Private Credit’s Golden Gap

As highlighted in our The Year Ahead outlook, we continue to see a growing divergence between capital supply and demand across key asset classes. Some sectors such as build-to-sell apartment developments are becoming too competitively priced with significant private credit and bank funding chasing fewer projects, however, most of the economy is still experiencing a shortage of capital.

The gold mining sector exemplifies this trend—while prices have surged 76% in the past three years (Bloomberg), traditional financing channels remain constrained due to evolving regulatory requirements and risk-weighted capital limitations imposed on banks. This dislocation has created a compelling opportunity for private credit to bridge the funding gap with secured loans.
Merricks Capital’s investment approach remains focused on identifying sectors where credit demand significantly outstrips supply, allowing for attractive risk-adjusted returns. Building on our recent insights into opportunities in agriculture, real estate credit and infrastructure, asset-backed gold financing presents another avenue where we see a strong macro tailwind combined with structural capital dislocation.

• Our investment team has seen a threefold increase in gold project financing inquiries over the past 18 months, totalling $250m. Despite Australia being the world’s second-largest gold producer (World Gold Council), bank appetite for lending has tightened due to regulatory constraints on their balance sheet leverage.
• Banks have steadily retreated from the resources sector over the past decade, with exposure down 37% since 2015, reducing capital allocation by $25b despite overall balance sheet growth (Bridgend Capital Advisory). This shift from resource financing accelerated with APRA’s 2023 ‘unquestionably strong’ capital framework, aligning with Basel III and requiring higher capital ratios to bolster resilience against downturns.
• The tailwinds behind the gold price remain strong, supported by a structural shift in gold’s sensitivity to real interest rates and inflation since 2022 (see chart below showing the divergence). Incremental demand from central banks and investors seeking diversification against geopolitical risk and US dollar strength has become a dominant price driver.
• We estimate $3–5b in capital demand over five years for CAPEX and reactivating dormant or expanding projects. With APRA phasing out hybrid bonds, we expect private credit to be crucial as banks may scale back large-scale project financing, particularly in the resource and gold sectors. Gold producers increasingly favour debt over dilutive equity, preferring senior debt to fund project capital. This shift allows lenders to negotiate favourable terms and pricing, with downside risk mitigated by senior mortgage security over the physical resource and operating business.
• From a portfolio perspective, gold-backed loans at modest LVRs align with our hard asset strategy, benefiting from deep and liquid markets, established mining processes and structured hedging mechanisms to manage commodity price risk. Loan amortisation can also be structured efficiently. These dynamics underpin our investment strategy to potentially increase gold-backed private credit exposure from nil to 5-10% within the Merricks Capital Partners Fund over the next 24-36 months.
• We are already active in gold financing, with a senior secured loan near Rockhampton funding the processing of existing gold tailings. This facility, set to commence drawing in May 2025, will at peak represent a 4% allocation within the Merricks Capital Partners Fund. The loan, which is also backed by the Northern Australia Infrastructure Facility (NAIF), was structured at a feasibility gold price of AUD$2,800/oz in 2022/23.

The dislocation in gold financing presents the current opportunity for private credit to bridge the funding gap with well-structured, secured investments. Merricks Capital’s sector expertise enables us to capitalise on high-quality transactions, enhancing portfolio diversification and delivering attractive risk-adjusted returns.  With central bank demand and geopolitical uncertainty expected to support gold prices over the next three to five years, we believe a modest allocation to financing the gold sector enhances the portfolio’s downside protection.