Does a slowing economy increase the risk of loan defaults in private debt?

Well-run private debt funds use rigorous scenario testing and real-time monitoring to mitigate risks. Historical net write-offs by banks peaked at just 0.68% during the GFC and were 0.04% in September 2024, demonstrating strong resilience across economic cycles.

Does a loan default always result in a credit loss?

No. Private debt investors are protected by their seniority in the capital structure. Senior debt holders get repaid first, before subordinated debt, preferred equity, and common shareholders. Covenants and controls act as early warning signals allowing lenders to engage with borrowers to mitigate financial loss.

Are all private debt managers the same?

No. Private debt managers differ significantly in scale, credit skills, and experience. Quality managers need sizable assets under management, bank-level credit skills, extensive networks, and the ability to directly originate and diversify loans across borrowers to achieve optimal outcomes.

Does commercial real estate debt put capital at risk in a property downturn?

Property owners face greater risk than lenders. With typical loan-to-value ratios of 60%, owners' equity acts as a buffer. Even if property values fall significantly, lenders can compel borrowers to restore their position or pursue asset sales to maximize recovery without necessarily incurring losses.

Are non-bank lenders lenders of last resort?

No. Competent private debt managers lend to quality companies and often compete with banks or work alongside them in lending syndicates. Post-GFC regulations requiring banks to hold more capital have created financing gaps that private debt fills for established companies with sound fundamentals.

In-Depth Interview with Andrew Lockhart on Private Debt

Great risk-adjusted returns and diversification have drawn an increasing number of investors to private debt. Metrics Credit Partners (Metrics) has become a leading private debt provider in Australia with more than $13 billion under management across a suite of listed and unlisted managed funds that finance medium and large Australian companies. Metrics’ Managing Partner Andrew Lockhart discusses the risks and rewards of private debt for investors in this in-depth interview with Peter White from the Inside Adviser network.

You can watch the interview by clicking on the video player below.

Topics discussed

0:40 – Introduction to private debt

2:05 – Why companies use non-bank financing

4:05 – How lenders limit risk

5:58 – How low interest rates affect the market

6:43 – How private lenders become relevant to banks and borrowers

7:32 – How investors access private debt funds

9:17 – Fixed rates versus floating rates

10:48 – Due diligence on borrowers

12:30 – Low default rates

13:57 – The growth of SMSF investors

15:35 – Private debt as a defensive investment

16:33 – Educating the market

17:29 – The importance of good corporate governance

18:18 – Investing in private debt versus equity

19:09 – Diversification of lending

The Inside Adviser | 30 June 2022 | 00:20:23

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