COLONIAL First State (CFS), which manages A$151 billion (S$136 billion) of Australian pension and wealth assets, plans to add billions in private credit deals as it sees interest rates staying elevated for longer.
CFS will boost its private credit allocation to an average of about 3 per cent across its portfolio, chief investment officer Jonathan Armitage said. The change will happen gradually over a couple of years and marks a shift from its historically low exposure of less than 1 per cent to the asset class.
Armitage, who earlier this month travelled to Europe and the United States to speak to investors, said his trip reinforced the view that the “resting heart rate of inflation” would be higher than in the last five to seven years, which is influencing the way the fund is shaping its portfolio.
“The floating rate nature of those investments means that we’d benefit if we were right” and interest rates don’t fall as rapidly as markets have been predicting, Armitage said. “Equally, if we were mistaken in that view, or if the US economy in particular was weaker, we’d also benefit because those investments would benefit as rates declined.”
Australia’s A$3.7 trillion pension industry has shown a growing appetite for private credit, with multiple funds chasing opportunities across the globe. While A$85 billion pension Rest last week sounded some caution about the huge flows pouring into the highly competitive industry that’s seen massive global growth, most large rivals including No 2 player Australian Retirement Trust are still bullish on the asset class and building allocations.
CFS plans to cut its listed real estate holdings in favour of private credit, as well as direct some of the fund’s cash balances to new deals. “The forward returns are likely to be greater in private debt than we think they are likely to be in the listed real estate sector over the next three years or so,” Armitage said.
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The fund was focused on private credit investments in the US and Europe due to the wide range of deals available across different industries, but was also “looking actively” for opportunities in Australia, Armitage said. It plans to target larger companies typically earning more than US$100 million of Ebitda.
“There is less competition in terms of the number of firms lending in that particular area,” said Armitage, adding that bigger firms were well placed “to handle any challenges at an economic level better than smaller companies”. BLOOMBERG
