While not opposed to private markets, Roy Keenan, co-head of fixed income at Yarra Capital Management, said increased transparency and clarity on valuation policies would benefit the private credit sector.
“I’m not anti-private markets, don’t get me wrong,” he said, pointing to Yarra’s leveraged buyout strategy, which invests in senior secured loans to support private equity sponsors acquiring well-established businesses.
But Keenan admitted that one of his main concerns is the broader private credit market, which, although Yarra is not directly exposed, could reprice risk.
“I always felt that the private credit market was always where, particularly in construction and development, was one area that in some ways we didn’t have exposure to, but could reprice risk,” he said.
“I think from ASIC’s point of view or any private credit manager, transparency and having openness on valuation policies or whatever it may be can only be good for the sector in my view,” Keenan added.
Keenan encouraged portfolio managers to embrace these measures, while noting that confidentiality requirements from private agreements would remain.
“I think portfolio managers, we should embrace it. And yes, there will be confidentiality because there’s private agreements between counterparties and vice versa. But I’m sure we can find workarounds in some of those things,” he said.
The fixed income head said he fears the swift expansion of private credit could lead to credit spreads tightening excessively, diminishing the risk premium for investors.
“When you grow so quickly, that money needs to get put to work. If there is too much money in a sector, then credit spreads come in and potentially come in too tight to the point where you’re not getting paid for the risk you are taking. In some aspects, especially as the RBA is cutting rates, the actual overall return in some of those private credit areas will fall as well,” he said.
“The gap between investment grade credit and private credit is probably going to narrow over time, so investors just need to be aware of that and aware of the risks.”
Keenan’s advice is to “stick to the big managers”.
“I’m a big believer the bigger the manager, the more ability, more resources to manage through cycles.”
The corporate regulator has kept a keen eye on private markets, including private credit in particular.
Just last month, the corporate watchdog signalled it will not sit on the sidelines as private markets boom, declaring it is “not a passive observer” and will not take a “wait and see” approach.
Concerns about the private credit sector extend beyond ASIC to some advice licensees and research houses, with SQM Research announcing earlier this year it has placed the private credit sector on watch – increasing its ongoing monitoring and “made adjustments to its ratings scoresheet to place a greater weighting towards governance factors.”
InvestorDaily has learnt that SQM’s credit sector watch remains in place.
“What is critical going forward is that fund managers in the private credit sector offer full transparency on their respective loan book,” SQM’s managing director, Louis Christopher, told InvestorDaily.
“SQM now expects nothing less of our rated managers in the sector.”
Earlier this week, InvestorDaily reported that Lonsec has lowered its rating on several funds run by Metrics – the largest private credit operator in the country.
