By Emma Rapaport
Wilson Asset Management’s Alternative Assets listed investment company will expand into private debt in an attempt to hedge against rising inflation and capture higher yields.
The LIC, which invests across a range of unlisted assets including real assets, private equity and real estate, will begin its entry into private debt next month, targeting floating rate loans.
Portfolio manager Dania Zinurova says the rising interest rate environment presents an opportunity as banks retreat from riskier loans.
“Because interest rates are rising, banks are more squeezed out from the private lending sector they have tighter restrictions on lending, so private lenders are stepping in, and they’re really using the situation,” she said.
“Of course, it is sensitive to the point that by how much they can keep increasing interest rates depends on the level of household debt, on the level of economic growth or economic compression, but overall having private debt within the portfolio is a really important element right now.”
Ms Zinurova adds that yields have been rising due to the floating rate nature of many private loans – also known as a variable or adjustable rates – providing a natural inflation hedge.
“For example, some of the senior loan strategies in Australia that you’d look at last year with running yield of 4.5 per cent, now have running yields of 8 [per cent] or 8.5 per cent,” she said.
“I’m building out more exposure within the portfolio that brings an inflation hedge.”
The 1-month bank bill swap rate, used as the benchmark for floating rate loans and bonds, averaged just 0.08 per cent in the last financial year, but the average implied by the market for the next financial year is 3.4 per cent, according to debt fund managers Bentham.
WAM Alternative Assets (trading as WMA) is entering the space following an increase in corporate debt-related LICs since 2020 to meet the demand for yield. US investment company KKR has raised money in this format, alongside local firms Qualitas, Metrics and Perpetual.
Embracing complexity and illiquidity in private debt could result in higher returns, but also comes with higher risk.
WMA maintained its annual dividend after a year of strong returns.
The board declared a fully franked final dividend of 2¢ per share, bringing the full-year dividend to 4¢ per share, and committed to paying a “stream of fully franking dividends to shareholders”, provided sufficient profit reserves and franking credits.
Ms Zinurova would not be drawn on whether WMA would look to increase its dividend in FY23, saying it’s up to the board, but noted “very healthy profit reserves”.
WMA’s profit reserve was 17.3¢ per share on July 30, representing 4.3 years of dividend coverage before this year’s payment. Operating profit before tax stands at $23.2 million, up from $22.6 million this time last year, and $6.5 million in financial 2019-20.
The portfolio returned 12.2 per cent in the year to June 30 driven by its real assets – primarily water assets – and private equity.
“The vintage year for most of the portfolio concentration [is] 2015-16, which means the investments were made back then, and now they’re being matured,” she said.
“The private equity dynamic in Australia… there was a lot of dry powder in the market, a lot of competition for more mature assets, and we’ve had some really good exits on the private equity growth side.”
Shareholder returns totalled 9 per cent, including share price growth and dividends, offset by a moderate widening in the share price discount to net tangible asset value. The listed investment company, which took over the Blue Sky Alternatives Access Fund in 2020, is currently trading at around a 12.1 per cent discount.
Its pre-tax net tangible assets rose 9.7 per cent over the year, including the 4¢-per-share dividend.
Wading in water assets
An investment in the Adamantem Capital Fund paid off after the manager partially exited an investment in Climate Friendly, a developer of local land-based carbon offset projects. WMA also benefited from value appreciation of water entitlements in the Argyle Water fund, driven by strong demand and limited supply.
WMA also committed to a new investment partner in Allegro Funds, a turnaround, special situations and transformation private equity manager, and decreased its exposure to water rights to reduce portfolio concentration and facilitate its entry into private debt and infrastructure.
Ms Zinurova said diversification was key to her strategy throughout the year, deploying funds via its new investment partners.
“Real assets have been a material part of the portfolio to build a solid income producing foundation – water rights is an income-producing asset class, with some capital growth,” she said,
“I want to diversify, so I added core healthcare real estate via [manager] Barwon, infrastructure invested via Palisade.”
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