Lonsec confirms private credit research model | Australian Markets

In the wake of fellow Australian research home SQM Research just lately placing the private credit sector on “Watch”, Lonsec Research and Ratings has confirmed it made changes to its research course of in the beginning of 2024 to higher align with the growing private credit sector and tackle its “risks and challenges”.

Similar to SQM Research’s increase of its “initial due diligence screening”, Lonsec stated in a assertion that it had reviewed its “seven-factor private markets model” used to supervise its protection of private credit merchandise to focus more on governance.

Lonsec additionally instructed that the research transfer happened as more retail traders appeared to private credit as a portfolio diversification strategy, given the continued ‘democratisation’ of private markets to offer non-institutional traders with entry to beforehand untapped alternatives.

“Private credit can present compelling opportunities for both investors and borrowers but it also brings significant risks and challenges. Balancing opportunities with risk management is essential,” Darrell Clark, Deputy Head of Research & Manager, Alternatives at Lonsec Research and Ratings, stated.

“We use a seven-factor model as the muse for research scores, with the Product issue particularly designed to judge the construction of the investment product underneath review.

“Prior to our Alternatives Sector Review last year, we enhanced the Product factor within our private markets model to better capture the additional risks associated with private market funds, such as illiquidity and valuation governance.”

The research home confirms the method change as different industry and market strikes level to private credit being underneath scrutiny, after the Australian Securities and Investments Commission (ASIC) launched a dialogue paper citing a “lack of transparency and the need for more data” and later denied that it was “agitating for any policy change”.

SQM Research additionally cited the ASIC dialogue paper in its determination to position the private credit sector on ‘watch’, within the aftermath of studies that publicly-listed financial advice firm, Count Limited, had determined to not embrace some Metrics Partners funds – together with the Metrics Master Income Trust, Metrics Income Opportunities Trust and the unlisted Direct Income Fund – from its authorised product lists (APLs).

Lonsec additionally highlighted a number of areas of ‘heightened risk’ which have been built-in into its ranking course of, together with governance, start-ups, vertical integration and/or associated social gathering points, experience and independence, complexity of Warehouse buildings, general firm resourcing, credit high quality, portfolio variety, and risk management and underwriting requirements.

“Lonsec has been providing product ratings to Australian advisers for over 30 years, with our Alternatives rating team having a broad range of private market experience across several market cycles. We are highly aware of the trust placed in us by Advisers and their clients and as such, end investors are top of mind when we evaluate and rate funds,” Clark stated.