Sydney-headquartered FC Capital is looking to raise as much as A$500 million ($331 million) for its debut credit fund, with a focus on mid-market lending opportunities in Australia and New Zealand.
The fund will target a first close of A$300 million, with the possibility to expand to $500 million if its fundraising efforts are successful, Christian Brehm, chief executive officer, told FinanceAsia in an exclusive interview.
The firm is marketing the fund to institutional investors across the US and Europe, where it feels it can secure larger commitments, compared to Australian investors.
Brehm noted that the fund is not looking to attract a specific type of limited partner (LP) or overall investor mix, but said that no single commitment will contribute more than 20% of the total fundraise.
“Our main focus is to bring the right investors into the fund,” he said.
The CEO anticipates fundraising to take up to 12 months, although he hopes it will be quicker. In the meantime, the fund will target a soft close of about A$100 million – an amount that will allow it to service an existing deal pipeline.
“From the hard close, we will commence the deployment period, which we have marked as two years,” he shared.
Australia appeal
FC Senior Credit Fund I will provide these global limited partners (LP) an opportunity to gain exposure to Australia, Brehm said.
On the merits of this market, he explained: “Australia has had a triple-A rating for over two decades and went through the global financial crisis (GFC) without a recession; so overall performance is fantastic. But the market size is quite small, and that makes it challenging for investors to directly diversify into Australia.”
He also noted better risk-adjusted returns in Australia, compared to the US and Europe, where companies have higher leverage levels and arrangements between the credit providers and borrowers are increasingly covenant-lite.
The A$300-500 million target that FC has set for its first vehicle is based on what the firm has historically been able to deliver and feels comfortable in telling investors that it can deploy, he added.
Established in 2012, FC capital has to date, deployed more than A$2 billion on behalf of wholesale and sophisticated investors under individually managed accounts (IMA) and through its trade credit arm, Finstro. It also manages third-party capital on behalf of a A$700 million external fund.
“We tried to launch the fund last year but got side-tracked with [separate] deployment. The market here picked up quite tremendously – even more so this year – and we had enough capital at hand to keep ourselves busy and deploy. We now have a bit of breathing space to get out and promote our own fund,” Brehm explained.
The fund will target tickets sizes of $15 million on average. “The maximum ticket size we would want to write is probably $40 million.”
While the firm would consider investment in smaller companies if they have demonstrated strong performance and stable incomes, a sweet spot would be those with an Ebitda of between A$50-100 million, a segment of the market that the team considers to be under serviced by the banking sector.
The fund will target double digit returns, with monthly distribution and returns anticipated at between 10% and 12%.
“Ideally, this will be a floating target, based on our floating rate, which is usually the Bank Bill Swap rate (BBSW), plus a margin,” Brehm explained.
For comparison, the firm’s managed accounts have been able to deliver between 13-15% internal rate of return (IRR) on average (excluding upfront fees), he added.
Shift to private credit
The global private credit (PC) space has grown to $1.4 trillion as of the end of 2022, from $500 billion in 2015, and is expected to rise to $2.3 trillion by 2027, according to data provider, Preqin. In recent years, global pension funds and sovereign wealth funds have increased their allocation to alternative assets in search of yield in a low interest rate environment. The floating rate nature of PC makes it a resilient asset under rising interest rates.
Global alternative investment manager, KKR, argued in a report last year that asset owners should consider targetting a 10% allocation to PC, noting that the sector has seen attractive returns of up to the high-teens for distressed and special situations strategies.
“Investors are realising this and changing their investment strategies over the next couple of years,” Brehm said.
The retrenchment of banks from the space in recent years – the result of Basel III and local regulations curtailing bank lending – has left a gap for private credit players such as FC Capital to fill.
The recent global banking turmoil and ongoing uncertainty around the Fed’s interest rate policy has further tightened liquidity, as lenders have pivoted to wait-and-see approaches.
“In Australia, there is barely any liquidity in the small end of the market; that is, at the A$5-30 million level…. Without competition, you can go in with more opportunistic pricing,” Brehm said.
“But I believe that it's a short-term trend for the next couple of months; beyond that, we will see a more capitalised market, with investors providing more liquidity and having more certainty around the inflation and interest rate environments,” he proposed.
Amplification elsewhere
Later this year, FC capital plans to launch a second credit strategy, the FC Senior Credit Income Fund. This will be open-ended and cater to Australian investors. With a target of A$100 million, “its main purpose will be to provide Australian investors access to our deal flow and will offer slightly different returns,” he said.
To support its efforts, FC capital plans to expand its investment team in Australia by two or three people “over coming months”. The firm currently counts “8 to 10 people”, and occasionally hires additional advisors on a contract basis.
Further down the line, Brehm envisages establishing investment teams overseas, as well as expanding deployment across Asia.
“Over the five or so years, I hope we will have offices in the US and in Europe, with funds focussed on opportunities in these regions. But that’s sort of future music.”
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