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If you’ve been thinking about investing in private credit, but are worried whether it’s a safe investment, we’ve written this guide to answer your questions.
While the higher returns of private credit are attractive to investors, many are also concerned about risks such as loan defaults, illiquidity, and capital losses. All these are real risks, but it doesn’t mean that it’s unsafe to invest in private credit.
Understanding how various risks are managed and mitigated will help you pick a safe private credit investment that earns you a steady income.
How to Invest Safely in Private Credit: 6 Questions to Ask
1. How can I assess the safety of a private credit investment?
Risk exposure depends on how a particular fund is run and the processes they have in place to protect investor capital. To assess the safety of a private credit opportunity, here are the main factors to consider.
- Fund diversification across borrowers and industries. This protects capital from risks and volatility in any one particular sector and results in more stable yields.
- Conservative loan-to-value (LTV) ratio, which provides a safety cushion in case of a default. It ensures that the fund can recover all its money when the collateral is sold.
- Proven management team. What’s their track record? How much credit have they underwritten? What’s their recovery rate? Have they been stress-tested by an economic downturn?
- Senior secured positions, meaning collateralised debts get paid first in case of a default.
At PSA, we go a step further by avoiding consumer credit lending. We focus on business/commercial lending, which has a lower default rate and where recovery is easier.
2. How liquid are private credit investments?
When it comes to private credit, only invest money you’re willing to forget for years, sometimes up to 5 years or more. Investors are rewarded for the illiquidity with higher returns.
That said, it’s still important to find out the minimum lock-in period before any withdrawals and what the redemption terms are (some funds allow you to access all or a portion of your capital at specific intervals).
Remember that even if your capital is locked away, you’ll still get regular interest payouts. At PSA, we have quarterly distributions.
3. Are private credit investments regulated?
There’s less regulation in the private credit sector compared to public markets, which allows more investment flexibility but can put investor capital at more risk. ASIC recently warned investors about issues like hidden fees, conflicts of interest, and a lack of transparency.
When considering private credit opportunities, look for funds that have transparent reporting and clear communication. That means detailed financial reports, regular investor updates, quick communication if there’s a problem, and an easily accessible information memorandum (you can download PSA’s memorandum here)
4. What happens if a borrower defaults?
Defaults are inevitable in private credit lending, but a good management team should keep default rates low and have processes in place to protect investor capital when they happen.
Getting collateral is the best way to protect against defaults. At PSA, we require asset backing of at least 160%, ensuring that we can recover the full loan amount in the event of a default.
In addition, we outsource recoveries and collections to shield PSA and our investors from legal risks.
We also take proactive action by offering credit on fair terms that make it easier for borrowers to repay and exit sooner. These include affordable repayments, zero exit fees, and a lower disbursement fee.
5. Is private credit affected by economic downturns?
Yes, private credit is affected by economic downturns. When there’s a slump in the economy or a recession, default rates tend to rise as borrowers struggle to make repayments. Collateral value might also drop, which affects recoveries.
How well a private credit fund weathers the hard times depends on its loan structure and risk management.
PSA’s conservative LTV ratio and 160% loan security reduce risk to investors, even when defaults happen. We also have strong covenants in our loan agreements, which allow us to take action on time to reduce the risk of default.
6. Can I lose money in private credit?
There’s no zero-risk investment. While we and many other private credit funds make efforts to offer stable returns and protect capital, there’s still a possibility you can lose your money. But PSA’s focus on capital preservation offers defensive investors a low-risk investment opportunity.
We have a proven record of protecting capital, and we consistently pay out returns averaging over 8.5% P.A.
Make a Safe Investment With PSA
If you’re looking for a safe private credit investment opportunity that offers low-risk investments, is transparent in its reporting, and provides stable, high returns across all market conditions, PSA is a great choice.
Give us a call at (03) 9847 7689 to learn more about our safe investment options.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
