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Moelis Australia Private Credit Fund

The Moelis Australia Private Credit Fund (“the Fund”) is a newly established fund that
provides investors exposure to the Australian private debt market. The Fund was established
by Moelis Australia Asset Management Limited (the Trustee) which, in turn, appointed Moelis
Australia Funds Management Pty Ltd (the Manager) as investment manager. The Fund will
endeavour to create a diversified portfolio of secured loans to mid-market corporates and
small and medium enterprises (SMEs). All loans will be secured by first lien senior secured
collateral, which ranks ahead of any other type of debt in the capital structure in terms of
priority of payment and security on assets and cash flows. The Manager will not engage in
any subordinated loans. Private credit investments will include a mixture of senior, stretch
senior (unitranche) and secured loans, to operating businesses with stable recurring cash
flows and/or strong asset backing. This reflects a strategic emphasis on lower credit risk,
rather than stretching for yield, and in turn reflects a consistent approach by Moelis Australia
of focusing on preserving investor capital. The Manager has a very proactive approach to
structuring and managing its credits. It facilitates this by being either the sole-lender or, in
the case of syndicated corporate loans, being the lead or co-lead lender. This provides for
greater transparency and deal control, with the potential to structure more favourable pricing,
collateral, covenants, and other credit terms, in addition to greater control / influence in the
event of a default and potential recovery / workout situation. The Fund is targeting a quarterly
distribution equivalent to 5% p.a. and total returns equal to 8-10% p.a. net of fees.
INVESTOR SUITABILITY
The Fund is designed to deliver stable returns with exposure diversified across credit
market segments, borrowers, industries and origination channels and lower risk of capital
loss created by the defensive nature of senior secured credit investments. Returns are
expected to be in the form of income and capital, with a risk of capital downside should the
Manager recoup less than the principal outstanding on a defaulted loan. IIR would deem the
investment strategy to be at the lower end of the risk spectrum of private debt based on the
first lien security, prudent underwriting, a very proactive approach to portfolio monitoring,
which includes the investment team’s significant experience in resolving deteriorating
credits in addition to the investment team’s prior track record. Private Debt offers several
advantages over the traded sub-investment grade markets of high yield bonds and bank
loans (public debt). Private debt lenders receive more detailed due diligence information,
senior investments benefit from security over assets, there is a lower degree of interest
rate sensitivity as private debt investments are more often floating rate notes, and there
is lower marked to market volatility. Further, private debt investors benefit from stronger
covenants and better information / monitoring rights. For these reasons, IIR views private
debt strategies such as pursued by the Fund as a sensible allocation within a larger holding of
debt related investments.
RECOMMENDATION
IIR ascribes a “Recommended Plus” rating to the Moelis Australia Private Credit Fund. The
investment strategy is managed by an experienced team with an established history in the
corporate and SME lending segments. While the Fund is newly formed, IIR has a high degree
of conviction in the Manager’s ability to achieve the stated total returns objective over the
foreseeable future given the strength of the investment process and broader resources at
Moelis Australia. Private debt has, to date, presented an attractive income opportunity, partly
through a persistent illiquidity and complexity premium, attractive arrangement fees and a
considerable market opportunity given the withdrawal of traditional bank lending in the SME
and mid-market corporate lending segments. Given the first lien senior secured nature of
the direct loans the Fund will engage in, IIR considers the targeted total return premium to
that generally derived in the more established North American and European private debt
markets, let alone to that of the liquid / bank loans market, as attractive to very attractive on a
risk-adjusted basis.