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Dear Readers,

You are really going to get quite sick of hearing me giving you this piece of advice, because I’ve given it so often.

But I know that, despite my repeated pleas, tens of thousands of you will ignore it. But I’m not going to stop because I want you to be financially safe.

Now is not the time to be handing your precious savings over to non-traditional hedge funds for the next few years.

Here is what I mean.
Source – Australian Financial Review

From the above article.

The great private credit debate has once again ignited in a week when one big player was forced to introduce mechanisms to deal with withdrawals while another was reported to be the subject of regulatory scrutiny.

The developments have added to a lively debate between supporters and critics of the market’s hottest asset class – which has been attracting not only investor capital but regulatory attention along with it.

This is not the type of news private credit funds ever want to see associated with them.

I know, both from my research into this area and from face-to-face interactions, that a large cohort of investors do have significant amounts of their money tied up in such funds.

This could be one of you.

So, I want you, should you be involved or are thinking about it, to ask yourself a difficult question.

How confident are you that you’ll be able to get your money back from these funds during a crisis?

Because, if this article is any guide, you are going to have a tough time getting your money out now, let alone in the future during a crisis.

Here is an example of what I mean.
Source – Australian Financial Review

The $1.2 billion flagship fund run by Regal Partners’ private credit subsidiary Merricks Capital has told investors it will have to delay redemptions because there is no “unallocated cash” to distribute to them.

You what?

Surely, they can just sell some shares or an ETF that they have invested in on your behalf.

It’s here that the truth of how such funds operate comes to light. To get these ‘risk-free’ returns each year, they instead place your money into senior secured loans across all its available sectors.

In this instance, one of Merrick’s Capital sectors is for commercial property developments. These aren’t something you can go and sell units of whenever you please. Speaking of ‘units,’ that’s how those same investors had their request handled.

Instead, the Merricks Capital Partners Fund has offered investors who want their money returned a new class of unit that means they can continue to receive dividends but aren’t forced to back any new loans.

Translated into English; you-aren’t-getting-your money-back-now.

That’s alarming. And this is happening when things are good- markets are in all-time highs and most of the developed world is not in a recession.

So, what do these funds do when we are in one?

Raise those red flags.

For many years now, traditional banks have been shying away from providing what they consider riskier loans.

Private credit firms in Australia flourished after the 2018 banking royal commission, as banks pulled back from lending to riskier or less established parts of the market.

The same story occurred in other countries – it was a response to tight banking regulations.

Sectors that struggled to get loans – property development, hospitality and small businesses – have become the natural customers of the growing non-bank lending sector.

Hence why funds like Merrick’s Capital favour secured loans. However, it isn’t without risk.
For instance, one of the primary reasons why investors in Merrick’s Capital fund couldn’t get their cash back was its interest in providing finance to Halo, a proposed 55-storey office tower made partly of timber in the centre of Sydney.
Source – Australian Financial Review
There’s just so many red flags popping up everywhere here.

Just be careful with what you now put your capital into. Safe and liquid assets that you can sell easily.

Remember, if something sounds too good to good to be true it usually is.

More broadly, only those blessed with the knowledge of timing will be the ones who fully escape the coming carnage, using the timing of the real estate cycle.

Learn that timing here via membership to the Boom Bust Bulletin (BBB). Let the BBB guide you on the inherent timing of the economy only knowledge of the land market can give you.

Each month this history and knowledge will be yours via monthly written editions and video postcards that will help explain the real estate cycle like never before.

The corporate regulator, the Australian Securities and Investments Commission (ASIC), is increasing its scrutiny of the sector but when they say it can’t be sure how big the unregulated private credit market is – that’s a problem.

I ask you; what do you think happens to redemption requests that cannot be honoured without a value destructive fire sale that harms existing investors.

Then ask what happens to those same loans when the real estate pledged against them falls and keeps falling.

Use the timing of the real estate cycle to keep yourself safe. That’s what the BBB offers you.

Sign up now.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team

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This content is not personal or general advice. If you are in doubt as to how to apply or even should be applying the content in this document to your own personal situation, we recommend you seek professional financial advice. Feel free to forward this email to any other person whom you think should read it.