Certain sectors ‘too risky’ to lend

As the nation emerges from the Covid crisis, many businesses are finding banks are still unwilling to lend.

Managing director of Realside, Alex Hone, at the investment firm’s office in Sydney. Picture: Adam Yip

As the nation emerges from the COVID crisis, many businesses are finding that banks are still unwilling to lend, with certain sectors deemed too risky.

For these companies, in industries such as leisure and travel, private debt is a welcome alternative. Sitting on the other side of the transaction are investors clamouring to put their money to work outside of the sharemarket.

“What we’ve seen in the last couple of months is market opportunities have really started to come to the fore because of the activity of other investors, who were quietly trying to remove things or shift their balance sheets or were refusing to refinance,” said Alex Hone, managing director of investment firm Realside.

“So it has been demand-led by the companies needing capital, but it has also been supply-led by virtue of other investors in the marketplace having to make changes and therefore throwing up further opportunities.”

Launched in mid-2019, Realside specialises in unlisted property, asset finance and structured equity.

Its principals have a two-decade record and have undertaken more than $2bn of deals.

Sitting alongside Mr Hone on the Realside board is industry veteran Chris Cuffe, the former chief executive of Colonial First State and Challenger.

The shift in private sector borrowing to non-bank funding has been gathering pace for some time but there is ample room for growth, according to Mr Hone.

As sharemarket valuations climb higher, sophisticated investors such as high net worths and family offices are on the lookout for alternatives for their money.

Of Australia’s roughly $3 trillion lending market, non-bank lending represents just 10 per cent, or $300bn.

“That’s about a quarter to a third the size of what it is in other markets. Typically in other Western countries, non-bank lending has market penetration of high 20s to 30 per cent,” Mr Hone said.

“Undoubtedly the private market will continue to grow above system credit growth for many, many years. We’ve seen that over the last decade, and we’ll see it continue over the next ­decade.”

Realside’s Capital Flagship Fund, launched in late August and with current assets under management of $48m, invests in a range of unlisted assets and has a target return of 12 per cent per annum.

 As typical with unlisted funds, the investment time frame is considerable, with investors locking their funds away with Realside for a three-year term.

Mr Hone says that Realside, with a focus on opportunistic debt, has carved out a niche in the $10m-$40m range: the SME asset-backed market.

Some of its recent investments have included businesses the banks are shunning through the current COVID-19 environment.

“We’ve invested this year in a couple of asset-backed leisure businesses that have very strong track records and performance,” Mr Hone said.

“The banks haven’t been willing to lend to them or roll facilities in this current market, just because they don’t have the appetite in those sectors any more.

“But it’s very easy to look at these assets and businesses on a two-year view, and understand that their underlying fundamental economic characteristics are robust, and therefore it may be a very strong asset to back.”

Other investments included A-grade hotel assets, after the owners, whether domestic or overseas, were turned away by the banks not willing to put capital into that segment of the market, he said.

“Their desire to put debt in to facilitate growth means they don’t have to issue equity at this point in the cycle,” Mr Hone said.

As investor interest in private debt grows, the debate on the riskiness of the asset class rages on. For Mr Hone, if done right, it should be “incredibly low risk”.

“The approach you need to take is very much one of capital preservation and of debt risk, that is, I only make an investment because I have a huge amount of confidence in the quality, the margin of safety,” he said.

At the current 12 per cent return target, he says he can still make low-risk investments.

“We’re taking far more security and collateral for a loan at this stage of the cycle, because we see the return, given the relative value to interest rates at zero, earning double-digit returns in this space is enough,” he said.

“It’s about making sure you’ve got even more security and lowering the risk of the loan.”