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The year that was and the year ahead!

A year in review – 2022

  • Geopolitics and Covid-19 pandemic pressures in 2022 led to supply chain disruption, inflation, and a global credit squeeze. This led to the opportunity to use our dry powder and deploy at higher rates with more modest risk.
  • During the year our flagship funds the Merricks Capital Partners Fund and Merricks Capital Agriculture Credit Fund increased FUM collectively by 60%.
  • In the 2022 calendar year, Merricks Capital reviewed $7B of investment opportunities, deploying $1.2bn with an expected IRR of 10%.   
  • Agriculture loans were a shining light as we saw the benefits of the sector participating in commodity inflation. Combined with good precipitation across Australia and New Zealand, the agriculture lending book saw borrowers exceed earnings expectations.
  • In anticipation of falling markets, we reduced the average LVR (Loan to Value) of loans in both portfolios: Merricks Capital Partners Fund from 65% to 63% and Merricks Capital Agriculture Credit Fund from 62% to 57%. 
  • During 2022 the Merricks Capital Partners Fund had its lowest exposure to the construction sector since the strategy’s inception as builder risk became more heightened in 2021, with lower builder margins, easing credit and weaker covenants. 
  • We moved approximately 70% of our portfolio loans to floating rates. 
  • Our core view is that real estate prices will fall 25% from their peak (January 2022) due to cap rate expansion and then rise 10%+ as rental yields increase over the next two years.
  • The number of technical defaults experienced during 2022 was in line with 2021 with no noticeable change in portfolio performance. 
  • Borrower requests to roll over loans increased during 2022 highlighting fewer refinancing options. 

The year ahead – 2023

  • Less liquidity in the alternative lending and bank sector has meant we can lend at more modest risk levels and maintain a return target of RBA + 6-7%. We believe this continues to present the opportunity to earn equity risk premium with debt risk.
  • Lending against apartments and residual stock is emerging as the biggest opportunity for 2023.  After pulling back from residential development exposure through 2020 and 2021 we believe there is an opportunity to build exposure to completed apartments:
    • 1% vacancy with limited new developments in the market highlights a healthy supply-demand equation.
    • Australia must maintain strong migration and the entry of new residents is evident in the last quarter of 2022, but there is nowhere to house the growing population which will only compound the tight supply.
  • Agricultural borrowers are now seeing good refinance opportunities with commercial banks as they look back at two years of strong interest coverage. This is proving a healthy pathway to exit many of our existing agricultural loans.
  • Agricultural earnings are potentially near the top of the cycle. We don’t anticipate dramatic deterioration in earnings for most agricultural subsectors, however, a prudent approach means a more cautious stance and lower LVRs across this industry.
  • Commercial Real Estate projects are largely on hold due to rising costs and lack of presales or pre-lease.  This suggests the more limited new builds that get underway will be met with tighter supply when they are delivered in two years’ time. We expect higher returns, stronger covenants and good supply dynamics for construction will re-emerge as a bigger opportunity in 2023.
  • We begin 2023 with a healthy market balance where there is credit rationing and strong demand from borrowers at terms that are favourable to investors (lenders).

 

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