Australia Sovereign Wealth Fund Eyes Distressed Debt Investments
(Bloomberg) -- Australia’s sovereign wealth fund has been adding distressed debt investments to its hefty private markets portfolio as it sees more potential deals across the global credit landscape.
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“On the distressed side, there are some pockets of opportunity, particularly in real estate and some private equity,” said Future Fund Chief Executive Officer Raphael Arndt, adding that the fund wasn’t seeing a broad underperformance in credit. “We have moved some money into some of those strategies.”
Arndt was speaking to reporters on Wednesday about the A$225 billion ($151 billion) fund’s latest results, which posted a 9.1% annual return thanks to buoyant stocks and strong private markets. He said distressed debt had become an area of focus for managers, citing the need for lenders to offload some of their riskier investments.
“We’re seeing opportunities through regulatory arbitrage strategies around the world, where banking regulators are putting more and more onerous conditions on banks holding assets,” said Arndt. “It becomes quite attractive for us to buy those assets off banks. As long as you do the credit work, we think the credit quality is fine.”
Distressed situations typically arise when companies are in financial stress or can’t meet the requirements of their existing debt agreements. Riskier borrowers, especially those backed by private equity or within the real estate sector, have seen a jump in borrowing costs as a result of rate hikes.
Alongside equities, the fund singled out hedge fund and private credit as performing strongly over the financial year through June. Almost 15% of the Future Fund’s assets are in private equity investments, with a similar allocation to alternative assets, while 11% of holdings are invested in credit.
“The changes in the investment environment and the resurgence of geopolitical risks of which we have been warning for several years continue to play out,” Arndt said. “Our portfolio is now more robust to these events with relatively low exposure to fully priced equities, low exposure to interest rates and a range of inflation hedges in place.”
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