State Investments, which manages the long-term financial interests of the state of Queensland, has issued a A$500 million ($336.3 million) private debt mandate focused on the Australian market to QIC.
State Investments CIO Allison Hill said she was confident in QIC's ability to achieve attractive risk-adjusted returns, capital preservation and low volatility through selective investments in both directly originated and bank-led senior and mezzanine corporate debt opportunities.
“In this current volatile and inflationary landscape, we need a holistic private debt offering which has scope to move up the risk spectrum when opportunities present themselves,” said Hill.
“History suggests investing in periods of dislocation can be attractive," she said.
Phil Miall, head of multi-sector private debt at QIC, told AsianInvestor that the core objective of the mandate is to capture the performance of the domestic private debt asset class, including illiquidity and complexity premia, by investing in a diversified portfolio of corporate, asset-backed securities (ABS) and real estate loans.
“With gross yields of circa 9% at prevailing interest rates, selective investments in these sectors offer attractive risk adjusted returns,” said Miall.
“The multi-sector private debt team will focus on originating loan investments in Australian and New Zealand markets which can typically range in size between A$20 million and A$50 million, increasing to as much as A$75 million.”
Private debt investors are concerned about macro headwinds, including higher interest rates, inflationary pressures and supply chain disruptions, many of which borrowers have not had to address for many years, according to Miall.
“Despite this, we believe it’s a favourable time to allocate to private debt as the recent repricing of transaction margins and base rates is leading to increasingly attractive gross yields and also as deal terms may become more creditor-friendly on account of greater investor caution,” he said.
Miall believes his team's expertise in investment selection and structuring will allow them to navigate these macro headwinds to avoid borrower distress and achieve the returns available.
STRONG SUPPLY AND DEMAND
Despite the macro-economic headwinds, the supply and demand sides of Australia’s private debt market are growing strongly, according to Miall.
‘On the supply side, gradual disintermediation of Australia’s loan market is occurring from what has traditionally been an oligopoly of domestic banks. This is chiefly due to changes to bank regulation in recent years and bank capital reform in particular,” he said.
On the demand side a number of characteristics of the domestic private debt market, Miall explained, would attract institutional investors.
“These include attractive and stable returns available for investors that can harness the complexity and illiquidity premium of the asset class, Australia’s reputation as a creditor-friendly jurisdiction and the direct relationships with borrowers providing an ability to negotiate terms which can include sustainability-linked loan structures,” he said.