Balmain Investment Management, a Sydney-based specialist in managing Australian commercial debt, is turning to Asian investors for the first time to invest in one of its products.
Michael Holm, executive director at the firm, says interest from Asia and the Middle East in Australian real-estate-related loans is running high, thanks to Australia’s relatively high interest rates.
And more opportunities to invest are emerging as banks, both foreign and local, cut back on lending activity, allowing space for institutional funds to step in (or for banks to spin off credit teams into asset management businesses).
Balmain is a non-bank private-debt specialist with a business stretching from origination of new loans to credit underwriting, asset management and recovery of distressed loans. It manages A$3.5 billion of assets.
Holm says the industry has changed dramatically since the global financial crisis. Foreign and domestic banks have retreated from lending to commercial and residential property deals, creating a gap in the funding market. Yields have gone up from under 100 basis points (over local bank bills) to 250-400bp over, depending on duration.
Given the demand for loans for property, asset managers can compete with banks, giving a long-term source of stable returns to pension funds, insurance companies and other liability-driven investors.
Although valuations on real-estate assets have declined in Australia since 2008, these have stabilised, according to Holm. “What used to be a borrower’s market has become a lender’s market,” he says, adding the risk-return profile is the most favourable to investors in over 15 years.
In Australia, first mortgages are also supplemented by corporate or personal borrower guarantees, so the portfolio provides recourse debt, a further advantage to lenders.
Balmain this year raised an initial A$250 million for a new fund focused on mid-cap property loans to wealthy people; given inflows to Australian markets from investors in Japan, China and the Middle East, Balmain decided to double the size of its fund and close by the end of this year.
The fund is closed-end, with a five-year term. Fees are around 40 basis points, in addition to a portion in which the manager puts into a loss reserve.
There is a 20% performance fee if the fund hits its target yield and returns all principal. The target is a spread of 350-400bp over 90-day bank bills, which is 3.5-3.6% today, giving investors an annualised total return target of 7-7.5%.