Transcription of The Stock Network Interview with Pengana Global Private Credit Trust (ASX:PCX), CEO Nehemiah Richardson
Lel Smits: Global private debt assets under management reached two trillion US dollars by mid last year with the broader private credit ecosystem estimated at around four trillion US dollars. Pangana Global Private Credit Trust gives Australian investors access to a globally diversified private credit portfolio managed by Pangana Credit. I’m joined today by CEO, Nehemiah Richardson to discuss why access matters just as much as allocation, how to put the strategy into practice and also how to separate the noise from real credit risk.
Nehemiah, welcome to the Stock Network.
Nehemiah Richardson: Yes, thanks very much for having me. It’s great to be here.
Lel Smits: The case for allocating to private credit is well-established now, but you’ve said how investors access it matters just as much as whether they allocate. Can you outline for us why?
Nehemiah Richardson: Yes, well, it’s because the private credit asset class is an illiquid asset class. So private credit loans aren’t traded, managers will hold them to maturity.
And that’s actually the source of the premium, the fact that it doesn’t trade. And it’s also what aligns the incentives between a manager, a borrower and an investor. Because managers can’t trade out of a problem loan, they do deep due diligence, they seek senior security, they seek tight covenants and they actively monitor the individual loans in a portfolio so they can catch any issues early if they might arise on any individual loan.
Now, the flip side is you can’t reposition a private credit portfolio the way that you can a public bond portfolio. So with public fixed income portfolios, you can rebalance or you can trade out pretty much daily. In private credit, once a portfolio is constructed, it’s largely static.
So it’s gotta be built for resilience day one to hold up through any environment, not just benign environments. And so we build PCX to provide investors with the ability to invest in what is an institutional quality, diversified global private credit portfolio that has liquidity options to address the liquidity strength of the asset class. So investors have the option to be able to trade units daily on the ASX or they can tender into a quarterly off-market buyback at the net asset value at that time.
And we seek to run these buybacks quarterly and they’re capped at 5% of the units outstanding, which is in line with the liquidity that is there in the underlying portfolio. And so for us, that buyback, it’s been consistently run since we listed and the tenders into it have been well below that 5% cash cap each quarter that we’ve run it since inception, which tells you that the structure is doing its job.
Lel Smits: Excellent. And Nehemiah, in terms of putting this strategy into practice, can you outline how Pangana Global Private Credit Trust really is putting this into practice?
Nehemiah Richardson: Yes. Well, we do that through three strategies, each of which earns returns from a different source. So the first is indirect lending, which is about 70% of the portfolio and that’s really the income anchor.
So typically senior secured loans that are made to non-cyclical mid-market companies in the US and in Europe that don’t have public financing options. They’re actively monitored, so our managers can act early if anything goes off track. And these direct lending strategies underpin our 7% minimum yield target, which over the past 12 months in our performance, you’ll see that we actually delivered an income total return of about 8.8%. Then there’s sort of structured credit and specialty finance, which is really a diversifier in the portfolio.
So returns there, they come from income that’s earned typically from a pool of assets like mortgages or commercial business loans with the risk managed through security from the underlying collateral of those pools and clear guidelines as to the types of loans that are eligible to be financed. Now, this helps to diversify the sources of return away from just single company profits that pay back direct loans. And then finally, we have credit opportunities, which is a smaller sleeve in the portfolio.
So it’s only about 14% of the portfolio and this is capital that’s there for dislocation. So when markets seize up and you can see a fundamentally sound company may not be able to refinance, our managers can step in and they get well compensated for providing that liquidity to a company. So today across the portfolio, we’re about 80% first lien with the balance and subordinated debt and a small equity component.
And we’re now invested across 30 funds and 28 managers split roughly about sort of the 55% US kind of 40% Europe and put together those three strategies have genuinely different risk return drivers that really drive a wide diversification. Yes, and Nehemiah, there has been a lot of headline noise this year really about things like redemptions, also software sector stress. How do you think investors should separate that from real credit risk? Yes, I think a really important point with all of that news flow is that all of that noise really comes down to one thing.
It comes down to concentration risk and that news flow has not really been driven by credit risk. Okay, so the stress has been in specific vehicles or specific managers with a concentrated exposure, whether that be a concentrated exposure to a redemption structure of a manager. And that’s, you’ve seen that widespread a sector.
So for example, software, where people have had concerns of the impact of software in AI and some portfolios will have very large concentrated positions in software or single names where there’s been a single name that’s been reported and some managers would have had a concentration in their portfolio to that single name rather than being widely diversified. So one name wouldn’t actually impact on the overall performance. So it’s really been driven by those types of things as opposed to a systemic issue of credit decline in the market or in the asset class.
And I might just note, some of the press that we’re even seeing in our market now with this, the news on Bothell, this situation in real estate. And I think as you look at that, there’s a couple of things that go to this point about concentration, where when you’re investing in this asset class, we would say, you just don’t want to be concentrated in geography because any sort of credit investment that you have in Australia is going to be subject to the performance of the macro economic conditions of Australia, right? Which is why we think you should be diversified away. And it’s in part why we built our vehicle to provide that diversified access.
Secondly, there’ll be some, I think, managers in this country who will have concentrated positions in that situation. There’s others that would be much more diversified so it doesn’t impact on the overall portfolio performance. And this is precisely why we are very strong advocates when you’re investing in this asset class and you can’t trade it, that people should be diversified.
Lel Smits: Yes. So Nehemiah, where does the opportunity lie and what does the opportunity look like from here?
Nehemiah Richardson: Well, I guess in the US and Europe, the more mature markets for private credit, it’s really attractive at the moment, like genuinely attractive. The new deals in direct lending are being written at up to 50 basis points wider than they have been in more recent times.
And they’re also being done at a lower borrower leverage and with tighter documentation. So in other words, better terms for our managers who execute on that strategy. Secondly, banks continue to retreat from parts of the market so it’s a really structural opportunity, not a cyclical opportunity.
And that capacity has to be absorbed by managers like ours for companies to finance themselves to grow. And the volatility that’s created in the headlines that we see is exactly the kind of dispersion that our credit opportunity strategies are able to take advantage of. And so we really feel like the opportunity set available to our managers is genuinely very attractive.
Lel Smits: And finally, how has that translated to performance?
Nehemiah Richardson: Well, we’ve delivered an 8.8% yield over the past 12 months, which is well in excess of our target. And we’ve done that through what’s been really a genuinely stress period for the sector in terms of the sentiment from the news that we talked about earlier. Our credit quality has been very stable.
We’ve seen no signs of deterioration across our portfolio. And we see a very clear path to continue net accretion as spreads normalize and leverage moves back to target, meaning the leverage of our underlying managers and the way they deploy their strategies.
Lel Smits: Nehemiah, thank you for the update on Pangana Global Private Credit Trust.
We’ll link to the white paper in the release.
Nehemiah Richardson: Yeah, great. Thanks very much again for having me today.
Ends