The opportunity and outlook for Australian private debt
Andrew Lockhart, Managing Partner at Metrics Credit Partners, provided insights into the opportunity and outlook for Australian private debt in this recent Livewire Alternatives in Focus article.
Lockhart emphasises the short-dated and floating base rate attributes of private debt assets in his view the sector will continue to “generate real returns over and above inflation.” These attributes mean rising interest rates have flowed through to higher total returns.
“We lend across the market, but commercial real estate is particularly attractive currently,” Lockhart says.
“An area that banks pulled back from because of changes to regulatory requirements, this created an opportunity for lenders such as us.”
“Private debt is on the radar for more people as it can provide an inflation hedge, deliver low capital volatility, and generate consistent income even in turbulent times,” Lockhart says.
He also believes the asset class can work in either the defensive or growth component of investor portfolios “Sometimes even both at the same time.”
As Lockhart explains, funds with “relatively low risk” positions in senior secured debt, or investment grade debt, may provide defensive investors with an alternative to bonds.
“Alternatively, funds that provide exposure to sub-investment grade debt or alternative parts of the capital structure can instead replace part of an allocation to equities,” he says.
Lockhart believes private debt provides greater return prospects, with lower risk, than other asset classes over the next 12 months – and within most economic conditions.
“Credit growth in the local market is likely to be between 5% and 6% in the current environment. And our size, at $15 billion, allows us to be very selective in terms of the companies and projects we finance,” he says.
Lockhart also emphasises the diverse range of deal types covered by Metrics, which invests across:
- corporate lending,
- project and infrastructure funding,
- real estate,
- leveraged buyouts, and
- acquisition finance.
“We also have the flexibility to participate in different structures, from senior unsecured debt to subordinated or mezzanine debt,” Lockhart says.
He regards commercial real estate as particularly attractive now, partly because banks have pulled back as regulatory capital charges have become too high (APRA increased Common Equity Tier 1 capital ratios to 10.25% from January 2023).
“We believe there is a growing sense that Australian real estate is the next logical market in which they should invest,” Lockhart says.
“But to do this well, you need to have people on the ground, relationships in place and the ability to manage risk for projects in which you invest.”
- Launch date: October 2017
- Funds under management: $1.77 billion (as of October 2023)
- Minimum investment: $500
- Fund objective: Provide monthly cash income, low risk of capital loss and portfolio diversification by actively managing diversified loan portfolios and participating in Australia’s bank-dominated corporate loan market
- Target Return: RBA Cash Rate +3.25% p.a. net of fees (currently 7.60% p.a.)
- What it costs: 0.24% management fee (excluding administrative costs and performance fee)
- Performance: 5.57% p.a. since inception (as of 31 October 2023)
- Launch date: April 2019
- Funds under management: $567 million (as of October 2023)
- Minimum investment: $500
- Fund Objective: Provide monthly cash income, preserve investor capital, and manage investment risks while seeking to provide the potential for upside gains through investment in private credit and other assets such as warrants, options, preference shares and equity. MOT may also invest in private equity and equity-like investments
- Target Return: Target Cash Return of 7% pa net of fees paid monthly. Target Total Return of 8-10% pa net of fees through the economic cycle
- What it costs: 1.03% p.a. (plus performance fee)
- Performance: 8.88% p.a. since inception (as of 31 October 2023)
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