Super funds could join the big four banks as a major lender to Australian companies over the next few years.
The impact of Basel II reforms, which require banks to hold greater amounts of capital for their riskier loans, has encouraged banks to seek partners for certain loans which have come up for re-financing since then. Basel III reforms which come into force in Australia on January 1, 2015, are further regulating their capital structure.
A group of fund managers are hoping to partner with banks by creating loan funds financed by institutional investors.
Metrics Credit Partners, a spin off from NAB, has already made its first loans with institutional investor money (including $75m from IOOF) and it is being closely followed by Tyndall which is speaking to super funds to gauge their interest in private debt and syndicated loan opportunities.
Overseas managers are seeking to enter the space too, with ICG and private equity specialist HarbourVest soon to launch funds.
Interest from super funds in the private loan market in Australian and overseas is also being driven by the falling yields on investment grade credit.
Richard Brandweiner, director of investments at First State Super, said: “The reason why it is interesting is that credit spreads in the traded markets have been bid down to less attractive levels. In pockets of private markets, because of Basel III requirements, there are probably better opportunities.”
Brandweiner said it would be great if there was a developed loan market to invest into in Australia, but in common with other investors he is still trying to assess to what extent the risks are justified by the returns.
“Traditionally bank dominated, it is fairly illiquid and that is problematic as while the credit spreads are more attractive than the traded markets, in many cases they probably do not go far enough in compensating you for the illiquidity risk.”
Sue Wang, a principal Mercer, who has analysed this market, says for many other super funds, it was not the illiquidity of loans but a lack of track record of the funds that was slowing decisions to invest.
She said that banks were keen for institutional investors to take a share in individual loans, because if they partnered with another bank, they might find themselves competing in the offer of banking services to the company taking the loan.
“I have not heard of a bank which has not welcomed the idea of institutional investment involvement,” she said. “They welcome it because at this stage it is by no means a threat or competition to them.”
Tyndall is touting its private debt fund as having returns of 400-600 bps over inter-bank lending rates, with returns of 200-300bps for its syndicated loan fund.
Tim Martin, head of alternative assets at Tyndall is getting strong interest from small to medium sized super funds that have not invested in the loan market before. Part of the attraction, he said was a growing appetite for benchmark unaware opportunities.
Notably, Ross Bernays, soon to be the new chief investment officer of Prime Super, following its merger with HIP Super, has expressed an interest in finding new debt opportunities such as private debt, that would diversify its asset base.