Peter Robinson, Challenger

Australia’s consultants say investor appetite has turned towards niche and esoteric private credit strategies as they hunt for extra yield in the asset class.

Trevor Castledine, senior director of private markets at bfinance, said clients were keen to invest in private credit strategies, but weren’t sure how to manage liquidity. “The idea of investing in trade finance, for example, is attractive since while investors might not necessarily get liquidity, they will get visibility over short-term cash flows,” he said.

During a panel discussion at Investment Magazine’s Private Credit Forum, Casteledine said sophisticated investors are looking for add-on investments such as mezzanine debt or the riskier loans that the banks can no longer hold because of higher regulatory capital demands.

Simon James, an investment consultant at Willis Towers Watson, agreed that given the weight of capital coming into core markets, investors want to allocate fresh capital to niche and esoteric strategies such as real estate back-lending in the UK and Europe predominantly.

“We have a lot of consumer- facing exposures in the US,” he said. “Our view in the US is that corporates have re- leveraged where consumers probably haven’t so we are pivoting exposure there.”

The challenge for James is the number of first-time private credit clients allocating to niche sectors. “How diversified should they be?” he said. “We don’t really have an answer but that’s what we are working through with those investors who are new to the asset class.”

consumers probably haven’t so we are pivoting exposure there.”

The challenge for James is the number of first-time private credit clients allocating to niche sectors. “How diversified should they be?” he said. “We don’t really have an answer but that’s what we are working through with those investors who are new to the asset class.”

Ray King, IOOF Holdings portfolio manager of alternatives told delegates he has been focussed on the local market because of the transparency as well as returns.

“As we achieve scale, we can be more innovative and we want to see if we can enhance the liquidity of portfolios without sacrificing return.”

Separately, Peter Robinson, Challenger’s head of strategy, fixed interest is also focussed on the Australian investments as they provide a liability match.

With superannuation funds being forced to pay retirees in Australian dollars, he said, they either have to hedge or deal with potential currency risk when bringing money back into the country.

“Importantly, the last 12-18 months has seen a weakened Australian dollar which has constrained investment in foreign assets, especially the less liquid ones,” he said.

In terms of loan origination, Robinson said it was better to be ‘first call’ in a niche segment of the market than fifth in a larger segment.

“If you are the first call, you’re probably the first to look at a deal, will see more deals and can negotiate better terms. Being the person to get the first call is very important in private markets,” he said.

The IOOF Holdings executive reminded the audience that investing is partially about leveraging information asymmetries.

“In an intensely competitive market we are looking for inefficiencies,” he said

Robinson said he mostly invests outside the ASX 300 and avoids competing head-on with the banks for institutional corporate lending books. “They {the banks} would lend to BHP and Rio Tinto for nothing just to get the transactional banking business,” he said.

“We are focused on private companies and sponsored-backed deals in the same way private equity sponsors are building diversified portfolios through loan origination

Elizabeth Fry is the editor of Investment Magazine's digital platform. Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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