AustralianSuper allocates $2.3b to private credit fund
Australia’s largest superannuation fund is increasing exposure to the fast-growing private credit market to boost returns amid shrinking bank balance sheets and tightening regulation.
AustralianSuper, which manages more than $300 billion of assets, has increased an investment mandate with private credit specialist Churchill Asset Management to $US1.5 billion ($2.3 billion) from $US250 million.
“From a private market perspective, we think it beats infrastructure and property,” Nick Ward, AustralianSuper’s head of private credit, said from New York in an interview on Tuesday.
“Margins have increased to take into account the higher risk environment,” he said, adding that Churchill typically focused on senior loans to US middle market companies at yields of around 11 per cent to 12 per cent.
Tripling exposure
AustralianSuper has over $4.5 billion invested in private credit globally and is expecting to triple the exposure in the coming years. Its bet on the $US1.6 trillion market underscores growing interest in the asset class following the 2008 financial crisis that saw regulators clamp down on risky lending by banks.
All of the super fund’s loans are offshore due to the relatively small size of the Australian market, as it seeks opportunities in Europe and the US, Mr Ward added.
Churchill’s president and chief executive officer, Ken Kencel, is betting on growth in middle market companies – borrowers he defines with a credit profile of B+ to BB- and cash flows of between $25 million and $100 million.
“These are good scale businesses and market leading companies, and we believe the risk-adjusted returns in the traditional middle market are the most attractive,” he said.
But for the private credit sector, a lack of transparency and regulation has become a source of concern. UBS Group chairman Colm Kelleher and Pimco executives warned in November of growing risks, such as a lack of transparency – a view that Mr Kencel disagrees with.
“We are not seeing any signs of any type of bubble or indications we’re approaching one,” he said. “We report to our investors every quarter with a tremendous amount of detail,” referring to the performance of each loan and its risk rating.
A survey from alternative asset manager Coller Capital showed that almost half of private markets investors were planning to increase their target allocations to private credit.
The London-based firm’s Global Private Equity Barometer found that 44 per cent of investors planned to boost their stakes in private credit, comfortably surpassing the percentage intending to ratchet up their involvement in other asset classes, such as infrastructure, real estate and private equity.
Investors have flocked to the private credit market this year, with a host of banks and asset managers pouring capital and resources into the fast-growing industry. That is thanks to its relatively senior position in borrowers’ capital structures when compared with equity. Higher interest rates have also boosted the yields on its floating rate products, leading to a stronger fundraising environment than for private equity.
The trend toward private credit is particularly strong in the APAC region, where 72 per cent of investors planning to increase their allocations, the survey showed.
With Kat Hidalgo.
Bloomberg
Bloomberg
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