According to specialist asset ratings firm, Evergreen Ratings, run by Angela Ashton, who also operates the growing investment consultancy business, Evergreen Consulting, private debt markets continue to offer “one of the most attractive risk-adjusted return profiles” in the market.
Commenting after the release of the latest research report, in which Global Credit Investments, or GCI’s, Commercial Finance Fund was awarded a ‘Commended’ rating, Evergreen is bullish on the sector, but notes that not all strategies in the sector are built the same.
In recent years, the major banks and other authorised deposit-taking institutions (ADIs) have retreated from private and corporate lending, citing more onerous macro-prudential guidelines and the requirement to hold additional capital to support these opportunities. This has seen “more borrowers seeking funds outside traditional banking sources,” says Ashton.
A confluence of events has resulted in a unique opportunity in the sector, with the withdrawal of the major banks improving “market dynamics” and “loan pricing,” while on the other hand, falling term deposit rates and dividend cuts mean investors and advisers are starved of “good sources of consistent yield.”
The increasing flow of potential lending opportunities, in a market that mainly relied on the banks until a few years ago, is allowing groups like GCI to be more selective about which loans to proceed with.
Ashton notes the alternative “premia” available in private debt markets that are all but gone from traditional fixed income and equity deals, highlighting the illiquidity and complexity premium as key drivers of the higher returns. GCI’s Commercial Finance Fund targets an annual return of 8.5% by investing into senior commercial debt facilities secured by real and financial assets.
GCI was co-founded in 2015 by Steven Sher and Gavin Solsky. Sher spent 17 years in senior investment and executive roles at Goldman Sachs, while Solsky founded the professional services and outsourcing firm Portland Group. The fund was launched in July last year, when two established GCI funds were merged. It has returned 9.3 per cent on an annualised basis since then and it has not recorded any loan defaults. The ‘Commended’ rating from Evergreen may well be a launching point for an expansion of the strategy.
Whilst confident in the outlook, stating that “we do not believe the fundamentals of this market in Australia will deteriorate over the foreseeable future” Ashton offers a word of caution, noting the importance of ‘nuance’ in lending practices and “understanding the risk each fund is taking to ensure you are being properly rewarded for that”.