March 13, 2024

Merricks Capital Partners Fund Portfolio and Market Update February 2024


The Merricks Capital Partners Fund (the Fund) returned 0.7%* in February and 10.1%* on an annualised basis since inception.

Underlying loan income from the Fund’s investments was 84 basis points (bps) for the month. The Fund’s credit default insurance and FX costs detracted 9bps as global credit markets tightened. The Fund’s forecast return is 10.4% for the 2024 calendar year prior to credit default insurance costs and expected to be 9.7% if credit spreads trade in line with five-year averages. During 2022, the Fund’s performance benefited 70bps as credit spreads widened and in 2023, spreads detracted 114bps. Tighter spreads mean the cost of buying the insurance protection is comparatively cheaper and we will maintain our protection as part of delivering investors a defensive senior secured product.

Australian CPI held steady at 3.4% year-on-year (yoy), slightly below market expectations (3.6%) (January 2023 to January 2024). The housing sector remains elevated with rents rising 7.4% yoy due to increased migration and tight rental supply (1-2% in capital cities). New dwelling costs has plateaued since mid-2023 in the 5% range and will remain a key indicator representing 1/6th of the CPI basket when taken together with rents. These are key research indicators within our commercial real estate portfolio which inform our view on future asset transaction values, the floor price for hard asset replacement values and residential supply shortages.

No new loans settled during the month. Two loans were restructured to enhance investor returns and align the return of capital with transaction outcomes. One loan is a large-scale vineyard where the borrower will lead property sales to fully repay debt from a starting loan-to-value ratio of 51% and the other is a specialised industrial asset that is mid transaction with a global dairy manufacturer.

One loan was repaid in full, a 1.2% allocation for the Fund that funded a 75-hectare greenfield residential development site in Victoria’s Western Growth Corridor. The development, 28km north of Melbourne, was refinanced at loan expiry and delivered a net IRR of 10.2%. The loan repayment reduces the Fund’s greenfield exposure to <2%. While certain greenfield projects with modest leverage can be attractive senior mortgage investment, there are headwinds for the sector with many project development consents being delayed at a council level and increased holding costs with council rates and interest costs eroding project feasibilities.

Due diligence progressed on $900m of new investment opportunities with a focus on opportunities in residential, mixed farming and specialised processing assets in the agricultural supply chain. Our expected peak LVR for the current $250m pipeline of agricultural investments is a weighted average of 49%. Similarly, in commercial real estate we’ve assessed $650m of new opportunities at a weighted average LVR of 61%, approximately 2-3% lower than comparable opportunities 12 months ago.

*These returns are stated net of fees and costs

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