Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Keen appetite for high yielding private credit remains unabated
The growing business demand for credit is fuelling the private debt market – a demand that is being met by a seemingly insatiable appetite for these high yielding securities by investors, particularly with self-funded retirees and high net worth investors.
In this competitive lending environment – Reserve Bank data shows it grew 7.6 per cent for the year to July 31, 2024 – it’s no surprise that private credit funds are springing up like mushrooms after a spring rain, with yields ranging between eight per cent and 12 per cent on offer.
These investors are prepared to overlook the risk factors that some private credit funds entail, notably lower liquidity, a lack of regulation (especially when compared with the banking sector) and the opaque nature of some investments in their search for yield.
Taking advantage of this demand is Arrowpoint Capital that has just launched a new private debt fund targeting high net worth investors, family offices, superannuation funds and SMSFs with a target fund size of $100 million.
Arrowpoint joint managing director Andrew McDonnell (pictured) says the supply of capital to good businesses is very low versus the demand for it. That represents a compelling opportunity for borrowers keen to secure capital, but also for investors who can harvest an attractive premium from private corporate lending.
Arrowpoint’s second private debt fund is targeting returns of greater than 10 per cent net through a diversified portfolio of senior secured investments. The returns on Arrowpoint’s existing fund were 14.6 per cent in 2023-24 and are more than 12 per cent a year since inception in 2022.
“Stringent investment criteria blended with flexibility and speed allow us the opportunity to solve solutions for our borrowers while also providing attractive, regular cash income to our investors,” he says.
Cornerstone investors will hold about 20 per cent of the capital raised in the second fund, which would be one of the highest in the Australian private debt market. “This is significant as it aligns the interests of the fund managers with investors,” he says.
The Australian-based corporate lender aims to take advantage of the large funding gap that exists between the credit that the big banks can provide and the growing demand for capital from corporate borrowers.
“Our private debt fund is relatively low risk as we target secured lending to profitable businesses that have been often overlooked by the big banks. The major banks put a greater emphasis on corporate lending versus the SME space which is where we are concentrate,” McDonnell says.
Arrowpoint joint managing director Michael Kurland says: “We see private credit as complementary to bank lending and it has its part to play in the economic eco-system. Banks still provide most corporate lending in Australia and New Zealand, however, due to a combination of factors, including the speed and flexibility of private credit, it plays a growing role in the economy, particularly in mid-market businesses,” he says.
“Importantly for investors, we’re very much cashflow focused, so we’ll only lend to a business that is generating a comfortable level of cashflow to service its debt.”
There is another angle to the private credit story. PwC recently reported that about 1.4 million businesses employing upwards of 7.9 million people and contributing almost $500 billion in GDP will retire in the next 10 years.
Kurland says as these successful baby boomer generation business owners seek to monetise their lifelong investments in their business and a growing cohort of motivated and entrepreneurial buyers seek to buy these businesses, Arrowpoint can play an important role to facilitate such transactions and ensure a smooth transfer of wealth between generations.
