Different route: AustralianSuper chief executive officer Paul Schroder during an interview in New York. The Melbourne firm boosted its investment mandate with Churchill Asset and is now exploring other avenues such as private equity instead. — Bloomberg
SYDNEY: Australia’s biggest pension funds are losing their appetite for bonds as interest rates peak and are instead ramping up bets on a potentially riskier avenue of higher returns: private credit.
Cbus, which has A$90bil (US$59bil) in total assets, is planning to triple its global allocation to private credit over the next 18 months, while A$104bil Hostplus is looking to add to its already record holdings of the asset class.
The nation’s biggest pension manager AustralianSuper in December boosted its investment mandate with private credit specialist Churchill Asset Management.
“In parts of the credit market and private credit areas, particularly some of the activity we do directly ourselves in Australian credit, we’re finding good opportunities,” said Brett Chatfield, chief investment officer at Cbus in Melbourne.
“There’s still very good opportunities to earn low double-digit returns.”
The fund plans to boost its private credit assets outside Australia to as much as A$300mil in the next 18 months, from the present level of about A$100mil, Chatfield said.
The pension provider is also looking to increase its A$1bil bet on Australian private credit by up to A$500mil, he said.
Australian pensions are part of a global trend towards private credit.
The amount of money in the asset class in North America, Europe and Asia Pacific jumped to US$1.64 trillion at the end of June, from US$1.43 trillion in December 2022, according to investment data company Preqin Ltd.
Private credit is when money is lent directly to a borrower who may have trouble accessing loans elsewhere.
The greater risk the recipient may be unable to repay the loan means investors can collect higher interest rates than they can from comparable fixed income markets.
That’s a risk many funds in Australia’s A$3.6 trillion pension market are willing to take to generate higher returns for their members.
Australia is home to the fastest growing pension pool in the developed world, with funds receiving a compulsory 11% of salaries from 27 million residents, a capital flow that’s spurred them to venture ever further offshore. While the last two years of rising global rates encouraged funds to load up on bonds, that window looks to be closing amid expectations for rate cuts this year.
Direct lending yielded an average 11.5% in the second quarter of last year, according to an analysis by JPMorgan Chase and Co.
In comparison, global investment grade bonds yielded an average 3.79% on Tuesday, down from a high of 4.42% in October, a Bloomberg index showed.
“We can buy traditional fixed income but also the next question is: can you continue to do better?” said Con Michalakis, deputy chief investment officer at Hostplus.
“The yield curve offered opportunities, but then also so did the private credit market, so did the investment grade market, so did the asset backed market.”
Hostplus is looking to add to its record 7% allocation to private credit in its default balance fund, and is combing through potential investments for asset backed, mid-market and special situation opportunities, Michalakis said.
Elsewhere some caution is setting in.
Fresh from boosting its mandate with private credit specialist Churchill to A$1.5bil from A$250mil, AustralianSuper is now exploring other avenues such as private equity instead.
Private credit is “certainly offering very high yield, but we haven’t really seen the impact to the real economy and to some of these businesses from substantially higher interest rates,” said Katie Dean, head of fixed income, currency and cash at AustralianSuper, which has A$315bil of assets.
“We’re not actively reducing, we’re just not actively increasing our allocation is probably the best way to describe that,” she said of the fund’s exposure to private credit.
AustralianSuper currently has about 20% of its portfolio in bonds, which is historically high, she said. — Bloomberg
