Why listed private credit is interest-ing for income seekers
A yield premium is the major attraction exciting private credit investors. We think equal attention to diversification across lenders and sectors is essential for navigating this asset class successfully.
Private credit markets have grown significantly in recent years, approaching the US$1.5 trillion mark globally. Until recently, the asset class has generally been limited to high net worth individuals and the big end of town who don’t require immediate access to cash and can take concentrated positions. While some closed-end private credit funds are listed on the ASX, these tend to be opaque, concentrated by sector to real estate and/or with limited liquidity. This year has brought ASX investors diversified, liquid access to this once out-of-reach asset class through an ETF.
The VanEck Global Listed Private Credit (AUD Hedged) ETF (ASX: LEND) is a diversified portfolio of globally listed private credit companies. In Australia the types of companies may be LITs, in the US, they are known as Business Development Companies (BDCs). These BDCs are often run by the biggest names in private credit such as Blackstone (via its Blackstone Secured Lending Fund), Blue Owl (via its BDC, Blue Owl Capital Corp) and Goldman Sachs (via Goldman Sachs BDC Inc).
Most of the companies LEND currently invests in are US-listed BDCs, so while there is credit risk associated with BDCs, investing in an ETF like LEND, allows investors to access the private credit market and limit single LIT/BDC credit risk and increase diversification. On a look-through basis based on LEND’s current constituents, this is 3,954 borrowers and 5,987 underlying loans.
While none of the ASX-listed private credit funds are included in the index LEND tracks, the LPX Listed Private Credit AUD Hedged Index (LEND Index) due to the lack of underlying holdings transparency, we think there is concentration risk when selecting an ASX-listed LIT or LIC for private credit exposure. Two of the largest of these, have a greater than 50% exposure to real estate, one of them only lends to real estate. This is problematic because being concentrated in a sector that is inexorably linked to the domestic economy means that should the economy weaken, a run to the exit may put pressure on prices. A more diverse loan book, including exposure to larger and more liquid vehicles across industries such as healthcare and IT, may be prudent risk management.
The LEND Index is highly diversified across industries and the capital structure.
Chart 1: Sector breakdown of LEND’s Index
Chart 2: Underlying capital structure of LEND’s index
Source: LPX AG, 31 May 2024.
We think, in addition to sector diversification, holdings transparency and liquidity are other characteristics of LEND that are not shared by the range of Australian Private Credit LITs on the ASX.
Right now, LEND is a diversified portfolio consisting of BDCs listed on US exchanges. These BDCs are often run by the biggest names in private credit. Many of these listings are covered by the broker research community. You can see in the chart below, that many have buy-and-hold recommendations. The advantage of LEND is that it takes the ‘pick’ risk out of selecting the right BDC by including 25 private credit companies, thus providing important diversification.
Chart 3: LEND constituents: Broker buy/hold/sell recommendations
Source: Bloomberg as at 24 June 2024.
One of the features of private credit is its high-income potential. As BDCs are registered investment companies under the Investment Company Act of 1940, they are required to distribute at least 90% of their net investment income to shareholders, and as a result, they are known for their substantial yield premium to other asset classes. Our website currently quotes the dividend yield of the LEND portfolio as 9.66% (Dividend Yield is the weighted average of each portfolio security’s distributed income during the prior twelve months), and you can see a breakdown in the table below. Noting that this should not be relied upon for future performance.
Table 1: Dividend yield of LEND’s constituents
Source: Bloomberg as at end of May 2024. Not a recommendation to act. Past performance is not indicative of future results. Dividend Yield is the weighted average of each portfolio security’s distributed income during the prior twelve months
Stable monthly income
Since its launch, LEND has now announced five months of dividends. Most recently, we made an announcement on ASX declaring the dividends that will be paid for the month ending 30 June 2024.
So, the five dividends have been as follows:
Table 2: LEND’s dividend history
Over all of these distributions, this decision has been based on the underlying yield of the listed private credit companies.
To add appeal to investors, Australian tax laws and VanEck’s tax expertise allow LEND to pay a smoother flow of dividends each month than would have been possible in the past. Our track record of paying a smooth flow of dividends is evidenced in our other AUD hedged products including:
Key risks
An investment in LEND carries risks associated with: listed private credit, interest rates, credit/default, currency hedging, ASX trading time differences, financial markets generally, individual company management, industry sectors, country or sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the PDS for more details on risk.
Published: 02 July 2024
Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.
VanEck Investments Limited (ACN 146 596 116 AFSL 416755) (VanEck) is the issuer and responsible entity of all VanEck exchange traded funds (Funds) trading on the ASX. This is general advice only and does not take into account any person’s financial objectives, situation or needs. The product disclosure statement (PDS) and the target market determination (TMD) for all Funds are available at vaneck.com.au. You should consider whether or not an investment in any Fund is appropriate for you. Investments in a Fund involve risks associated with financial markets. These risks vary depending on a Fund’s investment objective. Refer to the applicable PDS and TMD for more details on risks. Investment returns and capital are not guaranteed.
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