Merricks Capital Partners Fund Portfolio and Market Update June 2022
The Merricks Capital Partners Fund returned 1.2% in June and 9.0% annualised for financial year 2022 (FY22). The Fund also declared a FY22 final distribution of 4% and a full annual distribution of 8.0%. The Fund delivered these returns through senior secured first mortgage loans across 14 sectors, with a portfolio weighted LVR of 62% (at 30 June 2022).
In June, loan income contributed 80bps to performance and the portfolio hedge of credit default swaps (CDS) added a further 40bps (net of fees and costs). CDS values are normalising to pre-stimulus levels, primarily driven by rising inflation and official interest rates, and the increasing possibility of domestic and global recession.
The global macroeconomic environment evolved substantially in FY22 with central banks moving away from providing pandemic-related liquidity to raising cash rates to curb surging inflation. We also saw the war in Ukraine fracture global energy supply chains and heighten concerns around food security. As volatility increased in the global macro environment, businesses access to capital has diminished and the demand for private credit has intensified.
As part of our ongoing portfolio management during June we closely tracked the NSW floods alongside any second-order impacts on commodity supply chains or real estate assets that could impact our strategy. We have been in contact with our borrowers in affected regions and apart from estimates of 1–2-week delays on some construction schedules there are no current concerns reported in relation to our investments.
We settled three new loans during the month and extended an existing loan improving investor returns and reduced the maximum LVR. The new loan investments include:
- A $16m agricultural loan to fund the settlement of a large multi-use property in Western Australia, this loan is expected to generate a forecast investor IRR of 9.0% (net of fees and costs).
- A $38m loan to fund the construction of a luxury hotel in Melbourne’s CBD at a maximum LVR of 69% and a forecast investor IRR of 12.5% (net fees and costs).
- A $10m land facility to fund a property located in Parramatta, NSW at a 58% LVR and a forecast investor IRR of 11.2% (net of fees and costs).
Merricks Capital’s outlook for private credit into 2022/23 remains positive. Our pipeline reflects strong risk-adjusted senior debt opportunities, and we plan to remain highly prudent on new loan selection, loan structuring and new loan due diligence hurdles. As we deploy capital in a more volatile economic climate, our credit risk mitigation strategy will continue to focus on ensuring that the portfolio’s loans have multiple paths to repayment at expiry. The weighted average time to expiry of portfolio loans is 12 months.
Impact of Rising Rates on Real Estate Valuations
The Merricks Capital Partners Fund returned 1.2% in June and 9.0% annualised for financial year 2022 (FY22). The Fund also declared a FY22 final distribution of 4% and a full…