Earlier today Chris Joye (CIO, Coolabah and AFR journalist) and Andrew Lockhart (MD, Metrics Credit Partners) went head-to-head in a debate on the virtues of public credit vs private credit. Joye has been a vocal and aggressive critic of private credit (because they don’t do it), while Lockhart has built Metrics up as a big player in the private credit space. A transcript of the debate can be found here.
As Joye does, he has already written about the debate and the underlying matter in the AFR (here). In said article he claims exit polling had him winning the debate, 69% vs 31%, a poll he ran on his LinkedIn page. A poll conducted by ‘Livewire’, a more impartial pollster had Lockhart win with 55%.
You should know my views on private credit by now, but if not, I’ll refresh your memories. I’ve done private credit in the past, didn’t enjoy it. It’s labour intensive and requires specialist skill sets. My main issue with the asset class – here and now – is when it is blended in funds with public credit. Investors need to be mindful of the risks here, specifically around transparency and liquidity. If an investor wants private credit, go to a full private credit fund run by a reputable shop – such as Metrics, they have a strong track record. Don’t invest in a blended fund. And by private credit here, I mean direct lending to businesses that typically are considered too risky for the banks in the post GFC world – in the Australian context, tends to include a lot of property developers.
Does this mean I agree with Joye? In some regards, yes – as it relates to the private credit I referenced in the previous paragraph. In others, less so. He’s throwing – at least that’s my interpretation – non-bank originated mortgages into the mix of private credit, which is flawed. Recall, mortgages are used as collateral in RMBS structures. His comments here are twisted. Specifically….
“Looking at all securitised loans (adjusted for biases), we find that non-banks have default rates that are 2.5 times higher than banks. Even if we cherry-pick the very best “prime” non-bank loans, their default rates are 1.5 times worse than the banks. That’s not surprising and reflects the variances in risk preferences between the regulated and unregulated worlds.” My emphasis.
Sound terrible, doesn’t it. But what he doesn’t say is that loss rate on mortgages within banks through time has been 0.02% or 2 bps ($20 for every $100,000 lent). For the non-bank originators, the cumulative loss rate has been anywhere between 0.04% and 0.10% ($40 - $100 per $100,000 lent). Yes, loss rates are higher, but at a base level they’re also very low and have remained so for 30 – 40 plus years.
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