If 2022 was a year of uncertainty, then 2023 is delivering more of the same – but that doesn’t mean investors should stick to the same old script for their portfolios.
For those with dry powder to deploy, private credit is increasingly appealing, offering a fixed-yield alternative to bonds and an opportunity for investors to preserve their capital for next-cycle deployment.
Appetite for private credit spans retail investors through to institutions, with pension funds increasingly favouring the sector to bolster their defensive position.
But in terms of portfolio allocation, it’s still an underutilised asset class. Figures from the Australian Investment Council (AIC) for 2021 show private credit increased to $1.33 billion, but it remains a very small part of the overall Australian investment market. The current fiscal climate – with rising inflation and bonds losing their safe-haven status – represents the perfect opportunity for accelerated growth.
For what private credit can deliver for investors, it’s worth looking at Iceland, which has arguably the most successful pension funds in the world, a near 50 per cent allocation to fixed income and significant exposure to offshore real estate. In 2021, Iceland’s pension funds’ 10.2 per cent real return created significant alpha over the 3.5 per cent obligation. Even with the drop experienced in 2022’s volatility, the five- and 10-year returns were higher than the obligation.
In Australia-exposure to fixed income is increasing due to the somewhat shallow corporate bond market, while international capital into the local market ¬– especially from Singapore and Hong Kong -– is on the rise.
At PropertyShares, we believe alternatives can play the role of the illiquid fixed-income asset within portfolios, providing principal preservation and attractive risk-adjusted returns.
However, although investment-grade credit is highly attractive, it’s important that a flight to quality – not quantity – is maintained. Credit risk remains key, which is where PropertyShares’ due diligence and deep investment experience come into play. As a fund and private lender, we are custodians of our client’s capital, balancing risk adjustments with strong IRR over underwrite.
Private credit will continue to provide investors with a place for defensive allocation along with principal preservation – without sacrificing yield. As mentioned earlier, the market correlation we have been seeing over the past year presents private credit as an attractive sector to weather the uncertainty.
If you’d like to find out more about what PropertyShares can offer, contact William Colbrook at william@propertyshares.com.au
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