Ratings split on private credit highlights risks for advisers

According to AMP chief economist Shane Oliver, the divergence reflects differences of opinion – but it is also a cautionary signal.

Speaking on an upcoming episode of Momentum Media’s Relative Return Insider podcast, Oliver pointed out that quantitative assessments tend to align across agencies, particularly given analysts move between houses, bringing common frameworks and approaches. But qualitative assessments, particularly around governance and risk management, are more subjective.

“If someone’s raising it, flagging it as an issue, it would give you a bit of caution over it,” Oliver said.

Bottom line, the differences matter.

Earlier this week, Zenith reaffirmed its high ratings across Metrics Credit Partners’ suite of funds, even after rival Lonsec downgraded several of the same vehicles.

Zenith highlighted the strength of Metrics’ investment team, the robustness of its risk management, and its evolving governance practices as reasons to maintain confidence.

In an investment note, Zenith said its conviction in Metrics remains underpinned by the quality of the investment team – led by Andrew Lockhart and three other managing partners – and their hands-on involvement in all debt and equity decisions.

“Zenith has covered Metrics’ strategy since the initial launch of the Metrics Master Income Trust (ASX: MXT) in 2017 and continues to maintain a strong qualitative view of its investment team, process and risk management function,” Rodney Sebire, head of alternatives and global fixed income at Zenith, said in an investment note.

Lonsec, in contrast, cited governance concerns.

For fund managers and institutional investors, navigating these differences is part of the job – presumably they would likely investigate further before making decisions.

Financial advisers, however, face a more difficult landscape. Many advisers subscribe to only one research house and must take its rating at face value.

As Oliver observed: “It’s probably better than doing nothing … But it does create these difficult patches.”

The private credit space, where Metrics operates, illustrates why these divergences can be particularly pronounced. Namely, as agreed upon by regulators and many market pundits, private credit has historically been less accessible, opaque and lightly regulated.

As it becomes more mainstream, research houses are still grappling with limited data, inconsistent reporting and the challenges of assessing governance structures.

“As an investment option that’s available almost mainstream now, it’s still relatively new and therefore you might have more divergences of opinion simply because the research houses are still struggling to get fully on top of it. You could argue, well, we haven’t been through a full cycle yet,” Oliver said.

This raises the broader question of regulator confidence.

ifa understands that, as part of its close surveillance of private credit, ASIC is also closely examining inconsistencies in ratings especially the lack of standard criteria that in-house or external valuers consistently apply.

Its scrutiny suggests that regulators are aware that ratings agencies – while influential – are not foolproof.

While Oliver believes divergences in ratings could indicate healthy independent analysis, they can also flag areas where more transparency and oversight are needed.

For advisers relying on a single rating, divergence can be particularly confusing and costly.

So, what’s the takeaway for those navigating this complex landscape?

Ratings agencies provide a useful guide, but they are not arbiters of truth. If one house flags concerns, dig deeper and keep an eye on regulators like ASIC, whose increasing scrutiny of private markets underscores that even highly rated funds are not automatically beyond question.