The following article was produced by Professional Planner and sponsored by Metrics.
Australian fund manager, Metrics Credit Partners, is best known as a non-bank corporate lender that specialises in managing private credit portfolios on behalf of retail, wholesale and institutional investors.
It is less well known as an (intentional) private equity investor but, last year, the group launched the Metrics Real Estate Multi-Strategy Fund, which provides investors with exposure to both debt and equity in unlisted commercial real estate (CRE).
After successfully raising $300 million, the multi-strategy fund listed on the ASX in October last year, targeting returns of 10-12 per cent per annum, after fees.
As a key lender to Australia’s property sector, Metrics has extensive dealings and relationships with real estate companies, which presented opportunities to provide equity capital too, Metrics managing partner Andrew Lockhart tells Professional Planner.
“Our investors are looking for differentiated returns and this fund provides exposure to a diversified portfolio of CRE investments covering the entire capital structure from lower risk senior-secured first-registered mortgage debt investments to equity investments, which have bigger risks but also offer potentially higher returns,” he says.
While it’s early days for Metrics as a private equity manager, Lockhart said the group had strong capabilities and experience assessing risk, evaluating CRE opportunities, and negotiating and structuring deals, to maximise risk-adjusted returns.
“Investing in real estate-related projects is a significant part of what we do, providing our property clients with access to capital,” he said.
“Sometimes it can be senior debt, sometimes it can be mezzanine debt or equity capital, depending on the risk and return profile of each individual transaction.”
Public versus private
When it comes to real estate, equity investing is markedly different to traditional private equity, according to Lockhart.
Traditional private equity provides capital to unlisted companies to build, grow and innovate. Funds can be used to expand working capital, develop new products, and pursue M&A.
It can also be used to resolve succession, ownership and management issues.
In real estate, capital is allocated to specific projects that have a defined entry and exit date. This largely enables managers to determine expected returns, based on forecast project parameters.
“When we provide equity, it’s not like ordinary equity where shareholders are at risk of how the proceeds are used,” he says.
“We invest in specific projects, which are structured with appropriate terms and conditions to limit risk. Our role is to originate quality investment opportunities and ensure that they meet the mandated criteria for inclusion in a fund, based on risk, return and liquidity.”
The Metrics Real Estate Multi-Strategy Fund invests, more or less evenly, in two underlying Metrics strategies: the Metrics Real Estate Multi-Strategy Passive Trust and the Metrics Real Estate Multi-Strategy Active Trust.
Through the Metrics Real Estate Multi-Strategy Passive Trust, which also invests in the Metrics Real Estate Debt Fund, investors have exposure to around 120 different loan assets.
Through the Metrics Real Estate Multi-Strategy Active Trust, which also invests in the Metrics Real Estate Equity Opportunities Fund, investors have a private equity exposure to 12 projects. These projects are primarily residential and industrial developments.
On the equity side, Metrics likes high-density residential property projects.
This part of the market stands to benefit from a number of positive tailwinds including a demand and supply imbalance, population growth and low unemployment, leading to substantial opportunity, Lockhart says.
These trends are a boon for credit investors too.
“In Australia, an important way people create personal wealth is through property ownership,” he says.
“Australians have a significant amount of their personal wealth tied up in their home. We specifically provide finance for build-to-sell developments where our clients are undertaking large scale, high-density residential apartment projects to provide housing for our growing population.”
That said, it is critical for lenders to have contingencies in place to mitigate risks including planning risk, construction delivery risk and settlement default risk.
“As a lender, you don’t want to be exposed to risks like cost overruns or project delays. You don’t want to find out that you’ve backed a product that there’s no market demand for, so you seek to mitigate those risks,” Lockhart says.
Making alternative plans
Despite Metrics’ best efforts, things don’t always go according to plan, which is part and parcel of managing a private credit portfolio.
According to Lockhart, the best private credit managers aren’t just good at originating and structuring deals, they’re good at managing loans to repayment, of which a key part is sometimes working with underlying companies to turnaround performance.
Occasionally, it requires enforcing security to taking control of a property site.
Last year, the manager acquired a property previously held by a Melbourne-based developer after it defaulted on a loan originally funded by Metrics in 2022. As part of the deal, Metrics’ debt-only investors were fully repaid, and ownership of the property asset was separately acquired by the group’s debt-equity fund.
It is understood that the Metrics is also set to execute a debt-for-equity swap for disability services provider, Oncall.
“When you lend to a corporate and there’s no real estate asset held on their balance sheet, then your debt service is based on the ability of that company to operate and generate cashflow, which creates equity value and covers the risk associated with your loan,” Lockhart says.
“On the real estate side, you’ve got the cashflow that is required to service and repay debt, but you also have an additional tangible asset that is the fallback position if the borrower was to default. As a lender, there is the ability to exercise your powers and take control of the asset, which is designed to reduce risk for investors.”
Lockhart rejects the notion that the Real Estate Multi-Strategy Fund was established, in part, to house failed credit investments.
“Our role is to create investment solutions based on the risk and return objectives of investors, with consideration for the liquidity profile of the investment product,” he says.
“For investors seeking an alternative to public market equities and traditional fixed income, they can play in private markets spanning the entire risk spectrum in one vehicle.
“Our objective is to provide investors with monthly cash income, preserve investor capital and manage investment risks while providing potential for higher total returns.”
