SYDNEY: Australian pension and wealth manager AMP Ltd has been scaling back its exposure to private credit, citing an increasingly frothy market as its shifts money towards assets such as infrastructure.
The A$159bil firm began trimming private credit holdings within its diversified credit portfolio last year, according to Stuart Eliot, AMP’s general manager of investments.
The asset class, which includes both local and global credit, accounted for about 2.5% of the company’s portfolio before being wound back to roughly 2% in recent months.
“The yield spreads were getting too low to justify the risk and the covenants were getting lighter,” Eliot said in an interview, referring to returns in the fast-growing industry that have drifted lower in recent years.
“So it wasn’t appealing to continue to deploy capital into that area.”
While the firm isn’t pulling money from private credit directly, it’s retained capital as underlying deals are refinanced, said Eliot.
The proceeds are being held in cash as funding for other investments, including more allocations to direct infrastructure globally.
Concerns have been mounting around the US$1.8 trillion private credit industry, which has been hit by a wave of redemption requests from mainly retail investors.
Funds managed by firms including Apollo Global Management Inc, BlackRock Inc and Ares Management Corp faced unprecedented demands earlier this year, prompting some to cap withdrawal limits.
Australia’s A$4.5 trillion pension industry has piled into unlisted assets, with private credit emerging as a key growth area for some of the largest funds.
The Australian Securities and Investments Commission has stepped up oversight by demanding more detailed weekly data from private credit funds as global scrutiny of the sector intensifies.
While AMP’s reduction in private credit is relatively modest, about A$185mil, the move marks a shift in sentiment from one of Australia’s biggest players in the pensions industry.
“There are times when every asset class is attractive and unattractive, and it seems a bit frothy right now,” Eliot said, adding that he wasn’t worried about the overall credit quality of the industry.
Still, competition for deals remains intense. Australian pension funds have largely avoided the assets facing the heaviest scrutiny, and investment chiefs have consistently argued the recent redemption pressures are mostly confined to retail investors.
Colonial First State chief investment officer Jonathan Armitage said the market strains were concentrated in loans written in 2020 through 2022, when low interest rates led to looser underwriting standards.
His firm is focused on companies “large enough to have a number of levers to pull if you go through choppy economic conditions”, he said.
Aware Super, Australia’s third-largest pension fund, said its private credit allocation – worth around A$8bil – remains in a “steady state”.
“Most of our managers have moved up in quality in the last 12 months, in terms of where we are in the cycle,” head of Defensive Assets Sonia Baillie said in an interview, adding managers remain alert for new opportunities. — Bloomberg
