International institutional investors are eyeing the lucrative Australian small to medium-sized enterprise business lending space, seeking relatively higher returns than in the more developed US market.
Small and medium-sized business lending has been growing at the fastest pace seen since the global financial crisis, and competition is heating up among big banks to service the market.
But lender GCI says it is servicing customers with non-typical profiles, including smaller non-bank lenders, small businesses that are going through a transformation like a big acquisition or strategic reorientation, or “scale-ups” that are looking to grow their footprints.
“We’re there as a transitory part of the borrowing structure. We see it as a badge of honour if NAB later comes in and takes out the loan at half the rate,” says co-founder Steven Sher, a former managing director at Goldman Sachs.
Co-founder Gavin Solsky says GCI is starting to see more interest from both offshore and onshore institutions, including local super funds, seeking higher returns through fixed income investing.
“What’s attracted them up to now is the relative risk-return equation. It’s far superior to what they’ve seen in the US market, partly that’s because the weight of capital in the US is so great it’s pushed returns down,” Mr Solsky said.
“That’s because there’s relatively less capital in Australia chasing those opportunities.”
The company currently counts about 500 high net worth individuals and family offices as its main investors, who are looking for higher yield from credit investing. The investors pay a management fee of 1 per cent to 2 per cent, plus performance fees of 10 per cent to 20 per cent if the funds yield more than 8 per cent.
The managing director of GCI’s recently opened Melbourne office, Joel Keating, says the US market for this type of investing is far more developed. “I saw the US private markets really develop. They’re seven to 10 years ahead of Australia,” he said.
“The banks are not going to get any less regulation, and it’s a very viable source of capital so I really see the Australian market going in that direction.”
Mr Solsky said the low interest rate environment and increased awareness around diversification had led to strong interest among high net worth investors in Australia.
“On the one hand, you’ve got all these borrowers that can’t access institutional or bank funding, and on the other hand, you’ve got all these investors who are looking for returns,” he said.
“If you looked at a HNW portfolio in the US, about 30 per cent would be invested in credit; in Australia, that’s closer to about 5 per cent,” he said.
Mr Solsky said the business model worked even as interest rates started to rise because the banks were unable to deliver credit to complicated customers. The returns also remain high compared with term deposits, he said.
“We’re still delivering high single-digit to low double digits for investors so even if term deposits went to 2 or 3 per cent, our returns are still very competitive,” he said.