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Question asked 25/10/2025

Private Credit

James recently wrote a column for The Australian discussing private credit in which he opined that investing in this form of lending was highly risky. The example provided (from USA) equated the security as being equivalent to junk bonds. Could you please provide a more nuanced review focusing on offerings in Australia, perhaps even offering some suggestions where you view the risk vis a vis other higher return investments such as hybrids. Some managers such as Avari, Woodbridge and MaxCap offer private credit secured by first mortgages with low LVRs which I would have thought was vastly superior to junk bond status.

Thanks Bruce Phillips

Good Morning, James & Team,

Several commentators have mentioned that the private credit market is risky. How so? Do stocks like MXT & the like fall in the private credit category?
Does changing the volume in an existing share order without changing the price move the order in the queue?
Which would you consider to be a better investment, EOS OR DRO? The CEO of EOS was obviously talking up the book in a recent interview on Ausbiz .

How much weight would you ascribe to his very bullish forecasts? Many thanks & Cheers Sidney

Answer

Hi Bruce & Sydney,

We wrote a piece on private credit on Monday, partially as a response to Bruce’s question. Our note can be found here.

Private credit offers higher income and better collateral protection but comes with less flexibility and greater opacity. Junk bonds carry more short-term volatility but provide liquidity and transparency. In our view, private credit is simply a different form of credit risk — trading liquidity for control rather than being inherently safer.

A balanced mix makes sense — diversification remains the only free lunch in investing. We don’t advocate heavy exposure to private-credit LITs. Our Income Portfolio reflects this view: we hold one private credit LIT (MA1), the Perpetual Credit Income Trust (PCI) for diversified fixed income exposure, and the Dominion Income Trust (DN1), which is also diversified and includes a call date structure akin to a hybrid.

We continue to avoid the larger managers such as Metrics, which, due to scale, must continually deploy large volumes of capital — potentially into higher-risk loans to maintain yield. For wholesale investors, unlisted open-ended funds run by boutique managers that don’t suffer large NTA discounts can be good alternatives — such as the Manning Monthly Income Fund or the Avari First Mortgage Fund.

To stress our view again, having too much exposure to Private Credit is not a path we recommend. The opacity of the market, and reliance on managers ‘getting it right’, creates an underappreciated risk.
Our current preferences are DN1 <$100 & DMNHA <$100

Sidney, in reference the last pieces of your question.

Changing volume: If reducing volume, this will not change your position in the queue, but increasing volume will.
CEO’s talking their book: This is what they are paid to do. We don’t come across many that are not cheerleaders of their own companies, and rightly so, however, it’s important to critically evaluate what they say, don’t just take it on face value. In the case of EOS (& DRO), both CEO’s now have to justify a lot bigger market caps. We think the heat will continue to come out of both stocks for a while yet.

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Selection of income-focused LIT’s – Source – Market Matters

LAST UPDATED 22/10/2025 09:18

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