ASX funds and companies opening new doors for investors in private credit

First seen on Stockhead

• Private credit is a rapidly expanding asset class, projected to grow at a CAGR of 11% from 2022 to 2028
• Finexia Financial Group aim to become the leading private lender to childcare sector in Australia
• Metrics Credit Partners now offers two ASX-listed investment trusts alongside its unlisted funds

Private credit is experiencing unprecedented growth, reshaping the financial industry and offering a robust alternative to traditional bank lending.

As banks tighten lending standards and retreat from riskier ventures, private credit funds and companies have stepped in, filling the gap and providing essential capital to businesses.

Alternative assets research firm Prequin forecasts private debt AUM to grow at a CAGR of 11% from 2022 to 2028, reaching an all-time high of US$2.8tn - almost doubling the 2022 figure of $1.5tn.

Private credit has grown in popularity with potential for high returns, particularly as an alternative source of income to equity dividends and bonds.

VanEck Asia-Pacific CEO and managing director Arian Neiron told Stockhead growth in the private credit market is an unparalleled global phenomenon. The company earlier this year launched the Global Listed Private Credit (AUD Hedged) ETF (ASX:LEND).

“We’ve seen private credit increasingly taking over the core business of traditional banks, that is, the provision of debt capital to medium-sized companies and real estate,” he says.

Like most investments there are risks associated with private credit, with the main loan default along with transparency as many private credit providers are not publicly listed. Experts recommend mitigating risk by investing in exchange-listed private credit funds and companies.

Several ASX-listed funds and companies offer investors the opportunity to enter the private equity market. Here’s some more we’ve noticed.

Finexia Financial Group (ASX:FNX)

Listed on the ASX in 2015 as a securities dealer/licensee, FNX has over the years pivoted and evolved its strategy towards the private credit sector.

CEO and director Patrick Bell told Stockhead FNX is targeting markets and opportunities traditionally dominated by major banks but recently abandoned.

“The banks had departments specialising in various sectors and particular specialised risks but they’re largely not there anymore,” he says.

The company’s strategy is to become the leading private lender to Australia’s childcare sector, capitalising on growth in the sector.

“A lot of private credit businesses are specialising in particular areas so we’re specialising in childcare, but others are focused on unsecured or SME lending and agrilending,” Bell says.

“There’s a whole lot of different specialisations that sit below the larger funds, providing warehouse and funding lines to fuel these various businesses.”

Bell says growth in the Finexia Childcare Income Fund has been bolstered by several independent ratings, highlighting its unique market position.

“Our first target for the fund is to reach $100 million, and we are well on the way to that now,” he says.

“We see childcare as a significant opportunity as in the past 20 years, the childcare sector in Australia has boomed, a trend we refer to as ‘the childcare generation’.”

In addition to its childcare-focused lending, FNX also undertakes traditional private credit, including first mortgage lending against commercial and residential property for wholesale clients.

“We also have a sizeable book lending against ASX-listed equities,” Bell says.

“For example, an insider of a company might bring us their shares, and we lend them money against those shares.”

As of the end of H1 FY24, Bell reports that FNX’s loan book was ~$163 million, with funding from various sources.

“We are essentially a lending business, drawing funding from ASX-listed companies, wholesale and retail clients, family offices, and high-net-worth individuals,” he says.

Metrics Credit Partners

Metrics Credit Partners is considered a pioneer of listed private debt vehicles in Australia and now offers two listed investment trusts alongside its unlisted funds.

The Metrics Master Income Trust (ASX:MXT) seeks to generate monthly income of the RBA cash rate plus 3.25% p.a. (currently 7.60% p.a.) net of fees from a diversified portfolio of around 300 direct corporate loans.

MXT has returned 9.48% net of fees over 12 months to April 30, 2024 and 6.05% p.a. net of fees since its inception on October 9, 2017.

The Metrics Income Opportunities Trust (ASX:MOT) targets a cash yield of 7% p.a. which is intended to be paid monthly with a total target return of 8%-10% p.a. (in each case net of fees). In the 12 months to April 30, 2024, MOT’s total return was 10.45% and since inception on April 29, 2019 has returned 9% p.a.

Metrics managing partner Andrew Lockhart says private credit is an attractive alternative to corporate bonds, hybrids, government bonds or even cash deposits.

“More conservative funds can deliver a return of around 8% to 9% per annum,” he says.

Lockhart says a higher yield fund can deliver additional returns to provide a favourable alternative to investing in equities for income.

“The floating rates offered by many private debt funds also rise with official interest rates to provide a useful hedge against inflation,” he says.

“It is important to invest with a manager who has the necessary skills and experience to take the steps needed to preserve investor capital and negotiate appropriate pricing with the borrower to deliver optimal returns for investors.

“It is also important that the fund is well diversified and has a low level of exposure to any one individual loan.”