May 12, 2023

Merricks Capital Partners Fund Portfolio and Market Update April 2023


The Merricks Capital Partners Fund (the Fund) returned 0.8% in April and 10.3% on an annualised basis since inception. Underlying loan performance returned 89bps for the month and the Fund’s credit and FX hedging detracted 9bps.

Despite the tightening of AU credit spreads during April, macro risk is still a concern for global markets. The recent failure of a third US Bank (First Republic Bank) in the past 2 months signals that the banking crisis episode has not been fully contained. The US debt ceiling standoff has expanded default risk of US Treasury and widening US Sovereign CDS spread to levels not seen since the GFC (from 45bps at the start of April to 70bps at the end of the month, compared to a peak of 100bps in 2008). The Funds macro credit hedge strategy is in a strong position to protect the Fund against potential adverse impact from these US credit events into the Australian markets.

In April, the Fund settled one new investment, a $17.9m capital allocation to a Residual Stock Facility (RSF) in Glen Waverley, Victoria. The loan is secured to 65 unsold apartments within a 536-unit residential development, with two settlements completed during the first month of the facility. Other portfolio activity included the settlement of 7 apartments from another RSF located in Box Hill, Victoria.

The Fund currently has 4% exposure to RSF, and we are assessing a further $100m of RSF opportunities in Sydney and Melbourne. Trends in Net Overseas Migration are supporting completed apartment stock with 650,000 new migrants expected to arrive in Australia over the next two years. Based on pre-pandemic trends, more than 400,000 of new migrants will initially settle in Melbourne and Sydney (ABS), adding pressure to the already short housing supply. Listed rents increased 10.2% nationally in the 12 months to December 2022, a record in annual rent growth (CoreLogic). In May 2023 property gross rental yields for units were 4.5% in Sydney and 4.6% in Melbourne (SQM Research).

The Fund has a 1.8% investment in the Melbourne Place Hotel project that currently has administrators appointed over the development entity. Administrators are expected to finalise the restructuring over the next month and close out equity discussions.

During the month, Rabobank released its Australian Agricultural Land Price Outlook forecasting agricultural land price growth in Australia to be low double digits in 2023. This comes off the +20% growth experienced in 2021 and 2022. We don’t revalue our loans in line with the asset growth providing further risk management on our portfolio. This significant two-year growth in asset value and our portfolio risk management of lowering the weighted average LVR on our agricultural credit loans from 60% to 57% over the past 18 months has positioned the fund for growth as loans are repaid and capital redeployed.

Currently in the due diligence pipeline there are $400m commercial real estate, $250m of agricultural across horticulture, cropping and meat & livestock, and $250m of specialised infrastructure from ports to food processing investment opportunities.

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