Page 8 - Best of the Best | The Only Prescription for Healthy Finances

Most recently, findings from an RFI Global survey of 4,700 owners ensure the loans are indeed to businesses and people they want to
and operators in Oceania, revealed 70 per cent of SMEs in the support. One fund may offer loans to cattle farmers and chickpea
Asia-Pacific were less than satisfied with access to credit provided growers, but another may be lending for property development or a
by their main bank. management buy-out.
When choosing a loan provider or financial institution, the top One must also uncover whether lockups prevent an early
driver cited by 45 per cent of Australian SME respondents, was redemption, which of course might be required when one’s needs
competitive interest rates. Perhaps more importantly, however, 77 and circumstances change. With some, you may not be able to
per cent cited access to funds and flexibility in repayment options. retrieve your money within twelve months or even longer. Look at
least for monthly liquidity and no lockups.
Where banks might take six weeks to approve a small, short-term
loan, many non-bank lenders have enabled technology to approve Investors should also find out what the average duration of the loan
loans in 24-48 hours. book is. If the average duration is four months, your returns are more
likely to follow interest rates as they rise. If the average duration is a
Think of a wheat farmer, with a record crop, who needs to take
advantage of ideal harvesting conditions and a window of only year or two, you may find your returns lag any increases in rates.
a few weeks. Now imagine, in the middle of harvest, their header And finally, be sure to understand the structure. What I want to see,
breaks down and needs $140,000 of clearly critical repairs. A six- and what you should demand, is alignment between your money
week approval process is simply not going to cut it. and the capital of the lenders who are the businesses originating the
loans, processing applications, and providing the finance directly to
The RFI Global survey revealed Australian SMEs have made it
clear, should they require financial support in 2022, they’re less the borrower. Good alignment sees the originators put their capital
optimistic about obtaining it from their main banks. and returns at risk first. That way, if there are some defaults and the
security that was provided cannot be retrieved and therefore a loss
Private credit fills breach occurs, it is the originator’s returns and capital that are impacted

Enter private credit, to fill the gap. Growth in this asset class was first, offering some initial protection to returns and capital of fund
first driven by institutional investors before capturing the attention of investors.
family offices and high-net-worth investors. The continuing growth Private credit is a growing asset class, but it isn’t new. Your bank has
in the funding gap however has meant there’s more than sufficient been lending to SMEs for a century and now they’re pulling back,
demand from SMEs to permit wholesale and retail funds to be opening the opportunity for others. Previously you had to own bank
established. shares to see some of the returns from SME lending.
And the growth should be welcome. U.S. journal Institutional PRIVATE CREDIT
Investor found private credit funds can lend capital when it’s
otherwise unavailable, smoothing the credit cycle and stabilising the FUNDS NOW PROVIDE
market. In anticipation of an economic downturn, banks decrease
lending. But private credit funds, being already well-established, DIRECT ACCESS TO
can offer credit that banks are unable to. This can keep businesses
going, mitigating the severity of a downturn and helping a return to THIS INCOME STREAM
economic normality. AND GROWING ASSET
A growing number of private credit funds are being established
in Australia. And the returns, even during the pandemic have CLASS.
been alluringly high, stable and regular. The Aura High Yield
SME fund, which Montgomery distributes in Australia through a This article was written on 23 November 2022. All prices and
unique partnership, has returned a compounded 9.56 per cent, movements in prices are on this date.
and monthly income since inception with no negative months, even If you would like to learn more about the Aura High Yield SME Fund
during the Covid-19 pandemic when stock markets were collapsing. (wholesale clients only), please visit the fund’s web page to learn
What investors should look for more: Aura High Yield SME Fund
But as with any asset class, not all funds are created equal and You should read the Information Memorandum (IM) before
there are risks. Investors need to dig deep to uncover how much deciding to acquire any investment products.
diversification exists, whether any leverage is being used to boost Past performance is not an indicator of future performance. Returns
returns and whether ‘lock-up’ periods exist, preventing investors are not guaranteed and so the value of an investment may rise or
from leaving. fall.
Investors should first demand wide diversification. A fund with
many thousands of small loans arguably offers diversification
benefits that a fund with a handful of very large individual loans
cannot offer. Similarly, investors need to look under the hood to

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