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Global Investors rotating into Private Credit…Australia to follow
Last week we began the discussion about investor return expectations in the current macro environment. We have since seen the results of two key global surveys that shed further light into market expectations and trends in asset allocation.
The Bank of America Global Fund Manager Survey (BofA Survey) is a survey of 225 mutual funds, hedge funds and pension fund managers representing $645bn in funds under management, while the Private Credit Fund Intelligence (PCFI), in association with the Alternative Credit Council, recently surveyed 65 “alternative” investors, representing $3.8tr in total investor assets (of which only $51bn is invested in private credit).
One of the key findings of the BofA Survey is that managers remain incredibly bullish. 91% of investors believe the economy will be stronger in 2021 than last year – the best economic outlook ever – and 34% expecting a V-shape recovery is taking place compared to only 10% 3 months ago.
In this “Goldlocks” environment, a record number of survey respondents are taking higher-than-normal levels of risk. Cash allocation is down to 3.8%, the lowest level since March 2013, and allocations to stocks and commodities are the highest since February 2011.
Apart from the risks associated with the COVID-19 vaccination rollout (28% believe the highest risk to markets) and bond market wobbles, inflation is seen as the biggest risk (24%). A net 86% of respondents expect higher inflation over the next 12 months, which is down 6% month-on-month but still close to the peak relative to the past five years. And while inflation is expected to pick up, official interest rates are expected to remain low and 82% of investors expect a steeper yield curve.
Investors find themselves in a low interest rate environment with expectations of inflation and higher asset prices. The search for yield is leading to a search for new opportunities. The PCFI “Investor Intentions H121” report believes this will result in a shift in the use of alternatives, particularly private credit strategies as understanding of this class increases.
A key finding of the PCFI survey was that that 38% of respondents plan to increase their private credit allocation in the first half of 2021. Some of the supporting reasons, apart from returns, include private credit’s status as a portfolio diversifier, and the relative large size of private (bank) debt market versus only 3% of current investors’ portfolios. Private credit is also most likely to maintain the higher risk adjusted returns for longer as it is harder to compete with the returns when many pools of capital cannot access this opportunity set.
The Merricks Capital Partners Fund is well placed against this backdrop of low interest rates, which ensures an attractive return advantage, combined with moderately increasing inflation, which supports hard asset valuations as underlying loan collateral. The relatively short duration of loans also provides clear return “line of sight”, allowing adjustments for inflation risk. The record low levels of cash holdings by Global Investors does also highlight some need for caution and it underpins our lower risk bias by only investing in senior loans and maintaining portfolio insurance.
Portfolio Addition
Today we reach financial close on WEWORK AUCKLAND. Merricks Capital has completed its most recent investment of NZD$93M loan for the refurbishment of an existing 8 level office space in Auckland’s CBD located at 131 Queen Street.
