Australian advisers need to ensure they are adequately protected from US technology crashes when it comes to their private credit exposure, according to Zenith Investment Partners.
Many software and software-as-a-service (SaaS) companies form large parts of major private credit funds but have come under fire in recent months with several facing withdrawals when their software holdings faced problems.
Zenith head of global fixed income and alternatives, Rodney Sebire, said a severe decline is “unlikely to happen overnight” but that domestic investors need to ensure they are aware of the potential liquidity problem.
Zenith modelled a hypothetical private equity-backed SaaS business with debt at six times earnings, interest coverage of 2.2 times and a 60 per cent equity cushion. The analysis found the company’s earnings would need to fall by around 60 per cent over 12 months before it could no longer meet its interest payments.
“AI disruption is a real issue for lenders to monitor, particularly for companies with weaker competitive positions. But assuming every software borrower is suddenly a bad credit risk is far too simple. Many of these businesses still have meaningful protection beneath the debt.
“Most Australian investors access these funds through structures that are linked to US master vehicles, so what happens in the US matters.”
Among managers rated by Zenith, it said problem loans remain below 3 per cent of net asset value and some borrowers were capitalising interest payments rather than paying in cash.
It is important for advisers to ensure their clients understand private debt and private credit are long-term investments that their clients may not easily be able to exit in the same way as other types of assets.
“Investors need to understand that private debt should generally be held for at least five years, and that access to capital may be restricted in some market conditions.
“It’s not an asset class where investors should simply follow the headline yield. The quality of the manager, the strength of the loan protections and the liquidity structure all matter.”