Private Credit Lures $100 Billion Fund Seeing Sticky Inflation

Colonial First State, a major Australian pension and wealth asset manager with A$151 billion ($100 billion) under its management, is planning to increase its private credit investments as it expects interest rates to remain high for an extended period of time.

According to Chief Investment Officer Jonathan Armitage, the company aims to gradually raise its private credit allocation to an average of around 3% across its portfolio. This move marks a significant departure from its previous minimal exposure of less than 1% to this asset class.

Armitage, who recently traveled to Europe and the US to engage with investors, stated that his discussions reinforced the belief that inflation levels will be higher than those seen in the past five to seven years. This outlook is influencing the company’s approach to portfolio management.
According to Armitage, the floating rate nature of these investments means that if interest rates do not decline as quickly as markets have predicted, we would benefit. On the other hand, if we were wrong in our view or if the US economy, in particular, was weaker, we would still benefit because these investments would perform well as rates decline.

Australia’s pension industry, worth A$3.7 trillion, has shown increasing interest in private credit, with many funds seeking opportunities globally. While pension fund Rest recently expressed some caution about the significant inflows into the highly competitive industry, which has experienced substantial growth worldwide, most major competitors, including the second-largest player Australian Retirement Trust, remain optimistic about the asset class and are increasing their allocations.
CFS has decided to reduce its investments in listed real estate and shift towards private credit. The fund believes that private debt offers better forward returns compared to the listed real estate sector in the next few years. According to Armitage, the fund will focus on private credit investments in the US and Europe, considering the diverse range of available deals across various industries. Additionally, CFS is actively seeking investment opportunities in Australia. The fund aims to target larger companies with an EBITDA of over $100 million. Armitage mentioned that there is less competition in this particular area of lending, and bigger firms are better equipped to handle economic challenges compared to smaller companies.