About Private Debt
Private debt refers to the provision of non-publicly traded debt finance to consumers and businesses. Examples of debt finance include consumer loans (unsecured including credit cards or personal loans and secured such as car leases), business loans (secured including invoice financing, or supply chain finance and unsecured working capital loans) and residential or commercial property mortgages.
Private debt can offer a real return profile, a steady income stream, low volatility, a level of capital stability; and portfolio diversification. This may be attractive to investors.
It is important to note that like all investments, investing in the Manning Private Debt Fund (Fund) involves a level of risk. Investors should, before deciding to invest, read the Fund Information Memorandum and consider seeking independent advice.
The loans market has historically been the domain of the banks and ADIs, but with recent technology developments, changing consumer attitudes and regulations in recent years, there has been significant growth of non-bank activity (both in the lender and product spheres) and an increasing use of ‘Private Debt’ as a term that reflects the increasing breadth of opportunities.
No – private debt is a very significant, established and growing market overseas in a number of jurisdictions. The US and UK are the biggest offshore markets.
A number of factors drive investment returns in private debt. These include credit quality and tenor of the underlying exposures, availability of alternate funding sources and interest rate outlook. Manning Asset Management considers these prior to purchasing its exposures and on an ongoing basis to inform future purchasing and reinvestment decisions
In addition, costs, fees and taxes payable will affect the net return received by investors.
The private debt market is an attractive, established and expanding market both in Australia and overseas. Private debt can offer exposure to the following attractive investment attributes: a real return profile, a steady income stream, low volatility, an element of capital stability and asset diversification.
The Fund targets a return of RBA cash rate plus 5% per annum over rolling 5 years (net of fees, excluding tax). This may compare favourably with other asset classes.
Manning Asset Management believes the Fund can be a strong source of return while offering defensive characteristics.
Yes – however the private debt market is complex and nuanced with over 260 lenders in Australia alone. Therefore, it can be time consuming to research, analyse, invest in and continually monitor exposures. In addition, gaining access to some private debt lenders and exposures and building a diversified and scalable pool may be more difficult on an individual basis.
These include, but are not limited to:
Credit analysis – to understand the risk profile of underlying assets.
Debt structuring – to understand the risk profile of the various investment structures offered.
Legal – vital in the analysis of investment structures; and managing contractual risk when appointing a new lender.
Origination – to understand the intricacies of how, by and to whom loans are originated and the resultant implications as to asset quality.
Investment management – to enable the appropriate construction and management of a pool of assets to achieve the desired investment objectives.
Operations– to enable the understanding of business operational matters (including with respect to lenders and outsourced service providers).
Risk management – enabling the identification and management of various risks, including investment, operational, compliance, governance, credit, liquidity, market and strategic – at lender, portfolio, or macro levels..
Economic – to understand how economic conditions may be changing and what impact this could potentially have on the various exposures within the portfolio and on the portfolio itself and inform its go-forward positioning.
A specialist private debt funder is focused on understanding and identifying attractive risk adjusted return opportunities in the complex and growing private debt market.
A specialist private debt manager will typically construct a diverse portfolio aimed at meeting a particular targeted return benchmark and investment parameters having undertaken the necessary research, analysis and due diligence on selected lenders and underlying assets.
The manager will typically manage the portfolio on an ongoing basis and ensure all operational matters are attended to including investor reporting, cash management and administration. The manager will typically monitor performance and actively manage the portfolio over time in response to changes in inter alia the macro economic environment, return expectations, the private debt asset class, specific asset classes within private debt, lender originations and operations, and borrower behaviour.
A specialist private debt manager will also typically be known in the market and thus may obtain privileged access to lenders and assets.
Therefore, this can provide a cost-effective alternative to seek exposure to a diversified pool of private debt assets without the significant upfront and ongoing work involved in ‘going it alone’.
The spectrum of Private Debt lenders is very diverse, ranging from large ADIs to small alternative finance platforms. Their common feature is that they all advance debt finance to borrowers for personal or business requirements, however the terms and conditions of the financing and the underlying borrower characteristics vary substantially. Manning Asset Management Pty Ltd assesses these factors as part of its comprehensive lender selection and due diligence process.
Manning Asset Management’s analysis considers the level of risk retention by a lender (and consequential alignment of lender interests with those of the Fund) as being very significant in the decision to invest. Accordingly, Manning Asset Management would typically expect to see some form of skin in the game. The exact levels and format of this will be dependent on the underlying collateral type, originator and structure.
What are the characteristics of the underlying borrowers that private debt investors have exposure to?
The borrowers are a diverse range of business and consumer borrowers. Manning Asset Management’s comprehensive due diligence and lender selection process analyses the borrower origination and underwriting standards of each of the lenders prior to their selection to ensure that these standards are robust.
If an underlying loan goes into default usually the underlying lender (or alternately the servicer or backup servicer in certain circumstances) is primarily responsible for servicing the loan to recover outstanding. Recoveries are generally assets of the Fund. Depending on the nature of the exposure and the arrangements with the underlying lender there may be forms of structural protection which may be available to buffer the Fund against loss e.g. overcollateralization, first loss pieces and loss reserves, however there is no guarantee that these will be sufficient to protect against loss. Valuations of that particular asset may be adjusted if deemed necessary in accordance with Manning Asset Management’s valuation methodology.