Many fixed-income investors are unaware of the benefits Private Debt, as an asset class, has to offer.
The Aura Group newsletter will conduct a four-part Private Debt series via its monthly newsletters in order to provide increased clarity over this growing asset class. Many investors, seek to allocate a sufficient percentage of their portfolio to assets that can deliver consistent monthly distributions with little to no capital instability. Net Asset Value or NAV is equal to a fund’s or company’s total assets, less total liabilities, divided by the number of outstanding shares or units.
Funds that hold public assets that are priced to market see regular fluctuations in the total assets section of the equation, thus fluctuating the NAV. As an example, when credit margins increased in March 2020, the value of bonds and floating-rate notes held in public debt funds depreciated in market value, irrespective of any impairments on the underlying loans.
This is due to the inverse relationship between credit margin (yield) and price. In other words, when investors deem a credit asset to be riskier, they will demand a higher yield to purchase the asset. This increase in yield will result in a lower capital value of the bond or floating rate note, thus, reducing the fund’s total assets and numerator of the Net Asset Value equation.
Investors in such funds would notice a depreciation through a fall in the NAV, which would be reflected as a lower unit price. On the other hand, Private Debt Funds, which invest through structured finance warehouse facilities, would only see the NAV fall below $1 if losses in the pool of loans are greater than the borrowers’ security, lenders’ claim on interest, lenders’ committed equity capital, and the private debt fund’s interest charged to the facility.
Investors in Private Debt Funds typically receive their income on a monthly basis, as interest on capital invested in the warehouse facilities is due monthly. As the interest income is received, the fund's NAV appreciates beyond $1, as the fund’s total assets increase by the value of the income. Once this income is passed on to investors through monthly distributions, the NAV returns to $1. Investors may choose to receive this monthly income in cash or reinvest their earnings at the maintained $1 NAV. Additional investments increase both the Total Assets figure (numerator) and Number of Outstanding Units figure (denominator) by equal amounts, thus maintaining the $1 NAV.
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Aura Group subsidiaries issuing this information include Aura Group (Singapore) Pte Ltd (Registration No. 201537140R) which is regulated by the Monetary Authority of Singapore as a holder of a Capital Markets Services Licence, and Aura Capital Pty Ltd (ACN 143 700 887) Australian Financial Services Licence 366230 holder in Australia.