The Merricks Capital Partners Fund returned 0.6%* in May, maintaining a 9.8%* annualised return since inception.
Interest rate cuts in Australia and New Zealand supported real estate sentiment, and we are seeing transaction momentum build across loans approaching maturity. Credit spreads tightened significantly
during the month in line with market expectations of further rate easing. This resulted in the Fund’s macro hedge detracting approximately 25bps in May and bringing the year-to-date cost of this insurance to 8bps. The hedge remains an important protection against an uncertain macro credit environment that could trigger a repricing of global credit risk.
During the month, the Fund increased its exposure to residential and industrial through the settlement of two new loans. A 1% initial allocation was made to a $235m construction facility for a 32-level mixed use development in Melbourne’s Docklands, incorporating Build-to-Rent apartments along with retail and commercial components. The loan has a forecast net IRR of 13.2% to investors (after fees and costs) and a 28-month duration. The Fund also made a 1.3% commitment allocation to a construction loan supporting delivery of a storage and warehouse facility in Altona North, Victoria. The investment is underpinned by a 65% LVR, an experienced sponsor, and a forecast net IRR of 10.2% (after fees and costs), aligned with strong demand trends in the self-storage sector.
The Fund also received a partial repayment on a mixed-use facility following the refinance of a Stage 1 land release by a major bank. This loan is one of the Fund’s largest allocations (6.0%), and the repayment reduces the LVR from 65% to 59%. Two long-standing agricultural loans were also repaid in full. The first was a 0.5% allocation to a domestic egg producer that successfully refinanced with a major Australian bank. The loan was made to the egg producer at the bottom of the commodity cycle with the expectation of normalisation of supermarket pricing. The second repayment was the final instalment (0.2% of NAV) of a New Zealand dairy loan that was repaid from external equity. These outcomes reflect the Fund’s strategy to lend to asset rich borrowers that generally refinance to banks once they have added value to their business that enables them to enter a stronger net cashflow period.
The likely downward trajectory in interest rates is creating a more favourable environment for capital recycling than in 2024. As maturing loans are repaid, the Fund is well positioned to redeploy capital
into a strong pipeline of more than $1.2bn in new opportunities across residential, agriculture, and specialised infrastructure. This should lead to a portfolio rotation with a reduction in exposure to office
borrowers and increased exposure to ports and agriculture.
*These returns are stated net of fees and costs
