private credit (globally over the last 15+ years) was the Global Financial Crisis (GFC). The regulatory response to the market turmoil rewrote the rule book and introduced much tougher capital rules and restrictions for bank lending, and ultimately led to banks retracting from significant (and growing) parts of the corporate lending markets.
• How has it evolved?
Over the last 15 years, global private credit is widely acknowledged as one of the world’s fastest growing asset classes.
The impact of the regulatory changes implemented following the GFC means that, in global markets, private lenders are now the first “port of call” for an ever-growing subset of corporate borrowers.
Banks are scaling back lending as regulation makes access to certain markets more restrictive for them, and as a result non-bank lenders now dominate the global lending sector with over 80% of all loans generated outside of the banks.
• The difference between Global vs Australian private credit
Investors familiar with Australian private credit may make the mistake of assuming they KNOW global private credit – but the truth is that comparing the two is like comparing apples and oranges…
Due to the structure of the banking sector here in Australia, banks still account for ~90% of the corporate lending market. The remaining 10% in the private credit sector is predominantly concentrated across real estate, with any other strategies being on a much smaller scale. It is much less diversified and ultimately driven, to a large extent, by the Australian macro economic environment, particularly economic activity and interest rates.
Globally – this dynamic is very different.
• Private lending makes up a significantly bigger piece of a significantly bigger pie (over 80% of the entire lending market in the US and Europe) – it’s a large, highly diversified and mature market that is widely accepted as the default form of access to capital for many borrowers and investors.
• The maturity of the global private credit market also means that the market is dominated by long tenured managers, with solid track records, investing in a market with structural protections and dynamics that further drive growth.
• The Characteristics of global private credit as an asset class
Global private credit has shown a historical track record of resilience versus other asset classes across a variety of economic environments.
The low default rate and high recovery rate displayed by global private credit ultimately delivers an asset class with superior risk/return characteristics and proven performance through volatile periods when compared to many other traditional fixed income asset classes.
• Barriers and Risks involved in investing in global private credit
Some of the key risks that present themselves in investing in global private credit include:
– Borrowers defaulting on their loans – especially if they are not due diligenced, underwritten and managed properly.
– Broader economic or geopolitical events can impact returns – especially to the extent that loans are made to cyclical sectors, or companies heavily reliant on policy or economic conditions.
– Many loans are illiquid and can be more challenging to price, which means allocating to the right managers, with the right experience and methodologies are essential.
– Currency risk, given most investments are overseas, and currency movements may affect returns if hedging is not applied.
– And ultimately, performance depends to a large extent on the skill of underlying fund managers.
• How we have mitigated those risks through some innovative new vehicles
We work closely with Mercer, who have been appointed as investment consultant and have developed a portfolio of underlying funds that invest in over 3,500 underlying global private credit investments that drive returns for TermPlus account holders. Mercer is a global investment leader (responsible for over USD $17 Trn in assets under advice), with over 2,000 investment professionals around the world, and more than 30 years’ experience in private markets.
This association with Mercer enables TermPlus to deliver a diverse portfolio of best-of-breed global private credit investments for our customers.
In addition, we co-invests alongside customers in TermPlus into a Support Account, which provides an additional pool of capital to deliver 3 distinct layers of extra account protections aiming to deliver both reliable income and stability of capital for our investors.
