ASX listed LIT’s – can they go bust?

Hi Carl,

Never say never, however, the conversations we have with private credit managers suggest economic Armageddon would need to unfold before they go bust, however, it comes down to the structure of the underlying portfolio.  Our concern around this area was/is that a lot of private credit managers were focussing on property development, and even though they had exposure across many different deals, the correlation between all developers is high. i.e. they don’t operate in silos. We would avoid the ones that are too concentrated in a specific area, and we like the more diversified approach from a manager like Perpetual (PCI), who are not forced to own private credit i.e.  they can hold other fixed income assets.  We particularly like the new deal put out by Dominion (DM1) which is due to list next week, which is RMBS, and we think they are a sensible manager. They made a smart (unselfish) decision to put a 6-year maximum term on the structure, which gives it an end date.

Like all managers, there are good ones and there are bad ones that carry too much risk (and hide the risk). We think the listed versions are by in large, solid, however we would not over allocate in this space.  We used to hold Metrics (MXT) in the Income Portfolio, but we became a little uncomfortable for the reasons we discussed here.  Hindsight suggests we were too cautious and premature in our concerns, and we missed out on good returns, though some of the aspects we highlighted back in 2023 in that note are being discussed today by the regulator.

There is no doubt private credit is here to stay, and more transparency in the sector would be a good thing allowing investors to continually assess the risks and make more educated decisions.