Private Credit: Investing with purpose to deliver targeted risk-adjusted returns and positive social outcomes for Australia
Global Investment Insights
with Laurence Marshbaum OAM, Portfolio Manager & Co-Founder, Community Capital
Laurence Marshbaum OAM is an Executive Portfolio Manager of the Community Capital Credit Fund and the Co-Founder of Community Capital, together with diversified financial services firm Barrenjoey.
He has over 18 years’ experience in asset management, having spent the last 10 years with one of Australia’s largest superannuation funds, the Australian Retirement Trust (ART), which manages AU$230 billion in assets on behalf of more than 2 million members. Most recently, he was a Senior Portfolio Manager – Private Debt & Altenratives at ART, overseeing the fund’s AU$4 billion in Private Debt & Alternatives and Co-Investment programs.
In this exclusive interview with Global Investment Institute (GII), Laurence shares his perspectives on the role of private credit in institutional portfolios in the current investment environment, where he sees greatest opportunities to deploy capital into the asset class and his ambitions for the Community Capital Credit Fund and the types of social causes that the organisation is supporting in communities across Australia through its initiatives.
Q. What is the mission of Community Capital Credit Fund and how does your role within the organisation fit into the pursuit of its key objectives?
I co-founded Community Capital with diversified financial services firm Barrenjoey. In my role as Executive Portfolio Manager I am responsible for overseeing the portfolio construction, manager engagement and grant making strategy.
The mission of the Community Capital Credit Fund is to provide institutional investors access to a portfolio of the world’s leading private credit managers, to make strong risk-adjusted returns, while making a tangible social impact on Australia. We do this through the management fees from the fund (ex-costs) being granted to Social Purpose Organisations in communities across Australia.
The fund itself provides exposure to a diversified portfolio of world leading fund managers including Bain, PAG, Partners Group, Varde and HayFin, targeting a net return of 8-10% per annum.
Q. What social causes are you passionate about and what will success look like for the Fund?
We are passionate about growing an ecosystem for Venture funding of Social Purpose Organisations (SPOs) in Australia, in order to bridge a funding gap in the evolution of these organisations. Community Capital aspires to close a gap in the philanthropic ecosystem, enabling more promising social purpose organisations to successfully traverse through the growth cycle. This changes the game for social purpose entrepreneurs by supporting them to focus on their social impact expertise in the early stages, and then readying them for the tasks of organisation-building and long-term funding sustainability.
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Success is achieving the risk adjusted return outcomes for the fund whilst delivering on our social promise.
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We will strive to create a thriving ecosystem of social entrepreneurs and institutional capital providers, whereby ongoing funding is provided to those organisations, solving some of the most pressing social issues of our time in communities throughout Australia.
Success is achieving the risk adjusted return outcomes for the fund whilst delivering on our social promise.
Q. How does the Fund aim to create meaningful social impact through the investments it undertakes?
The Fund invests in the flagship funds of several of the world’s leading private credit managers, whilst applying strict ESG screens which align with the Socially Responsible Investment Options of several of Australia’s leading superannuation funds.
We then source and vet a pipeline of high-quality social purpose organisations that are active in communities throughout Australia, and provide them with early-stage, multi-year, catalytic funding.
The funding is derived from a uniquely structured social purpose investment fund which is expected to deliver strong risk adjusted investment returns whilst allowing superannuation funds, investment managers, and financial institutions to contribute to Australian communities. Community Capital’s oversight and support seeks to provide SPOs with the resources they require to evaluate and tell their stories of social impact, and to build the capacity and capability they need for future growth and sustainability.
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The Fund invests in the flagship funds of several of the world’s leading private credit managers, whilst applying strict ESG screens which align with the Socially Responsible Investment Options of several of Australia’s leading superannuation funds.
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Community Capital will be working in partnership with 10x10 Philanthropy, an organisation that has identified and funded over 300 early-stage Social Purpose Organisations across Australia and the world.
Q. Where do you see greatest opportunities to deploy capital across the private credit asset class within the next 12-24 months?
The changing nature of investment markets over the past 12 months has created a compelling opportunity in private credit. We have seen the pricing power of our managers significantly increase within our initial portfolio, given rate rises, global volatility and greater uncertainty in global markets. This creates strong opportunity in the more defensive part of the private credit market, with direct lending senior secured strategies in developed markets able to achieve 200-300bps increased spread on an unlevered basis.
Provided that the underwriting quality, deal structuring, and sector diversification of the underlying managers’ funds remains robust, I think that the risk-adjusted return premium investors can now earn in the more defensive part of this asset-class, broadly reaches the return objectives of our fund, which is 8-10% per annum returns on a net basis. Whilst opportunities do still exist in less developed credit markets, and in mezzanine/preferred equity structured deals, the marginal dollar invested in senior secured credit presents the best relative value opportunity in credit in the next 12-24 months.
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The changing nature of investment markets over the past 12 months has created a compelling opportunity in private credit.
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The Community Capital Credit Fund has developed a portfolio that has broad diversification across manager, geography and sector with a distinct preference to avoiding the more cyclical parts of the market. The Fund will be focused on deploying to managers active in sectors which have hard asset-backing or are less cyclical in nature, with a strong focus on sponsor-backed companies.
Q. What role do you see for private credit in institutional portfolios at a time of volatility and dislocation in public markets?
The growth and development of private credit within institutional portfolios has been a notifiable trend over the past 3 years. A private credit allocation should be a building block of an institutional allocator’s portfolio given the continued trend of increased bank regulation, the retreat of banks from capital markets and development of robust non-bank lending markets around the world.
Private credit provides access to a return stream and opportunity not replicable in public markets, with a liquidity and complexity premium that is available over public markets. Evaluated over a longer time horizon, private credit has historically outperformed public credit.
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Private credit provides access to a return stream and opportunity not replicable in public markets, with a liquidity and complexity premium that is available over public markets.
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The underlying quality of managers is essential in the construction of any private credit allocation, particularly given increased global volatility and uncertainty. Managers with large, dedicated teams, deep experience in their given markets, longstanding track records and experience in work-outs have a distinctive edge in the current climate. The non-mark-to-market nature of the asset class does not mask the inherent risks that investors face in allocating to private credit, as opposed to public credit. These risks are heightened by the unlisted nature of the asset class, ensuring that appropriate underwriting and monitoring of loans is central to the value proposition. The unlisted nature of the asset class can, however, give managers an edge in sourcing, underwriting and structuring, particularly if the said manager is the lead lender in a consortium.
In the current climate of increased volatility, uncertainty and dislocation, the underwriting standards, credit structuring and work-out capability of managers will differentiate the best managers from the rest in this asset class.
Community Capital’s absolute focus will be to partner with best-in-class managers who have experience through cycles. Like all allocations to asset-classes Private Credit should be seen as a building block of a private markets allocation and be viewed over a longer-term time horizon.
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In the current climate of increased volatility, uncertainty and dislocation, the underwriting standards, credit structuring and work-out capability of managers will differentiate the best managers from the rest in this asset class.
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GII will host it’s 2023 Private Credit Roundtable on Thursday, 4 May 2023 at the Grand Hyatt Melbourne, VIC 3000. This event is strictly invitation-only, with limited numbers. If you would like to register your interest in joining the event, please click here or click the banner below.
Laurence Marshbaum OAM, Portfolio Manager & Co-Founder, Community Capital
Laurence has over 18 years’ experience in asset management, having managed Fund of Fund portfolios across a range of global investment firms in Sydney, London and New York. Most recently, Laurence was a Senior Portfolio Manager – Private Debt & Alternatives at the Australian Retirement Trust overseeing the firm’s AU$4 billion Private Debt & Alternatives and Co-Investment programs.
Laurence is the Founder and Chair of 10x10 Philanthropy, which has distributed over AU$5 million to early-stage Social Purpose Organisations globally and engaged over 15,000 donors in giving. In 2022 Laurence was awarded the Order of Australia Medal for “service to the community through philanthropic initiatives”.
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