Case study of the Alceon Debt Income Fund
Alceon Group has launched a new retail fund which will invest in a portfolio of debt secured by real estate. The Alceon Debt Income fund will hold loans issued by mid-market real estate owners and developers to finance real estate assets in Australia and some limited exposure to New Zealand. Omar Khan, Alceon Group director and head of wholesale capital responded to some questions from Industry Moves about what went into the fund’s launch.
What goes into launching a new product?
Alceon has extensive experience in real estate credit, having deployed close to $4 billion since 2010 across almost 300 transactions. Given this experience and the fact that real estate credit comprises a significant share of the firm’s almost $2.5 billion in real estate funds under management, the firm is well placed to manage a real estate credit strategy. The launch of a new fund is a lot more procedural once the fund design and key features have been agreed. This work is undertaken in partnership with the fund’s Responsible Entity and our legal advisors.
Why did you decide to launch now?
For investors seeking regular income streams with some capital stability, it has become more difficult. Interest rates have been pushed down further, and the earnings outlook on some companies is unclear. The post-inflation return to investors in term deposits (TDs) is now negative. In search for alternative solutions, institutional investors and family offices have been increasing their capital allocation to secured private debt, but so far wealth advisory groups have had limited access to this sector.
How did you research market opportunities?
We engage directly with key participants in the wealth sector which includes advisors, consultants and research firms to understand the underlying market opportunity.
What is unique about this product in the Australian market place?
The fund features attractive risk adjusted returns combined with a conservative weighted average LVR and short weighted average duration. The Fund invests in loans with a conservative maximum LVR of 65 per cent and issued by mid-market real estate owners and developers to finance real estate assets in Australia and some limited exposure to New Zealand.
Since 2016, when APRA introduced lending controls, non-bank market share in Australia has increased from 4 per cent to circa 8 per cent - still well below global standards where non-banks command a 20 to 30 per cent market share. The growth, which continues today, can be attributed to a simple supply-demand equation where banks continue to reduce exposure to residential development lending. The reduced exposure is primarily driven by banks increasing the conditions that developers need to meet to obtain finance. The exhaustive and slow bank process can result in delays for developers, and hence they increasingly seek alternatives.
How did you decide on service providers?
Alceon has long standing relationships with service providers that continue to partner with the firm on the Alceon Debt Income Fund.
Can you explain the fee structure?
Investors are charged an annual management fee of 1.54 per cent plus a performance fee of 15.38 per cent subject to a hurdle rate of 5.00 per cent per annum. There is a cap of 0.50 per cent on the annual performance fee.
SQM Research recently awarded the fund a ‘Superior’ high investment grade rating, citing Alceon's close to 10-year track record in real estate debt and its well-resourced and highly experienced investment team as reasons for the rating.