Private lender Merricks freezes fund redemptions setting off industry alarm bells

Regal Partners-owned private lender Merricks is pausing redemptions on its $1.2bn fund. It is still open to new money and ‘continues to make regular distributions and is processing redemptions’, Merricks said.

Developer Milligan Group has won the backing of Merricks Capital to finance a Sydney CBD site where it is planning a $2bn office tower.

The private credit sector is reeling from the suspension of redemptions by Regal Partners’ lender Merricks Capital until the end of the year, which industry sources said risked triggering a doom spiral for its $1.2bn fund.

Merricks told investors on Thursday it was delaying redemptions due to a lack of “unallocated cash” in a major liquidity squeeze for the strategy whose capital is “fully deployed”.

Instead of receiving their redemptions, investors have been offered units in the fund, which would see their returns quarantined, but not used to back new lending.

Investors will be paid out as new cash comes in, either from new investors or as loans are repaid.

Merricks said it would handle redemptions “through a clear, equitable process”, noting the delay was “not a gating event”, in a message to investors.

“The fund remains open to new applications, continues to make regular distributions and is processing redemptions,” Merricks said.

Merricks chief executive Adrian Redlich said the fund had been pinched between late redemption requests from investors and a series of significant deals closed in the period, including a $400m loan to the Market Square development in Adelaide.

Mr Redlich said the move was part of Merricks’ normal processes, and came amid “a bit of indigestion” in the private credit market.

“Generally we’ll be able to manage liquidity,” he said.

“We’re seeing a lot of inflows from institutional clients — who are investing in Australia and New Zealand - wanting AUD assets we’re seeing a bit of a rotation in Australia, people moving in and out.”

Developer Milligan Group borrowed from Merricks Capital.

But well placed figures within private credit who spoke on the condition of anonymity warned said the fund’s move to suspend redemptions was a warning of the growing liquidity squeeze facing the sector, and could trigger an exodus at Merricks.

Regal, which snapped up Merricks in a $235m deal in June last year, was contacted for comment.

Merricks is part of a growing breed of new lenders which have capitalised on the retreat of banks from writing business loans. It manages almost $3bn across its funds.

Merricks has backed two developments from the privately owned Milligan Group, including a site at 32 York Street in Sydney.

The 55-storey Halo development on the corner of Hunter and Pitt Streets has been an open wound for Merricks, with more than $500m in debt behind the Milligan Group development.

Merricks tipped a further $30m in earlier this year.

The heavily indebted project is struggling after property giant Lendlease walked away from its earlier interest in buying the building for $685m.

Superannuation giant Cbus is now scoping it out, with an estimated $1.8bn end-valuation, but sources said the industry fund could pay below Lendlease’s earlier mark.

Merricks, which wrote down the loan on Halo, now awaits the outcome of the sales campaign.

Mercer Pacific investment lead Darren Spencer said he couldn’t comment on Merricks, but noted that investors in the private credit sector were keenly focused on the ability of lenders to pay out.

There “has to be some acknowledgment that these are illiquid investments”, he said, meaning there would be times when investors couldn’t expect an immediate return.

Mr Spencer said more liquidity squeezes could be expected in recessionary conditions.

“You’ve got to be thoughtful about diversification,” he said.

Mr Spencer said Australia’s private credit market was still five years behind the United States and Europe.

Both markets presented a more diversified spread of lending opportunities, compared to Australia’s real estate heavy sector.

A recent Mercer report warned many managers expected to see a “significant increase” in loss rates in the coming years, alongside continued growth in lending.

“You’re going to experience more defaults but in the big scheme of things you’re going to make more money,” he said.

“You’ve got to basically make sure you’re investing with managers who are tested across economic and credit cycles, who have really strong in-house work out capabilities.”

Mr Spencer said the best managers were those who had “really strong sourcing networks”.

“We’re investing with managers in their 60s, not a bunch of 30-somethings who spent a few years at a bank,” he said..

ASIC chair Joe Longo. Picture: Monique Harmer

The growing private credit market is of keen interest to the Australian Securities and Investments Commission which has pushed lenders provide it more information about their activities and fees.

Lenders were asked earlier this year to disclose matters concerning credit risk and liquidity management in retail funds.

Do you know more? Contact [e-mail]

Originally published as Private lender Merricks freezes fund redemptions setting off industry alarm bells