January Report

• Private credit remains compelling in a more discerning environment: As liquidity normalises, performance differences are becoming clearer, reinforcing the importance of underwriting discipline and experienced manager selection.
• PCX remains positioned for stable income and capital resilience: The Trust continues to focus on senior secured lending, deliberate diversification, and downside protection.
• PCX actively refines exposures as market conditions evolve: In January, the Trust added a US asset-backed fund and a European direct lending fund, while exiting a US direct lending fund due to less attractive risk-reward characteristics in the upper middle market.

Current Market Backdrop: Volatility and Dispersion 

In an environment of elevated volatility, driven by the intersection of macroeconomic policy, geopolitical conflict and technological disruption, it is increasingly difficult to identify outperforming assets when changes in sentiment may be unrelated to corporate fundamentals. 

AI optimists are judging business models on their ability to adapt to technological change, and the recent sell off in the software sector highlights questions over the sustainability of traditional software models.

Importantly, this is not a crisis environment. Rather, it is a period requiring greater selectivity, where capital remains available, but outcomes are becoming more varied. This increases the importance of portfolio allocations that can deliver regular income and capital preservation characteristics through periods of heightened volatility.  

Private credit is not immune to market forces. Outcomes depend critically on investment strategy, manager selection, underwriting discipline and portfolio construction. For much of the post-GFC period, low interest rates, abundant liquidity and easy refinancing masked differences in underwriting quality and portfolio construction. That era has ended. As a result: 

• Outcomes across credit managers are diverging. 
• Weaker deal structures and optimistic assumptions are being exposed, and 
• Manager behaviour and discipline are proving far more important than broad strategy categories. 

Private Credit Remains Compelling 

Private credit continues to play an important role in diversified portfolios because it allows investors to exchange liquidity for structural protection. Well-constructed private credit portfolios can: 

• Generate returns through contractual cash flows rather than daily market pricing. 
• Reduce exposure to interest rate volatility and the need to sell at inopportune times; and 
• Manage risk through seniority, collateral, covenants and governance rights. 

Our Approach: Manager Selection First  

Because credit does not participate meaningfully in upside, protecting the downside is paramount. 

That protection starts with manager selection. We prioritise managers who have demonstrated, through multiple cycles, the ability to preserve capital by: 

• Maintaining consistent underwriting standards rather than loosening them in competitive markets; 
• Focusing on durable businesses with strong market positions; 
• Lending at senior levels of the capital structure; 
• Using conservative leverage with meaningful equity buffers beneath the loan; 
• Insisting on strong covenants and control rights; and 
• Actively monitoring portfolios and intervening early when assumptions change. 

We favour managers with scale and depth, not for growth’s sake, but because experience, data and institutional decision-making processes materially improve judgment, particularly in volatile environments. Managers who have worked through different environments tend to be more disciplined in maintaining standards, avoiding the gradual loosening of terms in competitive markets, and recognising early the patterns that have historically led to poor outcomes.  

An example of how disciplined managers distinguish between market noise and structural shifts is in evaluating credit risk relating to software companies. The question of AI risk to software companies is not new. Many managers have been considering AI obsolescence risk (amongst others) in their underwriting of loans well before the significant flow of capital commenced. For example, when assessing possible future repayment challenges from technological disruption, determining whether the borrower’s product is mission-critical to customers, easily replaced by automation, and/or if the company has control of proprietary data.  

The risk we seek to avoid is not short-term price fluctuations, but the permanent impairment of capital that can arise when underwriting standards drift or responses to change are delayed. 

Our Approach: Portfolio Construction and Diversification 

Diversification within PCX is deliberate and structural. Our managers are selected not only for the quality of individual loans but also for how their portfolios are constructed, seeking to ensure risks are not concentrated around the same sponsors, sectors, refinancing windows or economic drivers. 

At the PCX level, we combine complementary strategies so that exposures behave differently under various market conditions.  

To achieve this, we diversify across four key pillars: 

• Lending approaches: enterprise-based lending (loans to operating companies based on their cash flows) alongside asset-backed strategies (loans secured by pools of financial assets such as equipment leases); 
• Geographies and legal systems, which influence how and when lender rights can be enforced, and capital recovered; 
• Borrower types and capital structures, with different sensitivities to operating performance, contractual cashflows, or refinancing conditions; and 
• Repayment and refinancing profiles, so that outcomes are not reliant on a single exit path and are supported by a combination of cashflow generation, sponsor quality, equity support, and multiple potential sources of liquidity.  

The objective, as far as practicable, is to ensure that individual challenges remain contained and do not cascade through the broader portfolio, while still maintaining sufficient focus and conviction to deliver reliable income and long-term outcomes. 

PCX’s Role In Investor Portfolios 

To recap, PCX is designed as an income-oriented, capital-preserving vehicle. Its objectives are: 

• Regular income; 
• Capital resilience across market environments; and 
• Lower volatility of outcomes relative to traded markets. 

To achieve this, PCX focuses on senior, secured lending and strong collateral. Our managers focus on the underlying creditworthiness of each individual borrower, seeking to confirm each business has the cash flow and structural protection to weather external shifts. It is designed to provide defensive stability in portfolios where other asset classes are increasingly volatile. 

Looking Ahead 

Headline-driven volatility is likely to persist. While narratives will continue to shift, the core role PCX is designed to play in portfolios remains unchanged: stable income, capital resilience, and diversification benefits at a time when many other asset classes require increasingly precise timing and security selection. 

Portfolio Update

Continued focus on capital deployment, diversification and downside protection. 

The January cum-NAV per unit decreased from $2.02 to $2.01 due to the limited number of investor statements received during the month. Many underlying funds have a December financial year end and, consequently, the receipt of December statements is often delayed as a result of annual audit processes. This represents a temporary timing issue that has historically resolved within the first few months of the year. The Trust declared a 1.3c dividend for December, exceeding the target minimum and in line with the recent distribution trend. 

During January, the Trust: 

• Onboarded a US asset-backed finance fund, enhancing strategy diversification and improving the speed of capital deployment within the Balanced bucket; 
• Onboarded a European direct lending fund, increasing European geographic exposure in line with target allocation guidelines; and 
• Redeemed from a US direct lending fund that has progressively migrated towards the larger-cap end of the market. As a result, the fund’s risk-reward profile is no longer considered appropriate for the Trust. 

All of our funds, both new and existing, are highly rated by Mercer with proven track records of delivering strong risk-adjusted returns through economic cycles. As part of the onboarding due diligence process, each fund is assessed within the context of the broader portfolio to ensure it contributes to diversification across managers, geography and strategy. 

The Trust is currently evaluating several new closed-end funds for potential inclusion in the Total Return bucket. Commitments to these funds are expected to support the Trust’s objective of remaining fully invested over time, thereby contributing to a stable and growing NAV.  

At 31 January, the Trust has maintained its target allocation mix, with capital diversified across fund types and managers as follows: 

• Income: $126.8m invested across 9 managers 
• Balanced: $39.8m invested across 6 managers 
• Total Return: $40.5m invested across 12 managers

The portfolio remains within stated limits across geography, seniority and investment strategy. Diversification by vintage, style and manager continues to underpin downside protection and liquidity planning. 

The Trust’s underlying sector exposure remains well diversified and focused on defensive, non-cyclical industries such as Financials, Industrials, Information Technology and Health Care. These 4 sectors account for 65% of the total Trust exposure (69% excluding cash). Exposure to the Real Estate sector accounts for less than 3% of the total Trust exposure.