Diversification critical in private credit due to unpredictable dynamics in markets

Diversification in private credit investing is becoming more important for income investors, due to unpredictable dynamics in financial markets coupled with geopolitical uncertainty, according to a private credit expert.

The depth and breadth of global private credit provides the grounds for a highly diversified approach which can spread risk and manage liquidity, according to Nehemiah Richardson, CEO of Pengana Credit. “Diversification is becoming a bigger factor as we see unpredictable behaviour in financial markets, including swings in bonds and currency markets, and economies moving at different speeds.

“Having some exposure to quality defensive positions in global private credit is arguably more important in this environment, especially when you consider some of the geopolitical uncertainty around the globe.

“Only global markets provide the ability to truly diversify both statistically and structurally, spreading investments across industry, geography, and strategy.

“When you consider these opportunities are unlisted, with lower liquidity, diversification is even more essential.”

Richardson said depth of quality is key when measuring the effectiveness of diversified exposure. “There is great potential to diversify with quality because private credit is a dominant form of lending to mid-market corporates in the USA and Europe.

“For investors, we believe the most attractive segment of the market provides access to bilateral loans with enforceable protections, which are held to maturity and do not compete with traded private credit.”

Richardson said the local market does not have the capacity for true diversification across geography, strategy and industry. “Global private credit provides the opportunity for statistical and structural diversification across a number of senior secured direct lending managers with portfolios ranging from 200 to over 1,000 individual loans.

“Global private credit is not constrained in its ability to deploy capital in the same way that the local private credit market can be, where the opportunity is limited to a narrower set of opportunities, particularly commercial real estate.”

And growth in the global private credit market continues unabated, with Preqin forecasting it will be worth $2.7 trillion globally by 2027. “We expect growth to continue as structural supply and demand dynamics continue to work in private credit’s favour.

“It has been driven by a structural withdrawal of capital as regulations have prevented banks from holding too many long term assets with short-term liabilities.”

Pengana, in association with Mercer, has launched several different global private credit vehicles, including the TermPlus online fixed term accounts for retail investors, the listed Pengana Global Private Credit Trust (ASX: PCX), the unlisted wholesale Pengana Diversified Private Credit Fund, and an SMA Fund.