Preserving capital whilst maintaining real income in an inflationary environment is an important challenge for investors to consider. Andrew Lockhart, Managing Partner at Metrics Credit Partners, explains that unlike many fixed income assets where capital value falls as rates rise, the income received from corporate loans moves in line with changes in the RBA cash rate.
“For us the capital value holds stable and the income that is generated from our lending activity increases. So the monthly distributions would increase in a rising rate environment. In lots of ways it’s a bit of a hedge against inflation.”
Corporate lending remains a relatively poorly understood asset class for Australian investors given that until recently access had been limited to institutional investors.
In this short video Lockhart highlights one of the biggest misconceptions investors should understand about this asset class.
- Unlike many fixed income assets corporate loans have a floating rate, which means income distributions are adjusted as the RBA cash rate moves up or down.
- Corporate lenders have the ability to hold security to protect against downside risk, which is one of the biggest misconceptions relating to the rights and controls that lenders have ahead of equity holders.
- If a business experiences deteriorating performance it is the equity holders who are exposed to the majority of the risk.
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