Private credit explained: liquidity, diversification and the risks investors miss

Owen Raszkiewicz (0:00)

GlobalX is one of the fastest growing ETF providers in Australia, and I'm proud to have worked with them for many years. GlobalX has a range of specialized ETFs covering things like commodities, or even things like income. As Australia embraces more income focused styles of investing, the ETF that I want to highlight for today's show is the GlobalX S&P ASX 200 High Dividend ETF, or ZYAU for short. This ETF targets dividend paying companies in Australia and does it in a way that's diversified and tries to identify quality companies. You can learn more about how this ETF is constructed and get access to the critical materials such as the PDS and TMD at globalxetf.com.au.

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Nehemiah Richardson (1:17)

If you're someone getting towards retirement or in retirement, you care a ton about stability of income, and you care a ton about capital preservation. What role does private credit play in a portfolio? Depending on what strategies you deploy into in private credit, the vast majority of people who are putting money into it, institutions as well as individuals, are trying to get stability of income and capital preservation with low volatility. It's not without risk, but that's why people are demanding private credit.

Owen Raszkiewicz (1:46)

Hey there, here's a quick note. This podcast contains general financial information only. That means it's not specific to you, your needs, goals or financial objectives. So don't act on the information until you've spoken to your financial planner. You'll find our full disclosure, disclaimer and link to our financial services guide in the show notes.

Nehemiah, how are you doing?

Nehemiah Richardson (2:04)

Fantastic.

Owen Raszkiewicz (2:05)

We're going to be talking private credit, global, Aussie. There's so much to talk about. We just spoke off air about quite a bit of this stuff. But there are a lot of people who are fascinated by the market for private credit right now. Locally, there's been a lot of industry reports. There's a lot of reporting on the industry reports, and then globally, there's a lot of headlines. How that interplays with public markets, private markets is all just so fascinating for people.

I really want to cover that ground with you because you're the guy to talk to.

You've been on the show before and people love the discussion, so I'm really pleased we get to do this. I just want to get everyone on the first floor here of understanding. You and the team at Pengana, you're very well versed in private credit, in private markets generally, to be honest. For folks who aren't aware of what we mean when we say private credit, just the high level, mate, what is private credit and then we'll roll from there.

Nehemiah Richardson (3:03)

Okay, great. So, I guess the first thing is what is credit?

Okay, and what is credit? We play in corporate credit, which means our fund managers will lend money to companies, not to individuals. Now, it could be a non-bank lender that lends to an individual, that's asset-backed lending, but the credit is, I have money, I'm lending it to you, you're a company and I expect you to pay me back. And within that, we have a contract that says, that dictates what you pay me, how frequently you pay me, I have security rights, I have protections that mean you have to operate your business in a particular way or I can intervene. Okay, so classic bilateral loans. As distinct from, there's a lot of credit that trades. So if you're in a bond fund, you get liquidity every day, right? So that's done very differently.

An arranger like an investment bank will work with a company, you'll issue debt and that gets sold off to investors, okay? And it gets traded every day. The bank doesn't actually hold it because they've distributed the risk across lots of investors. In a private credit fund, their bilateral loans, you can't trade them. So you have to then construct portfolios to be robust because you can't trade it, which means the alignment between the investor who invested in the fund and between the borrower and the lender is very tight, right? Because you have to work through things to get your money out the other end. But credit is just lending.