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Future Fund and Cbus see big opportunities in direct lending

Amanda White




The potential for super funds to be direct lenders is enormous, according to a panel that included the Future Fund, Cbus and AustralianSuper that are all lending directly.

Rob Leck, manager debt and quantitative solutions at Cbus, which is about to enter the private debt market, said that not only do investors have to be lenders, but they have the potential to assist in the development of a high yield market in Australia.

“The key thing for me is why do super funds have the potential to be direct lenders? What is it about super funds that distinguishes them from the commercial offerings? The key thing is the long term patient capital that super funds have. I could do a bespoke deal that a bank can’t do, that could change the landscape, because I can finance it for 30 years,” he said.

“Cbus has 14 year old apprentices in our fund, why wouldn’t I partner with commercial Australia and say we can lend directly and have a 30-40 year timeline.”

However he did say that Cbus will probably continue to use managers, rather than go directly, because of the depth of analysts needed.

“You need deep credit fundamental analysts to do this properly, if don’t put them in your team then [you] need to borrow them from your managers. The potential is enormous and unlocking it is the key.”

Similarly, Roger Knott, senior investment manager, credit, at AustralianSuper, said the most frequent opportunities are where the fund is prepared to loan out longer tenure.

Knott joined AustralianSuper 18 months ago to build out expertise in this area and now the fund has external managers and an internal team exploring opportunities.

AustralianSuper has seen strong referral from banks to access deals.

“If you are working alongside the banks and not eating away their ancillary business, they are good referees. We also have reasonable internal teams across equities, fixed income and property, and they become good referrals too. There’s also no shortage of capital advisory firms trying to access our capital.”

The Future Fund has been involved in the direct lending landscape since 2009, and first made an investment in 2010 in the European corporate middle market. It is viewed as a credit allocation and makes up around 30 per cent of the credit portfolio.

James Waldron, manager debt and alternatives at the Future Fund, said their definition of direct lending was directly originated, non-traded debt capital. Within that there is a whole suite of different products, tapping into different parts of the capital structure from senior to deep subordinated, different industries, and different geographic exposures.


‘Swathe’ of banking regulations

“Our thesis was originally driven by the growing imbalance between supply and demand for debt capital. Banks came under stress, hedge funds scaled back, created an opportunity for institutional patient capital. But our thesis has evolved through time and regulatory change is the driving force today,” he said.

“There is a whole swathe of banking regulation and we see that driving a wedge and providing more opportunity for us – we are potentially more flexible to borrowers and provides us with a good return.”

Waldron warned investors of some of the challenges the Future Fund has faced, including the fact that manager track record and footprint has been the biggest obstacle.

In addition, it is traditionally a banking environment which can be challenging for the due diligence process.

“You also need the right capital base to pursue this strategy. By its nature, it’s illiquid lending – like private equity with lower risk and lower returns. You need to bare that liquidity, very much a buy and hold strategy.”

He said that investors need to be able to assess the appropriate risk return for this strategy, which should include the appropriate credit risk premium as a baseline and include Illiquidity and complexity premiums, which are not constant.

“The opportunity for us is still interesting, we think it is quite early in terms of regulatory change and the impact of that for direct lenders to exploit. By [the] same token, there is more competition from both investors and managers,” he said.

Also on the panel was Philip Moffitt, head of fixed income Asia Pacific and chief executive, Goldman Sachs Asset Management.