This article first appeared in Preqin First Close.
Uncertainty – economic, financial, and geopolitical – continues to make things complex across financial markets. In private credit, uncertainty has been intensified by the question of how big AI will really become – and its potential impact on different software-related business models.
As Nicholas Mairone writes in our quarterly update for subscribers to Preqin’s Private Markets Research, investors want to see how managers navigate more turbulent times: ‘We anticipate more focus on underwriting and risk management for this reason.’ But he adds: ‘The long-term trends supporting the asset class remain in place.’ AUM is still growing.
US business development companies (BDCs) have dominated headlines recently, so it’s more important than ever for investors – institutional and non-institutional – to differentiate between the wide range of strategies and assets in private credit.
Preqin First Close asked Frank Danieli, Head of Global Credit Solutions at Sydney-based ASX-listed alternative asset manager MA Financial Group, about this differentiation theme.
‘Private credit globally has come to be synonymous with sponsor-backed or leveraged finance – loans to fund the buyout of companies by private equity. That’s one very narrow subset. It makes up 15% of the opportunity but the vast majority of private credit mandates globally.’
In fact, the asset class includes many more niches, he explains, including home loans, car loans, business loans, and equipment.
MA Financial is also active in real estate and hospitality, with $15bn AUM and $179bn in managed loans. Asset-backed lending accounts for 66% of its private credit AUM, followed by direct asset lending (such as real estate) at 20%, and direct corporate lending (such as buyouts) at 14%.
Frank has an international perspective, given that the firm employs 900 professionals across Australia, New Zealand, East Asia, Southeast Asia, and the US.
Investors need to differentiate between geographic markets. For example, Frank argues Australia has been ahead of the game in the expansion of private credit. The country has a concentrated banking system. Following the Global Financial Crisis, it was robustly regulated on prudential capital standards.
‘It resulted in our banks materially scaling back the kinds of things they do directly. And that's when the private credit opportunity came up.’ Banks could participate via partnerships with asset managers and other types of non-bank lenders.
MA Financial is expanding its asset-based lending activities, particularly in the US. ‘We think it’s going to be the largest growth area in private credit. In a decade's time when people talk about private debt, they will mainly mean asset-backed lending because the size of the opportunity is so large.’
And confidence in the asset class as a whole? Frank says the job of a private credit asset manager is threefold: making the right investments (and avoiding potentially problematic loans); well-structured portfolio management ‘operated in a robust way’; and effective risk management.
‘Those three pillars need to be seen as equal.’
