“In many respects the banks are at capacity in commercial loans because commercial lending has a higher risk-weighting,” he said. “We don’t do property development, it’s income-producing only loans. We don’t need to take risk to get attractive returns.” Banks were lending below $5 million or above $50 million, he added, with Perpetual being in the $5 million to $30 million space. This was an evolution of smallticket commercial lending which in the 1960s was the domain of solicitors who would bring three or four clients together and do ‘club deals’ – with Perpetual doing these on behalf of them. Institutionally, there was never a big demand for mortgage trusts because they were seen as retail funds, but post-GFC “returns for credit risk were incredibly attractive”, Brandweiner said. “With residential mortgagebacked securities or corporate bonds, you were getting a very attractive return for the level of risk you were taking,” he said.

For example, residential mortgage-backed securities were trading at, in some cases, 87 cents in the dollar and yielding 500bps above cash, he said. “This was for triple A securities that were extremely good-quality, lending to Australian home owners who have an amazing track record of paying people back. You didn’t need to take any risk. “In the past 12 months, those spreads contracted significantly and now those publicly traded assets are no longer yielding the very attractive returns they were, and the instos know that so they’re starting to look at private markets where the dislocation between supply and demand and liquidity is still there.” Liquidity flooded back to traded markets but there was still a mis-match in private markets, and instos had recognised that the easy trade of assets was over, so an opportunity had opened, he said.

Interest in No. 1 fund had come from industry and corporate funds, high-net-worth individuals, and HNW advisory groups. No pure retail funds invested because the minimum investment was $5 million, Brandweiner said. “We wanted to do an initial raising to prove the case in a market that has never touched it before. We hope to come out with a series of tranches while the opportunity exists and we’re talking with a number of retail investors to see how we can make that work for them.” Brandweiner talked up the No. 2 mezz debt second-registered mortgages fund: “We’ve done mezz debt for five years. Our balanced fund has exposure to a mezz mortgage pool and in the past five years it’s been the best-performing asset class of anything in our balanced fund.”