Protecting Capital.
Powering Wealth.

As we close the chapter on 2024 and prepare for the challenges and opportunities of 2025, we find ourselves in a landscape shaped by significant developments, opportunities, and challenges in the Australian credit market. Our focus remains steadfast on the critical factors that influence our investment strategy and portfolio management.

The persistently elevated RBA cash rate remains a central concern, directly impacting the health of household balance sheets. While these elevated rates introduce certain headwinds, they simultaneously offer opportunities for savers and investors seeking superior yields. The geopolitical landscape, marked by trade tensions, continues to demand our attention due to its potential to exert inflationary pressures and disrupt global supply chains. In parallel, while business trading conditions present challenges within specific sectors, there is cautious optimism due to encouraging signals from forward-looking economic indicators.

Throughout 2024, we have meticulously maintained the integrity and resilience of our portfolio. Key risk metrics within the Fund's holdings, such as arrears remain at sound levels, comfortably within the covenants designed to safeguard our capital across all transactions. We are also pleased to report that all our positions are performing robustly, reflecting our rigorous transaction analysis and high credit standards.

Despite the uncertainties that the market presents, our fund is well-prepared to adapt and thrive. We have strategically diversified our portfolio to minimise risks and seize emerging opportunities. Our investment approach is inherently flexible and adaptive, enabling us to respond effectively to market changes. We anticipate that a well-structured, diversified, and actively managed portfolio of fixed income assets will continue to outperform more volatile asset classes.

As we transition into the new year, our commitment to capital preservation and delivering consistent income to our investors remains unwavering. We are optimistic about our ability to navigate the evolving economic landscape and are excited about the opportunities that 2025 holds.

We are thrilled to unveil our refreshed branding that brings our vision and philosophy to life.

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Manning Asset Management Pty Ltd (ACN 608 352 576, AFSL 509561). This video contains general information for wholesale clients and has not been prepared having regard to your investment objectives, financial situation or specific needs.

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Market Outlook

As we approach the end of 2024, we reflect on a year marked by significant developments and evolving dynamics in the Australian credit market. This year has underscored the importance of our disciplined investment approach and our commitment to capital preservation. We are pleased to share our insights and performance highlights with you.

2024 has been a transformative year for the Australian credit market. The increased interest and demand for credit assets have driven yields lower, both in listed and private markets. This shift has been accompanied by heightened competition from other fund managers and domestic and international banks. Despite these challenges, our focus on maintaining high credit standards and rigorous transaction analysis has ensured the resilience of our portfolio and a commitment to delivering best-in-class returns and income to our investors.

Key Themes of 2024

1. Increased Competition and Market Evolution: The Australian credit market has continued its evolution towards a more mainstream asset class. This shift has driven significant investment and sophistication within the industry, benefiting our investment model and making it an attractive destination for transactions.

2. Economic Contraction and Monetary Policy: The year saw typical signs of a contractionary phase, including a softening labour market and higher interest rates. We have closely monitored these developments, particularly the implications for the RBA cash rate and its impact on our investment strategy.

3. Asset-Backed Securities and Structural Protections: Our focus on asset-backed securities has been a cornerstone of our strategy. We have implemented robust structural protections to safeguard investor capital, ensuring that our investments can withstand economic stress and deliver consistent returns.

4. Fiscal Policy and Government Spending: Government spending and fiscal policy have played crucial roles in shaping economic conditions. We have balanced these factors with our investment decisions, maintaining a cautious approach to areas most affected by weakening GDP and employment conditions.

5. Investor Sophistication and Engagement: The growing prevalence of credit within investor portfolios has led to a more discerning investor base. We have been impressed by the sophistication of the Australian financial advice ecosystem and the detailed questions we receive about our strategies.

As we move into 2025, we remain cautiously optimistic. While uncertainties will always persist, we are confident in our ability to adapt and capitalise on emerging opportunities. Our investment approach will continue to emphasise diversification, quality, and sustainability. As markets shift and opportunities and risks arise, we pride ourselves on crafting considered and deliberate strategies that are proven over time and we are relentless in our commitment to protecting and growing our clients' wealth.

Manning Asset Management’s Josh Manning joins Livewire for a very different interview on the burgeoning private credit space.

Note: This interview was recorded on Thursday 10 October 2024.

Australians would have heard plenty of reasons over the last few months for investing in private credit right now.

Asset managers and financial advisers have repeatedly told us that they are allocating more and more to the asset class. The high-net-worth world is reportedly also positioning more of its portfolios towards private credit. And private credit managers – across the asset class spectrum – are quick to spout its benefits.

But what about the reasons why you shouldn’t invest in the asset class – particularly as new managers and lenders come to the fore?

In this interview, Livewire sat down with Manning Asset Management’s Josh Manning for his insights into the red flags he is seeing in the market right now, the biggest lies he’s been told (and repeatedly so) by lenders, and why the idea that there’s no cycle in private credit is a bit of a furphy.

Why you should be careful when investing in private credit

When Manning Asset Management was established back in 2015, private credit was a relatively unknown asset class and was not prevalent in many portfolios.

“You then went through a stage where people thought all private credit was interchangeable; construction finance was the same as asset-backed securities, or lending to lenders was the same as non-investment-grade corporate lending,” Manning said.

“Fast-forward to today, everyone’s talking about it, and there are lots of glossy brochures around the benefits of investing in it.”

In recent years in particular, we’ve seen an explosion in construction financing, at the same time as the Australian property market has continued on its path higher.

“What that means is if you purchase a property and then you hold it for 12 months, typically, you’re selling it for more than what you bought it for, and that covers up a lot of challenges in the fundamentals of that loan,” Manning said.

Going forward, Manning believes we are unlikely to see the same level of price appreciation – meaning the fundamentals are far more important.

“At the same time, we’re seeing this huge influx of capital and competition into that asset class. If there’s one takeaway, I think investors really need to think about that – how strong these actual loan opportunities are and how clear is that exit,” he said.

Does private credit have a cycle?

While we are taught that all asset classes have cycles – equities go through booms and busts, commodities ride the rollercoaster, and bonds, linked to interest rate expectations, also can swing wildly – whether or not private credit has a cycle remains up for debate.

“The idea that private credit doesn’t have a cycle is quite novel. I don’t necessarily agree with that,” Manning said.

“So, typical asset classes ride an economic cycle, boom to bust, it’ll oscillate in a range with returns there. Credit, I think, is a bit different.”

Manning argues that credit has had its own cycle as an asset class – from its very early stages to the growth curve that it is experiencing today. Shifting credit spreads, he argues, demonstrates that there is a cycle in private credit. Credit conditions, such as the terms of loan arrears, also appear to shift and shape, and thus have a cycle.

“At some stage, [we will see] a maturing of that cycle, and the characteristics of that maturing will be more institutionalisation of that asset class. This is not dissimilar to what we’ve seen in US and European markets,” he added.

“At that stage, there will be more divergence in those that prevail and those that don’t succeed in that environment.”

That said, he doesn’t believe the maturing or institutionalisation of the asset class will result in losses for investors.

“I don’t see there being this cataclysmic cliff that we’re going to drive off and huge losses,” he said.

“I think we’re seeing a huge increase in competition in the asset class – a lot of new managers, a lot of new players bidding for transactions. That will bid down credit spreads, that will bid down expected returns, and not everyone will be able to endure.”

For instance, those that relied on wide spreads to survive, with big upfront fees to propel their businesses, will likely face challenges going forward as spreads tighten.

And while more managers are likely to enter the space as investor interest skyrockets, fewer managers are likely to prevail. Although those that do will likely become more sophisticated in the face of tougher regulation, Manning said.

Red flags to spot the fakers from the true private credit winners

1. Documentation risk

As Manning explained, this is lending where the fundamentals of the documentation vary considerably in terms of quality. Lower quality or inadequate documentation may have worked in a buoyant market when the borrower can easily make repayments, and the investors are getting a good rate of return – but when there are headwinds, and the borrower is unable to make their loan payments, they may want to challenge those documents, and that is a risk.

2. Fraud

Whether we like it or not, there’s fraud in every asset class, Manning said, so investors need to think about this when assessing lenders and managers that they want to invest in.

3. Highly leveraged exposures

Highly subordinated or very leveraged exposures are another area that investors should be aware of. There’s a lot more risk, Manning said, and you may not be getting as rewarded for taking on this risk as you used to.

4. Arrogance

If investors get a “whiff of arrogance” from managers they are dealing with, that’s an important telltale warning sign and red flag, Manning said. The big banks, who are fantastic underwriters, are very careful and realise they can get bitten if they make the wrong decision. Private credit managers are also not immune to mistakes.

The big lies lenders are telling managers

As a specialist in asset-backed lending, Manning Asset Management looks at all the lenders across the Australian market and assesses whether or not they should be providing wholesale funding to them.

“We speak to probably 15 or 20 lenders a month. And there’s a mix of people that give us the bare bones, “This is what’s happening. These are the things in our book.” And there are others that put a marketing spin over it,” Manning said.

1. “We don’t have any problems in our book”

While this would be ideal, it’s probably a furphy, Manning said – noting that even if lenders make the best possible underwriting decision, facts can change and the borrower may not be able to make their repayments.

“That’s no fault of the lender. That’s a reality, and you need to just work with those borrowers and find a way to get your capital back,” he said.

If a lender is saying they “don’t have any problems” it either means they haven’t been lending for long enough, they’re not thinking about the risks, or they’re not being completely transparent.

2. “We’ve never had a loss”

Holding up the concept of zero losses as a holy grail is also fraught with risk, Manning said, as losses from lending and credit have been “very lumpy” throughout history.

“There’ll be periods where there are heightened losses. It’s not this beautiful smooth line through time that oscillates marginally,” he said.

Just because a lender hasn’t faced a loss so far, doesn’t mean they are immune from losses in the future – and the arrogance that they won’t is a red flag, Manning added.

Why investors should consider the asset class

Lending has been a very prevalent and sophisticated asset class in Australia over the last 40 years, Manning said, with well-understood risk management approaches, mechanisms and philosophies around transaction and lending management.

“I think, if you can really pull the complete understanding around that sophistication in the asset class and embed that in your business and how you run money, you can mitigate a lot of the risk,” he said.

Glossy marketing brochures, for all their issues, aren’t completely wrong – the asset class provides investors with consistent inflation-adjusted returns and income.

It doesn’t mean the asset class is immune from risks, and investors need to be careful about which managers they align themselves with as competition increases, but there’s still plenty of opportunity on offer – you just need to know where to look.

And remember, if it sounds too good to be true, it probably is.

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Australia’s credit market continues to experience increased interest and thus demand for assets, pushing listed credit asset yields lower, which has flowed through to private or unlisted markets. As a specialist in asset backed securities or lending to lenders,  we see increased competition both from other fund managers and domestic or international banks who are actively seeking to grow their portfolio of credit assets. While domestic banks are governed by APRA primarily under APS120, limiting their risk profile/appetite, some international banks have less restrictive policies/regulations or may even have access to alternate sources of capital (I.e. in house or related party investment funds) enabling a higher risk profile/appetite. It is, therefore, of the utmost importance that credit standards and access to transactions remain at the forefront of our approach.

The above dynamic is a natural progression of the Australian credit market moving towards a more mainstream asset class rather than a less prevalent ‘alternative’ in investor portfolios. This evolution dynamic shall drive more significant investment and sophistication by the Fund manager that operates within it, while also seeing investment models with high manager fees and yields lose relevance. Overall, we welcome this evolution as we are constantly reassessing to ensure our investment model is a beneficiary of such industry changes and thus, an attractive destination for transactions.

As our minds turn towards the festive season and end of the calendar year, we would like to thank all our investors and advisers for their increasing support and engagement. Our continued investment in our team and investment process is only possible with your support.

Manning invests in a range of asset-backed portfolios which we quantitatively and qualitatively assess to determine their resilience and overall credit quality.

Central to the Fund’s strategy is rigorous transaction analysis and robust structural protection mechanisms across all assets. Each investment is evaluated with stress testing and credit protections embedded in the transaction documentation, ensuring comprehensive risk management safeguards our investments.

As part of our analysis, the following are some of the factors considered:

• Borrower Default Rates and Asset Value: Increases in borrower default rate assumptions and a reduction in asset / collateral value that reflect prolonged recessionary conditions and rating agency criteria. Further haircuts will be assumed on assets that are likely to experience more volatile valuations during periods of stress. Likewise, individual borrower and loan characteristics will be considered in the determination of stressed default rates.
• Asset Yield: A reduction in asset yield caused by market fluctuations and rising arrears, and investors demanding increased margins resulting from a trigger event or deteriorating economic conditions.
• Delays in Liquidation: We assume significant delays in liquidating assets that are securing underlying loans. We incorporate the accrued interest on defaulted loans during this liquidation period in our analysis.

The Manning Team models varying degrees of economic stress to estimate expected losses and determine required structural protections, such as the arrears tolerance on underlying loans and subordination prerequisites. Unlike direct lender funds (funds where the manager is also the lender/originator of the loans), where investor capital losses typically occur immediately if a borrower defaults and the asset value falls below the loan amount, our structures offer additional protection. In an asset-backed structure, investor capital is at risk only when the first loss or subordinated capital is eroded. We have implemented structural protections that trigger amortisation before losses or arrears reach a level that threatens investor capital. These protections prioritise investor interests and mitigate downside risks.

These are a sample of the measures we implement to protect investor capital and have been instrumental in maintaining our 8+ year track record of achieving the Fund’s RBA cash rate 5% net of fees objective through the economic cycle.