August 15, 2022

Merricks Capital Partners Fund Portfolio and Market Update July 2022

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The Merricks Capital Partners Fund returned 0.62% in July and 10.40% on an annualised basis since inception. For July, the private credit component contributed 0.82% and CDS contributed -0.14%.

This month the RBA increased the official cash rate to 1.85% which will benefit fund performance with 60% of loans pegged to floating rates.

The national residential vacancy rate has fallen to its lowest level on record, with Domain data showing 1% rental vacancy in July 2022 for Combined Capitals in Australia. This market tightness is being reflected via substantially higher rental yields. Higher income should to some degree cushion the impact of higher rates which see ongoing softening of apartment and house prices.

We see a medium-term housing supply shortage and accordingly are looking to increase exposure to the residential space after reducing the sector weighting over the last few years. With over $400m of residual stock and residential projects in due diligence we anticipate this reweighting will occur over the coming quarter. Modest loan to value ratios on these new loans will protect against price declines but support the growing need for homes. To date, the Merricks Capital Partners Fund has not experienced any residential construction risk through covid, with a stronger set of investment opportunities in our pipeline and tighter covenants being accepted by borrowers and builders the forward risk return looks attractive.

In agriculture, the pressure on supply chains, in particular infrastructure and logistics, has highlighted a funding gap in these sectors. We currently have a vertically integrated fruit business in due diligence.

We are now focusing on investments across both upstream and downstream of the farmgate supply chain. These opportunities are being identified as funding gaps in the market and have emerged due to pressure on a broad range of agrifood supply chains. For example, two consecutive record years of production for the broadacre cropping industry in combination with post-covid logistics challenges, have exacerbated insufficient grain infrastructure in the domestic market.

One new loan settled in July, a senior secured $57m land and construction loan (12.5% forecast IRR net of fees and costs) for the acquisition of a shovel-ready development site and construction of a townhouse project in southwest Melbourne. The development aims to meet the lack of ‘quality’ housing supply in the southwest bay area.

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