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Australian Firms Tout Private Credit After Pandemic Drives Down Yields

Australian Firms Tout Private Credit After Pandemic Drove Down Yields

Australian asset managers reported growing interest in the private-credit market from institutions and family offices seeking income after the pandemic drove down yields on traditional investments.

Funds are stepping in with direct lending to firms as banks retreat, participants said Wednesday on Bloomberg’s Inside Track webinar series. That’s opening up alternatives to fixed-income and the potential for higher returns in sectors such as property, technology and health care, they said.

Fixed income hasn’t offered anywhere near the diversity or the spread for the risk that you would expect, while private debt provides uncorrelated returns with a “very high” income component, said Bob Sahota, chief investment officer at Revolution Asset Management Pty in Sydney.

“Covid, whilst it’s been an economic and humanitarian disaster, for the Australian private-debt markets it has been the catalyst to really bring to the fore the decision to invest in this asset class,” Sahota said.

Australian Firms Tout Private Credit After Pandemic Drives Down Yields

More than $14 trillion of bonds come with negative yields in the wake of unprecedented monetary stimulus to fight the economic impact of the health crisis, catalyzing the search for other options. Private-debt assets under management globally were rising before the pandemic, reaching a record $812 billion in June 2019, according to Preqin, a researcher tracking the sector.

Revolution’s secure debt strategy currently returns 6% annually and typically targets 400-500 basis points over the benchmark interest rate, Sahota said. The firm had about A$500 million ($370 million) to deploy by the end of August and said it’s already invested more than A$550 million on behalf of investors.

IFM Investors Pty, which has about A$156 billion in funds under management, sees low- to mid-teen returns by providing debt capital to sectors such as health care, technology and property, said Lillian Nunez, executive director for debt investments.

FIIG Securities Ltd. sees opportunities in real estate as small real-estate investment trusts tap private-debt markets, said Erryn Lloyd-Jones, the company’s head of debt capital markets and private debt.

Private credit is popular among clients with a minimum of A$5 million to A$10 million to invest, Lloyd-Jones said. While it was unlikely to become a mainstream asset for retail investors, family offices were showing increased appetite, he said.

Australia is among the last developed markets where private debt is dominated by banks, the panelists said. The consequent lack of liquidity leads to higher risk-adjusted returns compared with the U.S. and Europe, they added.

“There’s a huge amount of opportunity coming as banks retrench,” Sahota said.

©2020 Bloomberg L.P.