Common myths about private debt cloud understanding of a sector that, in reality, aims to offer both reduced capital volatility and attractive risk-adjusted returns to investors. These myths misinterpret key characteristics of the asset class to suggest it may be riskier than traditional assets such as equities and bonds, when it instead provides investors with an alternative that plays an important role in portfolios.
Watch our demystifying debt video series to find out why the 10 most common myths fail to capture the true attributes of well-managed private debt.
Myth 1 – A slowing economy increases the risk of loan defaults
Lenders become more conservative and impose stricter terms and conditions on the borrower as the economy slows.
Myth 2 – A loan default is a credit loss to a lender
Lenders aim to spot early warnings signs and engage borrowers to understand how to mitigate risk and avoid a loss.
Myth 3 – Commercial real estate debt puts my capital at risk in the event of a property downturn
Risk of loss is borne by property owners, not lenders. Loan security also allows lenders to take control of assets.
Myth 4 – Dividends are a better source of income than private debt
An investment in secured private debt aims to deliver a lower risk means to an attractive income than dividends from equities.
Myth 5 – Equity investments are safer than private debt investments
Lenders protect capital by imposing terms and conditions on borrowers, as well as holding security. Such protections don’t apply to equities.
Myth 6 – All private debt managers are the same
Metrics directly originate loans and has the skillset in-house to provide investors exposure to a broad spectrum of borrowers from a range of sectors.
Myth 7 – When choosing a private debt manager, boutique is better
To be relevant in this market, you need to be large and scaleable – with strong origination and risk management capabilities.
Myth 8 – If the loan is not secured, my investment is at risk
The decision to lend should be based on the ability of a company to generate consistent cashflow – through operations or asset sales – to service its debt.
Myth 9 – Non-bank lenders are lenders of last resort.
Our role is to find good quality companies that are seeking loans. We often work alongside banks, or even compete with them, to provide funding.
Myth 10 – Private debt is distressed debt
We lend to strongly performing companies with sufficient cashflow. Distressed debt is actually limited in Australia due to its corporate insolvency laws.