Great Expectations

  • Over the summer period we have been amazed at the ongoing performance of the economy/ markets in the face of geopolitics wrangling and waves of “hard” COVID-19 induced lock downs.
  • Our simple conclusion is that
    • Monetary policy around the world is in fact too “easy” relative to the liquidity needed to deal with COVID-19 and the weaker economy.
    • Central banks and governments will maintain the over-stimulation far beyond what is necessary and investors should plan accordingly.
  • With this backdrop we have been contemplating the most asked question by our team, clients and consultants; “what is a good expected return for senior secured loans and what is your best guess for the Merricks Capital portfolio?”.
  • The first part of the question in regard to what constitutes a good return for senior secured loans in the coming year is easier, as our long-term perspective has not changed.
    • Assuming 10yr bond rates in the USA, Australia and New Zealand at approximately 1% and long-term equity risk premium of 4-5%
    • Then anything above 6% total return for senior secured credit is outperforming equity expected returns, let alone the lower returns that should be expected for debt investments.


Current Portfolio and Pipeline

  • During the second half of December and January we closed $150m worth of commercial real estate (CRE) and $40m of agriculture (Agri) senior secured loans.
  • The level of deployment was less than expected as the summer period delayed closing a number of opportunities and left the Partners Fund with more than 15% cash at January’s close.
  • In the coming period we expect to close $145m of CRE and $55m of Agri loans and have issued term sheets for a further $320m of senior credit.
  • Combined with the existing 51 loans, worth $1.6bn, that make up our credit portfolio we are confident the underlying book is “run-rating” 10% yields.
  • With only 14% of the portfolio due to be repaid in the coming 6mths the fund return has good visibility and will be mainly dictated by our ability to remain fully invested and manage any potential loan issues that may arise.
  • As with any prudent manager we need to highlight there are any number of risks that could derail returns, but with a solid base in place we continue to target 9-10% returns for the full calendar year.


Merricks Capital Senior Secured Loan Duration (AUD$ Principal Commitment across funds)

If you would like to delve deeper into our current thinking on expected returns please send an email to [email protected]