Why this asset class can still grow at 5-6% pa even in an economic slowdown

"When business or economic conditions deteriorate, what you tend to find is that top-line revenue becomes more challenging. Companies need to respond in terms of aggressively attacking their cost base, but also, as a result of rising interest rates, alternative asset classes become more interesting or compelling from a valuation perspective," Lockhart said recently.

Does a slowing economy have an impact on your opportunity set?

Lockhart: At the end of it, any business or economic slowdown can have an impact in terms of the demand for credit. Recognising that in Australia, though that most credit is provided by the banks, it's still a very large market. So for us, we're the largest non-bank private debt provider in the Australian market at around $15 billion. That's dwarfed in comparison to the size of the market, which is around about 1.1 trillion. 

So certainly, we have the opportunity to be very selective in terms of the kinds of companies and projects that we agree to finance, but we believe that credit growth will still grow at 5% to 6% per annum, providing opportunities for us to originate good-quality opportunities. 

But importantly, when you get a situation where business or economic conditions deteriorate, all of the protections associated with appropriate covenants, appropriate controls, ensuring that equity bears that risk of first loss, ensuring you've got appropriate security to mitigate your risk of loss, and giving you multiple ways in which you might exit your exposure are all designed to mitigate the risk of loss.

So again, as a lender, what you're looking to do is not take the risk that the company's going to generate a huge increase in value or earnings. That's an equity opportunity. 

So, when business or economic conditions deteriorate, what you tend to find is that top-line revenue becomes more challenging. Companies need to respond in terms of aggressively attacking their cost base, but also, as a result of rising interest rates, alternative asset classes become more interesting or compelling from a valuation perspective. So, in an environment where equity upside looks less appealing, investors tend to focus in on, "How can I generate an acceptable income while preserving my capital?" 

I believe that private credit does provide that opportunity. With a team that has a strong skillset in corporate restructuring and workout, you can manage through the cycle. Our team have a strong track record with many decades of experience in terms of different cycles, and the risks that may present to a lender.

LIT

Metrics Income Opportunities Trust (MOT)

Australian Fixed Income

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LIT

Metrics Master Income Trust (MXT)

Australian Fixed Income

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