Merricks Capital provides innovative investment solutions that deliver consistent performance for its investors while operating with financial discipline and prudent risk.
Our investment strategies include private credit across commercial real estate, agriculture and infrastructure and specialised industrial.
Established in 2007, Merricks Capital delivers a truly differentiated multi-strategy offering, with extensive investment capability and global experience spanning multiple asset classes.
Hedged for the Headwinds, Positioned for the Pivot
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This week’s 25 basis point RBA rate cut reinforces the “plateau then ease” narrative we outlined in our Year Ahead note. With inflation outlook moderating more quickly in Australia and New Zealand than in global peers, markets are increasingly pricing in further rate cuts. This supports a more constructive environment for capital deployment and asset transactions, particularly with loans written during the post COVID period when construction faced delays and significant cost increases, continuing to repay.
The worm has turned domestically – asset level momentum is building, borrowers are transacting, and capital is being returned through the sale of in-demand real assets. We are seeing this shift play out across several exposures in the Merricks Capital Partners Fund
Buyer engagement in the Sydney office market has strengthened, with narrower bid ask spreads and increased depth across selected assets. This momentum is expected to support a continued reduction in the Fund’s office exposure, with capital increasingly redeployed into Build to Rent, Agriculture, and Specialised Infrastructure.
Loan repayment activity has increased across sectors, including full repayment on a mixed use commercial real estate loan in Adelaide and a bank refinance of an agriculture borrower earlier this month.
While domestic momentum strengthening, we remain alert to external risks. As outlined in The Year Ahead, ‘left tail’ scenarios such as sovereign downgrades, trade disruptions, or liquidity shocks could still reprice global risk. Our macro hedge overlay is designed to guard against these potential dislocations.
Credit spreads widened sharply in the first quarter. iTraxx Australia CDS reached 115 bps in April before tightening to 79 bps, still above its one-year average prior to tariff escalation (Bloomberg). US high yield spreads and Treasury yields remain elevated, reflecting lingering macro stress.
The Fund’s macro hedge exposure is diversified across iTraxx Australia CDS, sovereign CDS, and major bank CDS. These instruments help protect against systemic risk and provide flexibility during market dislocations.
Hedging contributed 14 bps to Fund performance in March and 10 bps in April, bringing the year-to-date contribution to +17 bps. As spreads tightened in May, a negative mark-to-market is expected, which we view as a modest cost for maintaining risk protection.
During the April recovery phase, we reduced hedge exposure by approximately 10% capturing the wider credit spreads and reweighting the hedge to more iTraxx which we believe offers more effective protection due to its liquidity in the event of a macro shock.
To put this in context, if a GFC style credit event were to occur, the Fund’s current hedge structure should generate between $70m and $100m of cash for the Fund. While such a scenario remains highly unlikely, the relatively modest cost of this protection makes it a prudent risk management tool.
In short, while the domestic cycle has clearly turned, we continue to manage the portfolio with an eye on the broader macro environment and the risks that exogenous ‘left tail’ shocks may present.
