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.

Zenith ‘Meet the Manager’ Interview with Andrew Lockhart

Metrics Direct Income Fund (MDIF) has received a “highly recommended” rating – the highest possible – from Zenith Investment Partners. Fast-growing demand for private debt and the attractive risk-adjusted returns it can provide for investors has grown Metrics’ funds under management to excess of $13 billion across a suite of listed and unlisted funds, including MDIF. Metrics Managing Partner, Andrew Lockhart discusses the growth and benefits of private debt for investors and borrowers in this interview with Chief Executive Officer, David Wright from Zenith.

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

Topics discussed

0:41 – What is private debt.

1:36 – Why companies use private debt.

2:22 – How private debt providers compete with the banks.

3:50 – Diversification and protection of investor capital.

5:36 – The advantages of private debt over bonds and traded debt.

7:40 – Meeting the challenges of rising interest and inflation.

10:06 – Managing recession risks in private debt.

12:15 – Achieving the best risk-adjusted returns.

13:15 – How diversification of loans helps investors.

14:35 – Valuation and liquidity for untraded assets.

17:12 – Dealing with defaults and workouts.

19:06 – Why ESG matters to private debt providers.

21:41 – The growth of the private debt market.

23:38 – The benefits of scale for borrowers and investors.

Zenith Investment Partners | September 2022 | 00:25:42

The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned EVO2608AU 31 May 2022 ) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.

Equity Trustees Limited ABN 46‌ 004‌ 031‌ 298‌ AFSL 240975‌, is the Responsible Entity for the Metrics Direct Income Fund ARSN 641‌ 620‌ 331‌ (Fund). This communication is issued by Equity Trustees and has been prepared for the purposes of providing general information only, without taking into consideration your objectives, financial situation or needs. Before making an investment decision in respect of the Fund, you should read the PDS, TMD and full disclaimer available at metrics.com.au/mdif

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