Australia’s largest super funds are bridging demand for phenomenal growth in private lending where the regulator, APRA, constrains banks with capital requirements.
Aware Super portfolio manager credit income, Mike Cowell, said the Fund has been lending directly to Australian businesses since 2018, growing its loan book to 30 borrowers worth $2 billion, about one third of its $6 billion direct lending portfolio.
Borrowers include Harris Farm Markets, Guardian Learning Group and Visy Industries, with the loan assets allocated to its credit income asset class within the Fund’s Growth, Balanced Growth and Conservative Growth options for members.
With an average of five to seven-year loan terms, these assets form part of Aware’s income or defensive allocation with higher risk and return profiles than cash and fixed income.
Cowell says Aware’s ambitions are to be a $250 billion fund by 2025 and to grow its private lending business both in Australasia and in other developed markets.
It marries with the ambition of the country’s largest fund, AustralianSuper with $250 billion in assets, which announced in July it would triple its investments in private debt to $15 billion over the next three years.
Ahead of speaking alongside Pemberton Asset Management senior portfolio manager Ben Gulliver, and Epsilon Direct Landing founding partner Joe Millward at Investment Magazine’s Fixed Income and Private Credit Forum on April 6, Cowell said Australia’s direct lending market had strong potential.
While US and European markets had a “huge amount of institutional participation” Australia’s market was in its relative infancy.
“In 2018, we wanted to bring the centre of gravity of the portfolio back to Australia, New Zealand, and we… really invested in our own capabilities, directly new capabilities to sort of tackle this market here ourselves,” Cowell said
Alternative funding solution
“We felt there was an opportunity to provide an alternative funding solution for corporates.”
Seeking areas where banks are limited by capital requirements, Aware’s focus has been middle market companies to large listed businesses, family-run companies, real assets, such as infrastructure and, also more recently, SMEs via warehouse financing structures.
Risk-adjusted returns in private lending are healthier near-zero returns for cash and fixed income.
“We’re also looking to deliver our members, some, you know, healthy yields and so it’s all about getting that right balance between the risk and return,’’ Cowell said.
“Our risk appetite wouldn’t be too different from the banks, for example… (we are) predominately focused on the sub-investment grade markets but we’re generally in a senior secured position, generally well protected through covenants and other undertakings.
“For example, in the US market, the leveraged loan market is a ‘cov-light’ market and that is not something that banks generally can participate in.
“That’s coming to the Australian market a little bit, but thankfully, generally the Australian market is still a sort of covenanted market with very strong lender protections.”
Stronger capital requirements
Stronger capital requirements for banks, instituted since the GFC, have meant bank lending to corporations is less lucrative now because interest charged, relative to the capital required to set aside, is too low, ANZ chief executive Shayne Elliott told a recent Australian Financial Review super fund lending roundtable.
Super funds are taking on more long-term corporate lending which is also unattractive to banks, he said.
“I think globally, areas like real estate finance, particularly commercial real estate, particularly where there’s a development aspect or value-added aspect, that’s become very difficult for the banks to finance. So that’s a really obvious area where there’s this huge opportunity for private credit,’’ Cowell said.
He said rising inflation and expected interest rate hikes from central banks made the area a “great place to be”.
“You do have that that natural hedge, in fact, absolute returns should be enhanced through higher rates,’’ Cowell said.
“But what we’re really watching, then, is what the impact on higher rates is going to (have) on the serviceability of the underlying borrowers.
“Generally, corporates have been in very good health, even despite leverage… and given how low the borrowing rates have been, they’ve been very comfortably able to service their debt.”
But Aware’s seven-member private direct lending team was spending plenty of time modelling what serviceability looks like when rates increase by a few percentage points.
Cowell will speak on the subject: Compelling but Complex: What’s driving the private credit boom and what to be wary of, at the April 6 Forum. For the agenda and to register click HERE