The Private Frontier: Private Credit and Private Equity

Democratisation of Private Markets

Steve Gledden calls it the “democratisation” of private markets.

High net worth investors and family offices are increasingly allocating their wealth into alternative asset classes such as private credit and private equity, investments that were previously only available to institutional investors.

A key attraction of this new frontier is the relatively low volatility compared with traditional equity and bond markets, plus the strong and stable returns on offer, especially during the recent period of high interest rates.

Globally, private credit markets are now worth more than $US1 trillion. In Australia that figure is estimated to be at AU$188bn, having grown 7% in 2023 and 32% in 2022. 1 This market growth has underpinned a new wave of investment into private credit and private equity – with the common catch-all term ‘alternatives’ being regularly used by investors today.

“Alternatives are no longer the domain of just big institutional investors.  This asset class will continue to be democratised,” Gledden, the managing partner of Straight Bat Private Equity, told the Wingate adviser series forum.

“The next big market of funding for groups like us is not with institutional money, but with family offices and high net worth investors.  They want direct access to these opportunities.  Ultimately in 5, 10 or 15 years, I think these opportunities will also be made available to retail investors.” Gledden said Straight Bat, which takes its name from the cricketing passions of its key backer – the family office of Flight Centre co-founder Geoff Harris – focusses on “honest, decent, straight forward, reliable, consistent, long-run performance.”

The firm invests in mature and profitable medium-sized Australian businesses. Its primary return to investors is in the form of dividends, which have delivered steadily
 growing double-digit returns every 12 months over the past four years.

“Investors have realised that real wealth is created in the long term. Closed 10-year funds, particularly in private equity, don’t have enough time to get the job done. So open-ended funds, I think, are a growing part of the options.  Our fund at Straight Bat is an evergreen fund. We have an 80-year trust deed.  We invest in businesses that we are happy to own forever,” Gledden said.

“Investors have realised that real wealth is created in the long term. Closed 10-year funds, particularly in private equity, don’t have enough time to get the job done.”

Steve Gledden

Wingate’s Corporate Credit team offer a suite of medium and long term focused, open and closed-ended credit funds that participate in primary and secondary private debt investments. These funds aim to capitalise on markets where the major banks have pulled back, providing debt solutions for mid-size Australian and New Zealand companies seeking funding for growth, M&A, working capital and loan book funding.

“In the Australian environment, I think corporate credit is a very attractive sector,” Selwyn Schroeder, Managing Director, Corporate Investments at Wingate, told the forum. “When you consider risk, volatility, security, valuations, market sentiment and all the nuanced factors that are correlated to public company valuations, you can see why corporate credit has grown in popularity for those investors seeking a little more certainty and predictability.”

“Quality private credit provides an uncommon level of risk-adjusted return in today’s investment environment.”

“As an investor, the key focus needs to be on making sure that the fund manager is experienced and ‘battle-tested’ from both a personnel and investment perspective. Investments do not always perform to thesis, and you need to have confidence that the lender has the appropriate downside protections in place and can effectively implement a workout. The Wingate Corporate Credit team are seasoned and level-headed and have effectively managed through several of these situations.”

Wingate manages more than $8 billion in funds and the firm has funded $20 billion in property and corporate transactions since it was founded by Farrel Meltzer 20 years ago.

“Quality private credit provides an uncommon level of risk-adjusted return in today’s investment environment.” “As an investor, the key focus needs to be on making sure that the fund manager is experienced and ‘battle-tested’ from both a personnel and investment perspective.”

Selwyn Schroeder

Investing and structuring with a long-term vision

Daniel Minihan, Head of Private Clients, Wealth and Family Office, SW Accountants & Advisors Australia, told the forum that some family businesses with significant generational wealth ‘in the billions’ were looking at even longer-dated trust structures than the 80-year period mentioned by Straight Bat.

Minihan noted that when most people think about structuring, their mind immediately turns to tax. However, his mind initially focuses on asset protection and generational wealth transfer. This necessitates thinking around perpetuity periods and utilising structures or jurisdictions that can extend this beyond 80 years. Control is also a critical issue for the protection of wealth, so the consideration of trustees and appointors and the mechanisms around how this control is passed is critical to a longer-term structure.

Minihan has been a financial advisor to families and individuals for over 20 years, supporting multigenerational asset allocation strategies and portfolio construction with a carefully structured approach to risk. It is with this experience that he is able to provide guidance on how investors can best approach the complexity of the Australian taxation system and its interactions with different asset classes.

“Every individual investor requires their own advice and has their own circumstances,” he says. “One rule of thumb we consider generally is that growth assets like property and shares are held in trusts, and then income-producing assets like fixed income and private credit may be better held in a company structure.”

“This because trusts receive the CGT discount when distributed to individuals, whilst companies are taxed at a flat 30% rate on both income and capital gains.”

“These are not vehicles for tax purposes. These are vehicles to protect a lot of money for a very, very long period of time, over multiple generations,”

Daniel Minihan

Transparency, valuation and regulation in wealth creation

While private credit has become a valuable asset class with an important role to play in diversified investment portfolios, more scrutiny is being focused on the regulation of the sector, especially the standards of transparency compared to public markets.

The prudential watchdog, the Australian Prudential Regulatory Authority (APRA) has warned the country’s major superannuation funds that it is scrutinising their investments in private credit.

“Industry funds are fantastic and the majority of Australians should be using industry funds because they are low cost. They generate good, long-term returns.  Questions about their private market allocations has arisen, in my view, because of the quantum of money that is flowing into their system.  They have simply run out of places to put it,” Minihan told the forum.

He said super funds should be required to value their private assets more regularly than they currently do.

“What it is going to mean is that the underlying managers that they are invested in, such as a private credit fund or a private equity fund, are going to have to provide that valuation as well.  This means the level of regulation at the top level, will automatically flow down to the rest of the system,” he said.

“The big super funds just won’t deal with funds or investments or managers that aren’t providing that level of transparency.”

The Australian Securities and Investments Commission (ASIC) has established a taskforce to assess how private capital providers value the assets they lend against.

Selwyn Schroder told the forum that additional oversight of the sector had become inevitable.

“From my perspective, I welcome it because I think there are a lot of new entrants that perhaps are not as diligent in their processes and reporting and the like. Transparency is a very positive trend for the industry,” he said.

Wingate founder Farrel Meltzer told the forum that his firm had due diligence and processes for valuations built into its systems since inception.

“At Wingate each asset we hold is individually assessed in terms of its value on a systematic schedule. We have top-tier valuation firms assisting our in-house teams of lawyers, risk practitioners, property managers and other specialists. Each of the business heads and the heads of credit report into an independent investment committee, with particular focus given to investments where we see a change in the underlying value.’

“We do write assets down if we think that they are not worth their carrying value. We never write credit assets up,” he said.

“That is standard in terms of valuation, transparency and the discipline that any regulation would require.  I don’t know what every one of our competitors in private credit does, but I would be prepared to bet that 90% of them don’t do that.”

Meltzer said each private lender should be required to have a valuation process that is transparent and follows broad guidelines. “The best form of regulation as an investor is to look at the quality of the organisation you are investing in, its people and their commitment to doing what is right.”

“Transparency is a very positive trend for the industry,”

Daniel Minihan

“The best form of regulation as an investor is to look at the quality of the organisation you are investing in, its people and their commitment to doing what is right.”

Farrel Meltzer

Key Themes

1. The democratisation of private markets will continue, with private investors continuing to look for portfolio diversification and exposure to asset classes that have been the domain of institutions and super funds.
2. Effective structuring is about protecting capital for the long term, over multiple generations. It may well have some level of taxation and administrative efficiencies, but that is not the key benefit nor priority.
3. The democratisation of private markets will continue, with private investors continuing to look for portfolio diversification and exposure to asset classes that have been the domain of institutions and super funds.
4. All private markets firms are created not equal – with different track records, approaches to valuations, risk appetite, tenor of investment, experience of personnel and length of time in market varying significantly from firm to firm.

Straight Bat Private Equity

Straight Bat is an income oriented private equity fund that invests for the long term in mature, robust and profitable Australian businesses for old fashioned reasons – income, wealth preservation and sustainable capital growth. Straight Bat was founded in 2019 and manages capital provided by more than 250 families.  Straight Bat has ~$300m of funds under management and a 4-6 month long waitlist for investors seeking exposure to its flagship Perpetual Legacy Fund.
Learn More: www.straightbat.com.au

SW Accountants

As an independent, national firm with a strong presence across Brisbane, Melbourne, Perth, and Sydney, SW offers a wide range of accounting and business advisory services. With over 42 Partners and 400 staff, we are committed to delivering exceptional value to our clients. We are proud to be ranked as the 22nd largest firm by revenue in the 2022 AFR Top 100 Accounting Firms and the 9th largest national practice in Australia. Learn More: www.sw-au.com

The Wingate Advisor Series

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