AustralianSuper is planning to triple its private credit holdings across Australia, Europe and the United States in the next three years. Florence Chong speaks with Nick Ward to get a sense of the opportunities.
AustralianSuper has spent the past two years laying groundwork to position for a slice of the growing global private debt market.
The Melbourne-based fund has expanded its team in London and recruited for a new office in New York.
The US office represents a critical piece of the global jigsaw for AustralianSuper because the US has the biggest, most liquid and deepest debt market in the world.
The idea is to replicate its London investment capability in New York.
A long-awaited opening of the New York office was delayed by the COVID-19 pandemic. It is now up and running, with Susan Alexander as Head of the US team.
Mark Delaney, the fund’s Chief Investment Officer, has spoken of the fund’s ambition to have 60 employees in New York by 2026, looking especially at the debt market, among other opportunities.
A year ago AustralianSuper appointed Mikaël Limpalaër, whose key focus is real estate debt. Limpalaër has extensive real estate debt investment experience.
He joined AustralianSuper from Aeriance, where he was Director, Real Estate Lending. Prior to this he held senior positions at Morgan Stanley, Barclays Capital and Société Générale.
Completing AustralianSuper’s private debt strategy has been a key appointment – the promotion of Nick Ward to a newly-created role as Head of Private Credit – in July this year.
Over the next three years, AustralianSuper intends to grow the portfolio to over $15 billion in private credit across Australia, Europe and the United States. Currently, we have a $5 billion private credit portfolio
As a senior portfolio manager who has been with the fund for over a decade, Ward was already working on debt deals for the fund.
Now his brief is to manage the fund’s global amalgamated private credit exposure and indirect strategies, and to triple the fund’s investment in private debt in coming years.
“Over the next three years, AustralianSuper intends to grow the portfolio to over $15 billion in private credit across Australia, Europe and the United States,” Ward says. “Currently, we have a $5 billion private credit portfolio.
“Of that, $4.5 billion is in direct loans and evenly split between Europe and the US,” he says.
The balance is in loans to the property sector in Australia, managed by Melbourne-based real estate lender MaxCap, now 50 per cent-owned by a US fund manager, Apollo Global Management.
Ward says the fund’s preference is to be involved with direct lending, and this has been the approach since entering offshore markets five years ago.
It was in 2016 that the fund made its first direct investment – a A$500 million loan to the Spanish toll road operator, Itinere, to refinance some long-term debt.
Ward helped source the deal from his experience in the global infrastructure market. He was an investment director with Hastings Funds Management before joining AustralianSuper in 2011.
Earlier this year, AustralianSuper made a $800 million direct loan to a Blackstone portfolio company in the European logistics space and, more recently, has supported Blackstone with a US logistics portfolio.
“We continue to expect opportunities in industrial logistics assets and residential or apartment living,” he says. “Coming out of the pandemic, we are seeing strong tailwinds in these sectors.”
AustralianSuper is currently evaluating prospects to lend to borrowers planning large-scale development of student housing in the UK and Europe. Ward says:
“We have several live opportunities we are looking at. These have a collective value of $2-$3 billion in the private credit markets of Europe and the US.”
According to Ward, AustralianSuper will not shy away from financing office deals, even though the sector is going through an uncertain period with the emergence – and entrenchment – of hybrid working, and its potential impact on future office demand.
“The jury is definitely out on what the future holds for office,” he says. “We will selectively fund office, especially projects designed to cater to the post-COVID environment. These will have greater emphasis on health and safety measures for the workforce, and collaborative spaces to bring people back to the office.”
The jury is definitely out on what the future holds for office. We will selectively fund office, especially projects designed to cater to the post-COVID environment. These will have greater emphasis on health and safety measures for the workforce, and collaborative spaces to bring people back to the office
Ward said there would also be more transport opportunities in infrastructure as a result of the ongoing pandemic.
Last year, AustralianSuper participated in a new financing package for Heathrow Airport, sharing equally with an infrastructure debt manager for a £750-million tranche of ‘deeply-subordinated’ debt.
“Heathrow continues to be hugely disrupted. Traffic was down more than 90 per cent at different stages last year, the airport decided to raise capital to manage its overall debt book and liquidity profile,” says Ward.
“Heathrow is a massive issuer of debt, and has several levels to its capital structure,” he explains. “The first couple of levels are rated investment grade, and they trade on skinny returns. We are in what we call the deeply-subordinated position in Heathrow’s debt structure.”
The further a lender moves down the capital structure, the higher the risk, he says. But returns are higher to compensate for the risk.
Given its size, Ward told [i3] Insights, AustralianSuper would seek to play in the top spectrum of the private credit market, where it can achieve scale and secure a premium for complexity and illiquidity.
But competition is keen, even at this level.
“We have lost our fair share of deals. But we like to think we remain disciplined,” he says. “Private credit is not our only strategy. We can invest across all asset classes in private equity, property, infrastructure and/or listed equity.
“When we lend, we take a one-fund approach. We can switch between equity or debt, depending on the particular opportunity and where we see the best risk-adjusted return.”
Back in 2018, AustralianSuper participated in a construction financing for One Crown Place in London’s EC2, a mixed use site with largely residential apartments for sale.
The Australian superannuation fund has just recently refinanced the loan for £165 million, highlighting the fund’s preparedness to do repeat business with quality assets and sponsors.
AustralianSuper first played in the debt market in Australia when it mandated A$500 million to MaxCap for investing into property projects about six years ago.
The initiative has been a positive experience, and AustralianSuper has left the capital with MaxCap to use as a revolving credit facility for borrowers in the development industry. Loans valued at more than $1 billion have been made out of that mandate.
Over time, the expectation is its Australian debt portfolio will hover between $2 billion and $3 billion. Overseas deals are expected to make up the bulk of its debt book.
One of the largest loans MaxCap was able to arrange was a $360 million facility to Ashe Morgan Group and D Mann Corporation for development of the 45,000 square metre Midtown Centre at Charlotte and Mary Streets in Brisbane CBD, in 2019. At the time, it was Australia’s single-largest non-bank senior debt facility.
Under the mandate, Maxcap has also funded a major office complex in Sydney’s inner-city suburb of Pyrmont, with a $145-million senior construction loan to the developer, Milligan.
As well as real estate loans, the fund has embarked on corporate debt. In 2018, AustralianSuper partnered IFM Investors to lend A$150 million over 10 years to the global cardboard box maker and paper recycling firm Visy, controlled by Anthony Pratt.
Soon after, AustralianSuper, Cbus and IFM Investors jointly financed the Essendon Fields development project in Melbourne with a $100-million facility.
But these transactions were just tasters to whet an appetite for larger deals in the global debt market.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.