Not all Private Credit is created equal

Our next speaker in the Australian Perspectives is Andrew McDay from Remara.

His presentation topic is Not all private credit is created equal.

Remara is an Australian-based asset management company with $700 million in funds in private credit, real estate, and tactical opportunities.

They take an innovative and hands-on approach through vertical integration model, providing portfolio diversification, superior risk-adjusted returns, and capital preservation.

Andrew is the founder and managing partner of Remara.

Prior to that, he held multiple positions within Brookfield Asset Management, most recently as CFO Asia Pacific covering financial leadership.

He has served on the CFO Roundtable and the National Accounting Roundtable for the Property Council of Australia.

Welcome, Andrew.

Thanks, Angelina.

It's good to be here.

So the topic today, just a quick disclaimer about the information that we're going to share.

In terms of an overview of Romara as an asset manager, as mentioned 700 million assets under management.

We have three investment verticals, private, credit, real estate and tactical opportunities.

We've got 80 portfolio company staff and five investment professionals.

In terms of private credit, there's a lot of conjecture in terms of what that actually means.

So I thought I'd start quickly start off with an overview of what private credit is and essentially it's privately sourced fixed income.

So very similar to bonds and publicly traded credit instruments.

The biggest difference is that they are privately held.

They're not freely tradable usually on public markets.

and they're generally more illiquid in terms of no secondary markets to be able to trade underlying securities or underlying credit assets.

The Australian credit market as a total whole is three trillion in size.

with the biggest predominant parcels being made up of residential mortgages.

Not all private credit is the same, which is the topic of my presentation today.

For the majority of our loans, property is used and we receive collateral and security with prime borrowers.

In all cases, there are personal guarantees that apply as well.

In terms of private credit and what it can do for an overall investment portfolio, there's four key things that investors should ultimately look for.

One of those is a consistent income yield.

So fixed income provides a continuous stable income and essentially private credit should be able to provide that exact same thing.

So really the consistency in the income from any new investments that you're seeking should be one of the number one considerations in terms of looking at a new private credit investment.

Second is limited capital volatility.

So these are floating rate loans.

They're not subject to substantial changes in RBA rates, which means that the capital value of these assets should not move in a meaningful way.

So they shouldn't have a lot of capital variability and they should be able to form a good solid foundation for your underlying portfolio that doesn't have or isn't open to capital volatility and major price fluctuations.

The third is flexible liquidity.

So given that there is a portfolio of underlying loans, there should be continuous redemptions opportunities in terms of loans that are hitting maturity, being repaid, and the manager should be able to provide flexible liquidity in terms of redemption opportunities within that private credit investment space.

The fourth, and this is something that a lot of people haven't really probably considered in terms of the private credit strategy, is the portfolio diversification.

So generally private credit is uncorrelated to equities and there's also a reduction in real estate equity correlation as well.

Given most private credit is secured by real estate, the private credit opportunity

is certainly something that has a significant portfolio diversification benefits and can limit the fluctuations that would potentially be incurred in somebody's portfolio if they were subject to substantial equity investments.

In terms of Omara's credit platform, we've got three key features.

We're vertically integrated.

We've got four portfolio companies that originate nine different credit types for us.

Over our tenure, we've originated 2.6 billion of credit since 2016.

We have 12 and a half thousand underlying contracts in our portfolio.

As previously mentioned, we only lend to secure loans and to prime borrowers and net losses across that 2016 track record period is 28 basis points in terms of net losses.

The key features for our private credit income

fund is a consistent monthly return.

So since inception we've paid 13.15 per annum post fees and that inception of the fund has been going since August last year.

As I mentioned we are only lending to prime borrowers and only providing secured loans.

We do have an established track record from a private credit perspective.

So our vertical integration allows us to be able to procure credit with a long-standing track record and history.

We've got four years of our private credit fund track record at an institutional level, and we've been able to achieve RBA rate plus 7% through that four-year period.

And liquidity management.

So for us, we've got quarterly distributions, sorry, monthly distributions and quarterly redemptions.

and our integrated credit model certainly gives us the ability to be able to provide liquidity to investors as and when they need it on that quarterly basis.

In terms of fund details, I won't talk too much about this slide.

Obviously key aspects is monthly distributions, monthly applications, quarterly redemptions.

Our running yield at the moment is 13.3%, very low volatility in terms of our monthly returns, as you would expect from a credit fund.

And I looked through Obligora exposures, we've got 4,238 contracts in our underlying fund with the average position exposure of $69,000.

So extremely diversified.

From a track record perspective, obviously we've had a number of years since 2019 on the private credit track record.

In terms of our fund, you can see the graph on the page there where we have performed extremely well.

versus the RBA increase, which is the blue portion of the graph there.

The purple line is our target return and the lighter shade of purple is the total return over a monthly basis.

So a nice consistent return that has trended up as the RBA rate has ultimately increased.

In terms of our vertically integrated platform, there are a couple of benefits for investors.

But one of the key things is there's fewer layers between the underlying assets and investors.

So generally, there's an improved return profile as a result of a lower fees and a greater return to the underlying investors.

The secondary benefit is also an improved risk profile.

So given that we are providing credit to prime borrowers on secured real assets, there's definitely structural protections that investors receive as a result of that.

Number three, we're an aligned manager, so we provide risk retention or first loss across each and every loan.

And as a result of that, we will lose our money before any investors essentially lose theirs.

So that certainly hones our focus from a risk perspective.

And then we also provide underlying liquidity.

So with nine different types of credit assets that form part of our private credit fund, we've got continuous maturities that allow us to be able to provide liquidity windows back to investors and be able to ensure that we can meet those redemption requests as and when investors need their funding.

So that's a bit of an overview of some of the key considerations from a private credit perspective.

and how our private credit fund can benefit investors in terms of their portfolio and considerations that they could take into account for our private credit fund forming a part of their portfolio.

Thanks, Angela.

Thank you.

I've got some questions for you.

So what are the key considerations for investors when selecting a private credit investment?

Yeah, that's a really good question.

I think some of the key considerations need to be what is the underlying pool of assets that form part of

that private credit fund.

There are a substantial amount of funds that invest into larger ticket real estate and corporate loans and as you have larger oligory exposures you're generally exposed to potential risk in terms of a loss or a delay or an arrears in one of those larger portions of loans.

So one of the really key considerations needs to be what are the underlying exposures, what are the number credit contracts and as I mentioned

The Romana private credit fund has 4,000 underlying contracts.

Our platform as a whole has 12,500 underlying contracts.

So one of the key considerations for us is diversity in terms of our underlying risk profile and having a small individual or exposure so no single individual deal can create losses across the portfolio as a whole.

I remember in your presentation, you mentioned Romana's vertical integration.

So how does that benefit investors?

Yeah, look, that it's a it's a unique business model.

And essentially, for us that the vertically integration means that investors are closer to the underlying assets, there's fewer layers in terms of advisors.

And so ranges and so forth that essentially strip fees out of the underlying pool of assets.

So what that means is we're generally able to pay

a higher rate of return for investors for a consummate risk that other managers may be able to pay to provide as a result of having less fees taken out of that platform and out of that asset pool.

And with our alignment in terms of that vertical integration,

Ramara is on risk in terms of the underlying losses and loss protection across the underlying portfolios.

So what that essentially means is if there are losses that occur within that portfolio, Ramara via our underlying portfolio companies will essentially incur that loss before any investors do.

So that essentially means that we're very much aligned to the interests of our investors in the private credit fund.

and essentially as a result we would be losing money before them and that certainly hones our focus in terms of writing the right credit and ensuring that the portfolio is performing as it should be.

Well thank you very much, great to see you, take care.

No worries, thanks Angela.