This week the Federal Government announced its intention to ‘overhaul’ Australia’s foreign investment regime, with reference to tighter approvals on “foreign investment in critical infrastructure, critical minerals, critical technology…” due to the sovereign risk around these assets.
The following are our thoughts on why critical infrastructure and industrial investments have become highly compelling opportunities for private credit participation:
- We like the inflationary hedge of infrastructure and industrial investments. These projects often have costs tied to real assets, like land with plant and equipment, where the values typically rise with inflation as the cost to replace climbs.
- We focus on small to mid-market or ‘specialised’ infrastructure and industrial assets ($30m-$300m), which typically have shorter delivery time development opportunities with defined market demand.
- Record levels of capital flows to infrastructure CAPEX with over $125bn of capital for non-mining and $52bn for mining projects have been observed (ABS 2023), cultivating fertile ground for private credit to take the most senior part of the capital stack whilst supporting future development.
- The Merricks Capital Partners Fund currently holds an 8% exposure to specialised infrastructure and industrial investments, projected to increase 10-15% over the next twelve months. We have financed more than $250m in senior loans to this sector, which includes port infrastructure (Broome and Eyre Peninsula), a milk processing facility and two beverage packaging facilities, at a net investor return of +11%.
- We are currently in due diligence on $300m of specialised infrastructure and industrial projects including ports, energy, agricultural processing and mining processing investments. The primary drivers for the surge in infrastructure projects in our opportunity set are (1) shifting the domestic energy mix to renewables and stabilising transmission networks; (2) digital demand fueled by AI and IoT processing requirements; and (3) connecting domestic supply chains where new infrastructure to reduce reliance on international markets and mitigate global supply risks.
