April 14, 2023

Merricks Capital Partners Fund Portfolio and Market Update March 2023


The Merricks Capital Partners Fund (the Fund) returned 0.7% in March and 10.3% on an annualised basis since inception. Underlying loan portfolio performance returned 91bps for the month and the Fund’s credit and FX hedging detracted 20bps.

The collapse of Credit Suisse and some US regional banks during the month, highlighted that significant credit risk is still in the banking system. Persistent high inflation and higher global interest rates remain a threat to the global economy. Credit spread volatility increased significantly in March, spiking higher with the Credit Suisse collapse and tightening post the UBS and Swiss government bailout, along with US Federal Treasury guaranteeing deposits of certain banks.

During the month, the Bureau of Meteorology (BOM) announced the end of the La Niña weather cycle experienced for the last 3 years. The BOM El Niño–Southern Oscillation (ENSO) outlook is currently neutral, but there are indications El Niño may form later in the year. This means the above average rainfall experienced in the last three years is unlikely to continue for Australian agricultural producers. However, the excellent water supply in water systems and high subsoil moisture will help buffer drier conditions for the coming season. Crop yields are likely to revert toward their long- term average while wheat and barley prices are likely to be supported at or above current prices due to drier local conditions, tight global supply and strong global demand. Our communication with borrowers in the portfolio indicates the outlook for the 2023 growing season remains positive with above average grain crop prices supporting opportunities to reduce asset leverage in their businesses.

In March, the Fund settled two new investments. The first was a $90.4m allocation in a total facility of $392.4m arranged by Merricks Capital to fund the acquisition of one of Sydney’s last remaining major CBD development sites. The investment is forecast to deliver an investor IRR of 16.7% (net of fees and costs) with an LVR of 64%. The second was a $29.4m deployment to fund a construction facility for a 9-level commercial office development in South Yarra, Melbourne, with an experienced developer and builder. This investment is forecast to deliver an investor IRR of 12.7% (net of fees and costs).

The Fund’s commercial office exposure was 24% at month end. Increasing office exposure is in line with our investment strategy to capitalise on the tight supply outlook for new prime office over the next three years (Property Council Australia) at a time tenants are seeking newer buildings to attract and retain staff in a low unemployment environment (ABS unemployment ~3.5%). Higher quality office spaces are also better at incorporating ESG principles, which is reflected in their higher NABERs ratings. Notably, CBRE’s 2022 research showed that NABERS 6 Star and 5.5 rated assets had occupancy rates that were 4% to 11% higher than those of lower-rated assets.

Project construction remains on track for the Fund’s $20.1m investment in the Melbourne Place Hotel project where the project developer is in Voluntary Administration. Construction is over 50% complete and an equity sale process is expected to conclude by mid-May which will retire the Administrators.

Lending opportunities are increasing in our target sectors. We are currently reviewing $250m in Residual Stock Facilities and approximately $400m in Specialised Infrastructure in the investment pipeline. Specialised Infrastructure opportunities include two port infrastructure and two mineral processing projects.

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