Private credit investing involves a range of considerations, including how risks are identified, managed, and overseen. Before making any investment decision, it is important that investors take the time to understand the risks associated with an investment, how those risks may affect returns or access to capital, and the processes used to manage them. Seeking clear, accessible information about risk can help investors make more informed decisions aligned with their own objectives and circumstances.
The range of investment, operational, and market-related risks associated with an investment in the Merx Private Credit Fund is outlined within the Information Memorandum, alongside the governance structures, portfolio management practices, and operational frameworks used to support the management of those risks. These include areas such as credit assessment, portfolio diversification, liquidity management, conflicts management, compliance oversight, and investment governance.
We encourage investors to seek plain-language information about investment risks so they can make informed decisions about whether private credit is appropriate for their circumstances. Below is a summary of key risk areas outlined in the Information Memorandum, along with a risk index table summarising the nature of each risk and the measures used to help manage them.
Financial and Investment Risks
- Credit Risk: The Fund is exposed to the risk that borrowers may fail to meet their payment obligations, which could negatively impact distributions or lead to a loss of your investment capital. Even though the Fund takes security and third-party guarantees, these measures may not completely eliminate the risk.
- Concentration Risk: The Fund’s returns could be jeopardised if it becomes overly exposed to a single credit facility, specific sector, or region, and that particular exposure underperforms.
- Liquidity Risk: The underlying loan assets of the Fund do not have a transparent or liquid secondary market, meaning it can be difficult to realise these investments quickly. Consequently, the Fund may not always have the necessary cash on hand to meet redemption requests on a given date, potentially causing delays in generating the cash needed for withdrawals.
Risk Summary and Mitigants
The summary below outlines several of the key risks detailed in the Information Memorandum, together with examples of the measures and governance processes used to help manage them.
Financial and investment risks
| Risk | Summary of risk | Mitigants from IM |
|---|---|---|
| Credit risk | Borrowers may default on their payment obligations, potentially resulting in a loss of capital. | Initial credit assessments, ongoing monitoring, and credit recovery processes are utilised. Loans are secured with first or second mortgages and/or business assets using appropriate loan-to-value ratios. The Fund maintains a loss provisioning policy to prepare for potential future losses. |
| Concentration risk | Over-exposure to a single borrower, credit facility, or market sector could jeopardise returns. | Advances to any single borrower are limited to a maximum of 15% of the total loan portfolio. The loan portfolio is diversified across unrelated entities with varying risk profiles and market sectors. |
| Liquidity risk | The underlying loans or units in the Fund are not traded on a liquid market, which could delay the cash generation needed to meet investor redemption requests. | The Fund maintains short loan terms, generally 24 months or less and a diversified portfolio of loan investments.Six months’ notice is required for withdrawals to avoid a redemption fee, which aids in cash flow management.The Manager can defer or suspend withdrawals if necessary to preserve investor capital and ensure equitable treatment. |
Operational and management risks
| Risk | Summary of risk | Mitigants from IM |
|---|---|---|
| Manager execution and operational risk | The Fund’s performance relies heavily on the skill and operations of the Manager. | The directors possess substantial experience in loan origination, finance, and management. Directors are required to personally invest in the Fund to ensure their interests align with those of external investors. The Investment Committee requires unanimous agreement from its members before any loan is approved. |
| Conflicts of interest | The Manager or third-party providers could face conflicting interests during ordinary business. | The Manager maintains specific policies and procedures to identify, manage, or avoid conflicts fairly. The fund also maintains a formalised “Conflicts of Interest” policy in its governance library. |
| Related party risk | Transactions with related parties could be influenced to benefit interests other than the Fund’s. | The Fund maintains a strict policy against making loans to related parties of the Manager.Related party transactions are restricted by the Trust Deeds unless they are conducted on normal, arm’s-length commercial terms and permitted by the Trustee. |
| Regulatory and compliance risk | Evolving regulations or inadvertent compliance failures could result in penalties or operating restrictions. | An independent Trustee (Public Trust) oversees the Fund’s compliance with laws and governing documents.Professional legal, accounting, and audit firms are engaged by the Fund.The Manager utilises an extensive suite of internal governance and compliance policies. |
Broad market and environmental risks
| Risk | Summary of risk | Mitigants from IM |
|---|---|---|
| Market risk | Broader economic conditions, inflation, and interest rate fluctuations can impact fund returns. | The short duration of the loan portfolio, typically 24 months or less, actively limits the Fund’s exposure to long-term interest rate and market fluctuations. |
| Climate risk | Entities and projects funded may be impacted by climate-related property destruction or added costs. | There are no specific mitigants for climate risk detailed in the Information Memorandum. Climate specific risks are considered by the Investment Committee in the approval process – e.g. flood risk, land stability, environmental or planning considerations. |
Investors should carefully review the Information Memorandum and seek professional advice where appropriate before making any investment decision. Investments in private credit involve risk, including the potential loss of capital, and returns are not guaranteed. Understanding both the risks and the governance frameworks supporting the Fund can assist investors in making informed decisions about whether the investment is suitable for their objectives and circumstances.
Investors must qualify as “wholesale investors” as defined in Schedule 1 of the Financial Markets Conduct Act 2013. The fund is not suitable for retail investors.