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In the private credit market, shifting treasury yields are favouring credit investors, with yields higher across the board. Mark Sherwood from iPartners shares insights on rising investor demand, particularly for private credit. With base rates at 4-5%, portfolios that used to yield 9-10% are seeing returns of 11-12%.

Furthermore, Mark points out the appeal of the asset-backed lending sector, specifically in support of non-bank lending businesses. He sees value extending beyond real estate into business lending. Mark also mentions that his investment strategies typically favour trades occurring over 12 to 24 months, offering reliable returns during periods of economic uncertainty.

Find the full unedited transcript of this interview below:

Well, as I mentioned there at the front, those treasury yields continuing to shift higher. Let's take a look at the impact, particularly in the private credit market. Mark Sherwood joining us from iPartners now. Mark, good to catch up with you again. Thanks for joining us. So that's the story at the moment, isn't it, where those Treasury yields are heading? What's your view on the impact that's having?

0:18

Yeah. Good. Good afternoon, Andrew. Yeah, absolutely. Yields are higher right across the board. And that's that does correlate across to the private markets in terms of the private credit markets particularly. So yeah, the yields are in favor of the holders of capital, i.e. the the credit investors are in a pretty advantageous position here because everything's just slowly shifting, shifting wider. You know, base rates out at 4 or 5% means, you know, private credit yields that used to be 9 or 10% and now are now 11 or 12. It's that kind of dynamic that goes on in terms of the way that the world world moves. So absolutely, you know, we're we're in a pretty powerful position as private credit investors to negotiate slightly higher yields when everything is is moving, moving higher. So so the borrowers of capital do where that a little bit in a higher level of borrowing that they've got to pay in terms of the price of

1:18

the price of borrowing capital essentially. Yeah. There's certainly the mercy of the markets at the moment as far as those that are borrowing. But as you say, on the other side of the coin, it is advantageous. So

1:29

what are you seeing as far as investor demand is concerned?

1:33

The investor demand is definitely increasing, particularly for private credit. Not only in Australia, but it's actually it's actually a global thing. You know, in in all sorts of recent research is pointing to that as well, particularly globally. You know, I recently read out a BlackRock insurance survey that they put out annually and that said that 60% of their investors that they surveyed were going to add to private lending in the next in the next year or so. So it's definitely a global theme. We're seeing more capital getting allocated towards private credit in people's kind of bond percentage. So so when people run a portfolio where they they target a certain percentage in in fixed income type assets, they're definitely increasing the weightings towards private credit, making up a section of that fixed income weighting. Essentially, where is it proven to be most attractive regionally, I guess, where's

2:33

Australia stack up just as far as if you are investing in that space?

2:37

I think in Australia the best risk reward that we tend to see tends to be in what we've referred to as the asset backed lending space and that's particularly where we're funding some of the non-bank lending businesses, the businesses that provide alternative sources of capital, particularly to private companies as well as private borrowers, private individuals. I would say that's probably the sweet spot in terms of where we're seeing the strongest risk reward tilting in the favour of the the investor where we can essentially fund a growing and strong private business, but also take the security of the loan book when we make that funding to them. So that that really gives us a, you know, quite a strong level of security and support to the credit position that we're taking with that particular business. So so that's a space that we've been very active. So beyond real estate, where are you seeing opportunity at the moment?

3:34

Yeah, I'd say real estate as well as business lending is where we're seeing the strongest opportunity definitely in real estate. There's a lot going on where, um, property developers or property groups are just looking for kind of help to bridge finance to a certain point in a project. And some of these can be really interesting projects to fund because we can take a first mortgage exposure over the land. It might be a land subdivision type project where we know we're taking a first mortgage position at a fairly conservative gearing ratio. These types of deals can be very interesting to to have a look at. But then also to your to your question, when we're funding some of those non-bank lenders that lend to private businesses but have got very strong track records in the way that they've made sure that they've kept their arrears really low in any potential defaults, very, very sound and secure even in an environment where the economy is just generally softening. So that's really what we're looking

4:34

for. Well, what do you need to look out for, Mark? I guess, in terms of timing? We know that those as we were talking about those treasury yields are heading higher and we're seeing that that globally at the moment. How far ahead do you need to look in just in terms of your investment strategy?

4:51

We tend to like trades that are kind of anywhere from 12 months to 18 months, maybe a maximum of two years at this point in the cycle. You know, we are an investor can lock in some really sound returns for kind of the next two years. Hopefully that gets us through this this most volatile or most uncertain patch of economic history that we're kind of now, now, now sitting in where there's so much uncertainty as to as to whether there's further rate rises or whether there's, you know, soft landing scenarios, perhaps particularly for our local economy. So, you know, for us that if you can get sound returns that pay you a strong and consistent yield for the next sort of 18 months or two years, there the types of transactions that we that we tend to favor.