Private Credit

There has been an explosion in private credit investment opportunities over recent years, with both unlisted and listed structures available for investors. Returns have generally been solid, volatility is very low, and it can make a great diversifier in portfolios – indeed, many advisers are ploughing funds into this space to reduce ‘equity market risk’. Metrics Credit is a large and successful player in the space and they’ve been incredibly successful in raising funds and investing them for good returns. We’ve held MXT in our income portfolio until recently, having bought it in the IPO back in 2017. However, at the time we sold out of MXT, we questioned the visibility of their underlying exposures. While there are some valid reasons for this, one of our core principles at Market Matters is understanding what we’re investing in, and having a strong handle on what will drive that investment’s performance over time.

Private hospital group Healthscope was sold to Brookfield in 2019 for $5.7bn including debt. As the AFR reported recently, that debt is now being renegotiated with its 20-plus lender syndicate including Metrics Credit Partners. Healthscope has been under a lot of pressure financially, and the outcome of this will be very interesting. While we know Metrics holds Healthscope debt, we don’t know how much and in what structure, but we do know that Brookfield is a seasoned operator, and generally knows how far they can press. We question whether or not lenders will feel some pain on this deal.

There are two sides to this, the first being that Brookfield will want to deal with syndicate members again, so that creates a level of goodwill, although that’s partially offset by the huge volume of private credit funds that are now in the market, the large guys, like Metrics, are almost forced into participating in the bigger deals or risk getting left behind. The AFR article (available behind a paywall here) highlights some of the risks that we originally discussed last year (here) – somewhat prematurely!

• While we think Private Credit is a solid asset class, we also believe investors should exercise caution, and have a realistic view of the risks attached to this less transparent and potentially illiquid market.