Finding income in a low-rate world

For the best part of a decade now, income hungry investors have battled to find a decent yield. Thankfully, the capital gains from falling rates have offset the lack of income. But with rates around the world close to zero, it seems there’s limited room left for more capital gains.

Let me share an example. According to the ATO, the average super balance for a 65-74-year-old man is $446,800. Meanwhile, the average super balance for a 65-74-year-old woman is $378,600. So, let’s say our couple has a combined super balance of $825,200. Quite a healthy nest-egg. But with term deposit rates at around 1.75%, that will produce just $14,441 of income over the course of a year.

It should come as no surprise then that private credit, with its chunky yields, has seen a boom in popularity in recent times. Once purely the domain of institutional investors, these products are increasingly available to retail investors through listed structures on the ASX. Offering returns in the mid-to-high single digits, they attract a premium for the higher risk nature, while generating additional fees from deal origination.

Andrew Lockhart, Managing Partner of Metrics Credit Partners, has been a pioneer in this sub-sector in Australia. He worked for decades at a Big Bank on these deals, and then nine years ago decided to start Metrics with his business partners. In this week’s episode of The Rules of Investing, we discuss how the GFC shaped his investment philosophy, how Australia's big banks have changed the way they’re funded, and the sectors he'd be avoiding if the market closed for 5 years.

Time stamps:

• 2:10 - How Metrics came to life
• 5:22 - Andrew’s experience in private debt markets during the GFC
• 10:46 - How has debt risk changed since the GFC?
• 13:00 - What is private credit and why should investors be interested?
• 15:54 - The risk profile of private credit
• 22:40 - How would the asset class perform in a higher interest rate environment?
• 25:35 - Capital structure and credit markets
• 31:15 - Where will rates go from here?
• 34:44 - Andrew answers our 3 favourite questions

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