Funds Management partner Emma Donaghue chats with David Hinde, BC Investment Group (BC Invest) Chief Executive Officer, about lessons learnt from establishing a retail credit fund; how overseas trends are impacting the Australian debt markets; and the dos and don’ts associated with establishing warehouse loan facilities.
BC Invest is a leading non-bank financial institution (NBFI) offering personal and financial services of which its lending products are underpinned by capital provided by a series of global investment banks and institutional credit investors.
The company is owned by a group of institutional shareholders, including a Hong Kong-listed conglomerate, one of the world’s largest private equity groups, and one of Australia’s leading credit managers.
ED: BC Invest recently established a retail credit fund in Australia. What lessons did you learn from the process?
DH: BC Invest has managed a wholesale credit fund, BC Credit Fund, for the last five years which has performed very well and attracted significant institutional monies. In 2021, to complement the wholesale fund, we launched our first retail credit fund, the BC Invest Australian Credit Fund.
For us there were a few ‘lessons learnt’ in establishing a retail fund.
Firstly, our track record in managing a wholesale fund didn’t necessarily translate to the retail space. To counter this lack of retail fund track record we chose to use an independent responsible entity which provided researchers and asset consultants effective third-party endorsement of our process and procedures.
We were well assisted by the Funds Management team at McMahon Clarke in understanding fund structuring, PDS drafting, preparation of all material contracts, specific compliance procedures, and dealing with the external service providers. We leaned heavily on McMahon Clarke for their relevant industry knowledge and expertise rather than having to start from scratch.
The key messages are—
Also, we were fortunate to have a substantial shareholder seed commitment of $30 million to evidence commitment and alignment with investors.
We also looked to differentiate our offer with a reserve account set aside to provide fund liquidity and have two of our products ’green’ rated, this being the first green rated retail fund.
Today, BC Invest can evidence a commitment to a broad spectrum of investors ranging from smaller retail investors that can access our retail fund, to large institutional investors that may invest $10-20 million into our wholesale fund, to larger funds that can invest over $100 million in a single residential mortgage backed security (RMBS) or warehouse facility.
ED: BC Invest is headquartered in Hong Kong SAR and operates across Australia, New Zealand, Greater China, the United Kingdom, Singapore, Vietnam and Malaysia. Given your global reach, what trends are you seeing overseas and how do these factors impact the Australian debt market?
DH: Globally, we are seeing a Covid-induced inflation hangover and the Russia-Ukraine conflict causing market uncertainty and huge volatility in international currencies as each different central bank comes to terms with its own unique environment. Consequently, we are seeing very interesting trends in credit markets.
In the United Kingdom, for example, we are seeing the risk of a prolonged conflict and inflationary spike causing significant liquidity pressure on smaller NBFIs. The traditional UK fixed interest rate product offering and the substantial movement in the underlying longer-term rates is creating a funding mismatch and inability for smaller NBFIs to access capital markets.
Whereas the US credit markets, which are very efficient and transparent, have repriced quickly to maintain investor interest.
In Australia, we are coming to terms with uncertainty around inflation, natural disasters, property market value concerns, and the hangover from the major banks accessing the Australian Office of Financial Management (AOFM) funding facility introduced during Covid. The Australian authorised deposit-taking institutions (ADIs) have around $90 billion of AOFM funding to refinance over the next three years which will certainly test the depth and liquidity of the RMBS markets. This has meant broad liquidity pressure on the Australian credit markets leading to pricing distortion and now translating to increasing pressure on ADI and NBFI borrowing rates. In short, we expect interest rates to increase well beyond any official rate movements.
From our perspective, we are fortunate to have a very strong shareholder and capital base. We see this time as an opportunity for us to increase market share, albeit in a tougher capital markets environment.
ED: Can you provide any insights into the dos and don’ts associated with establishing warehouse facilities?
DH: NBFIs are typically funded in part by warehouse facilities with an ADI or investment bank providing the senior funding and investors or sponsors providing the junior funding. The warehouse facility allows the NBFI to originate mortgage loans within certain parameters and under specific eligibility criteria (ie to ensure it is geographically diversified and not overly concentrated in any particular borrower type). This is a first step towards the non-bank refinancing the warehouse facility with a RMBS.
The key to creating a warehouse facility is making sure you can utilise it as they are expensive to set up.
So, you need to evidence to the funder, and yourself, that there is demand for what you are signing up for, you can satisfy the volume and the diversification requirements, and you need to pay particular regard to the terms of the facility (ie pricing, penalties for non-utilisation, and the parameters).
ED: How have you managed the move from property funds management to the credit sector?
DH: The biggest change for me in the transition from being a property fund manager to starting an NBFI related to—
The similarity is that in both businesses we are making a real estate investment decision, albeit in credit we are more residential than commercial property focused.