December 11, 2023

Merricks Capital Partners Fund Portfolio and Market Update November 2023


The Merricks Capital Partners Fund (the Fund) returned 0.6%* in November and 10.1%* on an annualised basis since inception.

A major reversal in economic expectation during November saw markets pricing the end of the rate-rising cycle globally. Bonds rallied strongly during November (S&P ASX AU 10 Year T-Bond Index up 4.5%), and Credit Default Swap (CDS) spreads tightened, with our hedge detracting 0.3% from performance for the month. Since FY20, the CDS hedging has had an average annual cost of 60bps; 2022 CDS returned +1.1%, with 2023 tracking at -1.2% for the Fund’s macro hedge. We’ve taken the opportunity to increase our ITRAXX exposure by $20m with tighter CDS spreads as this dramatic move in fixed-income markets provides a good entry point to add insurance. The underlying loan income for the month generated a 0.9% return for the Fund, excluding the CDS hedging.

One new loan was added to the Fund in November, a 0.7% allocation to the Fund financing the construction of a large format retail centre in Seaford, South Australia, 30km south of Adelaide. The project attracted strong leasing interest, with five of the six available tenancies already preleased to national big box tenants, including Supercheap Auto and National Tiles. The 12-month senior secured loan has a 12.5% IRR.

During the month, the Fund’s largest agricultural loan (2.8% allocation) received a partial repayment due to a $20m property sale. The mixed farming dairy and cropping property was sold to a farming business via an off-market property sales campaign and is the culmination of a six-month due diligence process on the property. Based on the residual security position, the effective LVR for the loan is 56%. Two mainstream banks have provided refinance terms on the residual debt balance which we expect to occur Q1 2024.

In partnership with Northern Australia Infrastructure Facility (NAIF) and the Queensland Government, we closed our first natural resources loan, and the Fund will have an allocation of ~3% of NAV once fully drawn by Heritage Minerals. With a strong ESG element across environmental clean-up, social impact through 200 jobs for indigenous and local community, the loan will finance CAPEX to process gold tailings at the historic Mount Morgan mine, located 30km from Rockhampton. The investment, with a target 17.5% IRR, is expected to be fully repaid within three years of operation and will benefit from partially locking in the current record-high gold prices above AUD 3,100 per ounce. Merricks Capital has a long track record in the resources sector, from owning and operating mines to running over $1bn in commodity trading strategies. Heritage Minerals is a unique opportunity to invest alongside NAIF, and the Queensland Government. We don’t foresee the allocation to this sector growing past 10% and will only be in similar de-risked investment opportunities.

Investment opportunities are increasing in our target sectors. We are currently reviewing $550m in residential and residual stock facilities, $700m in Commercial Real Estate across hotels, mixed use, retail, $500m in specialised industrial and infrastructure from ports, to energy, data centres and processing facilities, and approximately $550m in agriculture from cropping, pre-farm gate horticulture, dairy and dairy processing/manufacturing. The private credit sector continues to grow but is still struggling to keep up with borrower demand.

*These returns are stated net of fees and costs

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