Metrics managing partner Andrew Lockhart said private credit is currently in a favourable environment with interest rates falling and economic activity expected to increase.
“When I look at the company earnings of all the various companies that we provide financing to, around 70 per cent of those companies are generating higher earnings today than they were 12 months ago and that’s actually quite a good environment for a lender," Lockhart told Investor Daily.
With the reduction in interest rates and business conditions starting to normalise, Lockhart said it’s also likely that insolvency rates may start to return to a more normal level.
“As interest rates come off, more normalised economic activity and conditions are expected to come through,” he said.
Lockhart said despite the outlook for credit quality looking positive overall, the fund continues to carefully assess risk based on a bottom-up fundamental assessment, with the broader macro environment still presenting risks to certain types of businesses.
Metrics continues to avoid companies with more cyclical earnings which may be vulnerable to changes in commodity prices and production volumes, trade disputes and foreign currency risks.
“They’re not the kind of businesses that we would look to lend to as they’re more of an equity market risk,” said Lockhart.
“As a lender you want to avoid companies where you’ve got volatility in cash flows or earnings. You’re looking for companies that have a more stable earnings base so that you’ve got a greater degree of confidence that through any economic cycle, a business is going to be able to generate sufficient cash to be able to service and repay their debt.”
Lockhart said companies with more volatile cyclical earnings are likely to be impacted by trade negotiations between governments, foreign currency fluctuations and changes in production volumes.
"From our perspective, we want to mitigate that risk. And so you're looking for companies that aren't necessarily exposed [to those risks]," he said.
With inflation easing and interest rates coming down, Lockhart also expects demand for private credit from the real estate sector to increase from here.
“We’re seeing strong, pent up demand for residential housing,” he said.
“The macro position is strong. Unemployment levels are low and we’ve got strong population growth from immigration so demand for residential housing is quite high. There’s also a lag in supply.”
The reduction in interest rates is likely to help moderate construction costs and create an environment where there’s more demand for financing for projects such as the construction of residential apartments, he explained.
In a separate conversation with InvestorDaily earlier this year, Lockhart expressed concern about Metrics being unfairly tied to broader scrutiny of the private credit sector.
“We operate in a market where we’re transparent and happy for people to scrutinise our funds, our performance. All I ask is that people compare based on fact,” he said at the time.
Metrics, Australia’s $22 billion non-bank lender, has come under the spotlight alongside its peers following ASIC’s paper on private markets, which has sparked ongoing industry debate.
However, Lockhart at the time insisted that Metrics’ performance and governance standards speak for themselves.
“If you look at Metrics’ funds over a 12-year period, we've never had a negative month … and we've been a proactive manager of our investors’ capital to protect and preserve their position,” he said.
“If Metrics is seen as the largest and most prominent manager, maybe the question ought to be: Why is that? Is it because we’ve delivered strong returns, managed risk consistently, adhered to high corporate governance standards? We're transparent with our investors, we don't have any conflicts of interest, and we're subjected to independent oversight and review of our funds.
“We certainly operate under the highest governance standards globally.”
Back in June, ASIC chair Joe Longo confirmed the regulator would release new research into private credit “around” August, as it considers regulatory reform aimed at improving transparency in private markets.
Speaking at a lunch at AmCham in Sydney on Thursday, Longo said the research – commissioned by ASIC and conducted by an unnamed party – will underpin further industry consultation and forms part of the regulator’s broader capital markets review.
Also at the time, Longo revealed that ASIC has “some models, some ideas” regarding how it might tackle private credit in particular, adding that a final framework is yet to be shaped.
“I have no intention in making Australia a more difficult place to invest or to create more regulatory complexities than we already have,” Longo said.
“I do feel strongly that there probably needs to be some adjustment to our regulatory settings around data and transparency … Haven’t quite figured out what that looks like yet, but I think it will be in everybody’s interest that the regulator gets the right data as efficiently as possible, in a standardised way and in a way that is of benefit to market participants.”
