UniSuper increases focus on private credit in high-yield pursuit
Like many global and Australian pension investors, the A$135 billion ($89.5 billion) UniSuper is leveraging private credit to enhance returns within fluctuating economic conditions.
"Private credit is appealing from a pure yield and diversification perspective, particularly relative to investment-grade public markets," Mathew McCrum, Head of Fixed Interest at UniSuper told AsianInvestor.
UniSuper's proactive strategy in navigating the evolving investment landscape includes a substantial allocation of approximately A$16 billion to credit assets across both public and private markets, which includes A$1.5 billion in private credit.
“Private credit also provides benefits during different phases of the credit cycle. However, we are mindful of the rapid growth in the private credit market in Australia and overseas,” said McCrum.
RIGOUROUS APPROACH
Successful investments in private credit require a nuanced understanding of both the market and the management teams tasked with executing them, according to McCrum.
“Manager selection revolves around capability, team, performance, fees, and process. We have appointed external managers to complement our in-house capability,” he said.
The allure of higher cash flows from private credit, as compared to public markets, is evident in UniSuper's strategy.
ALSO READ: CPP Investments sees growing private credit plays in China
“One of the benefits of private credit we have seen so far is that the cash flows generated are higher than those generated by public markets,” said McCrum.
These cash flows, derived from diverse maturities and refinancing opportunities, help mitigate some of the liquidity constraints inherent in private markets, making it a valuable addition to their portfolio.
TOO MUCH, TOO SOON
The Australian superannuation sector, which collectively manages around A$3.7 trillion has been gravitating towards private credit in search of higher yields.
The country's largest pension funds AustralianSuper and the Australian Retirement Trust have significantly increased their investments in global private credit. Meanwhile Aware Super is reportedly delving into more specialised offerings in the space.
ALSO READ: Australian Retirement Trust pursues core private credit assets
Similarly, Cbus Super and Hostplus have also announced their intentions to substantially increase their investment in global private credit over the coming years.
“As with any sector that grows quickly, there are dangers of too much too soon,” said McCrum. “We continue to see opportunities with outright yields still relatively high, spreads low, and the fixed-interest asset class receiving flows.”
Increasing competition for deals has necessitated innovative strategies to secure attractive investment opportunities and manage valuation pressures effectively, he said.
“From an Australian perspective, one way to get attractive investment opportunities is to go global. Another way is to be opportunistic.”
PERMANENT TREND
The growing trend towards the now-$1.65 trillion global private credit market reflects, in part, the Australian pension industry’s belief in its capacity for sustained growth and appealing risk-adjusted returns.
ALSO READ: Private credit investors weigh growing risks
In the current higher-for-longer interest rate environment, where equity valuations are already stretched, institutional investors are continuing to seek alternative investment avenues.
UniSuper’s McCrum expects growth in private credit to be a permanent trend over the longer term.
“The industry has gone through the introduction phase and is currently in the growth phase – how the industry deals with the maturity phase when that happens will be interesting,” he said.