Investors price more risk into listed private credit trusts: Morningstar

Investors are pricing in more risk for listed private credit vehicles, which are structured as listed investment trusts (LITs), with some trusts trading at a discount of 25% of their net asset value (NAV), according to Morningstar.

Property developer Bathla Group went into voluntary administration in late August, raising fears that investors will pull back from private credit funds exposed to the property sector.

According to Morningstar data, as of July 31, Metrics Real Estate Multi-Strategy Fund was trading at 27.2% discount of NAV.

Metrics' Income Opportunities Trust also sat at a 23.3% discount, while KKR's Credit Income Fund traded at a discount of 13.3%.

Morningstar director of manager research Thomas Dutka notes that the performance of LITs is a proxy for investor sentiment into the sector.

"For a number of these funds, there have been some fairly sizeable reductions in their in their trading value, so you can see that their [value] has declined. These aren't necessarily funds exposed to Bathla," Dutka told Financial Standard.

"Private credit in general, and some of those factors, I would say, are probably going to be more linked also directly to some of the issues that have been reported in relation to those funds."

ASIC has been scrutinising Australia's private credit sector, calling on funds to ensure their asset valuations are current, accurate and grounded in realistic assumptions.

To manage discount in prices, some managers have turned to issuing listed notes, which have a fixed term of several years and specify a fixed spread payable over cash, Morningstar's Private Credit: It Pays to Pay Attention report noted.

"These traits help stabilise pricing. Other managers have taken a different path, creating price support for their LITs by offering to periodically buy back a percentage (such as 5%) of issued units at NAV," the report read.

"While this should theoretically temper risks of assets trading at discounts to NAV, the buybacks aren't compulsory; some managers haven't stepped in even if units are trading at a discount. There's no cure-all solution here, it seems."

Dutka added there will probably be more investors looking to redeem from private credit vehicles.

"I think people are generally getting a bit more concerned. It's certainly attracting more negative media publicity, and that's bound to see more investors going: 'Okay, I'm going to review what I'm invested in and consider whether it's appropriate for my risk appetite'," he said.