"Growth": Rixon Capital's Patrick William's one-word verdict on Australia's private credit market

"You're seeing a lot of that private capital looking for private credit congregating in the property space," says William. 

And there's understandable reasons for the local bias towards property, he says.

"From the investor side - this is Australia, people love their property. People are familiar with the property and people understand property. And on the fund manager side, it's a lot more scalable and vanilla to underwrite."

"If you're doing a property development or even a brownfields property, you get a third party valuation report, you make sure the documents are in place, you can deploy $50 million. Whereas with a corporate or SME strategy, there's a lot of detailed diligence in assessing and integrating revenue models and asset bases."

But investors gravitating to property as the more-familiar option may be missing better risk-adjusted opportunities elsewhere, according to William.

"We're a SME lender, and my messaging to investors is when you've got a scarcity of capital and space, that's when you can generate those outsized returns, whereas in the property space you're seeing fair returns for fair risk."

This scarcity of capital in the sub-$20m lending niche means Rixon can target double-digit cash yields on a senior secured, tangible asset backed portfolio.

"We've got two pillars in our strategy: capital protection and a very attractive monthly cash yield."

But William warns that investors should not interpret a credit strategy offering “asset-backing” as a low-risk investment.

"The two examples I'd give: a piece of equipment that's leased and the borrower becomes challenged, odds are you can sell that piece of equipment for close to par and you get it done in three-to-six months. You'll get your money back," says William. 

"But then you look at the other end of the spectrum - a property development site - you've got a loan at a very attractive 60% LVR on an as-if-complete basis. But what that means is when the project is complete in three years, your debt is 60% of the value." 

"What happens if things go wrong in year one? You've got a big fat loan and a hole in the ground with three pylons sticking out of it."

Rixon currently offers two funds - the flagship Rixon Income Fund and the new Rixon Credit Opportunities Fund. 

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Both seek to target what William refers to as an "underbanked niche", namely businesses looking for loans of $2 to $20 million. 

This means a rigorous analysis of potential borrowers on their revenue model and collateral base.

One recently recent development in private credit markets investors need to be aware of, says William, is the rise of debt secondaries funds.

William believes the risk-adjusted returns of global debt secondary strategies are outshone by more vanilla domestic corporate and SME private credit.

Currency risks, borrower-friendly terms and leverage ratios exceeding 5 times EBITDA mean debt secondaries come with a meaningfully higher level of risk.

By comparison, the nascency of the Australian private credit market allows relatively-higher returns for a given level of risk, as well as lender-friendly debt terms.

Learn more about the Rixon Income Fund