Pengana bets on private credit to close equity LIC discount
Pengana Capital Group is expected to unveil an audacious structure aimed at narrowing the discount of its $318 million international equities listed investment company later today.
The Russel Pillemer-led boutique fund manager, which has been behind several innovations in the listed company space, has devised a new one that will undoubtedly get this shrinking but highly active part of the market debating its merits.
The proposal involves Frank Gooch-chaired Pengana International Equities (PIA) taking out a loan from an international bank and investing the proceeds in a portfolio of 23 private credit managers (and their 3,000 associated loans to mid-market companies) in a fund-of-funds managed by Mercer.
PIA, a global large-cap fund, has failed to keep pace with the index over the last five years and consistently traded at a double-digit discount to net asset value. This has lured activist funds such as New-York based Saba Capital to its register.
But the pitch to investors is that the leveraged exposure to private credit will boost the company’s income and with it, improve attractiveness to yield hungry investors who have been rushing to buy existing and new listed debt funds.
Pengana aims to earn a spread between high-yielding private credit investments and the lower rate of the loan, which will in turn increase the distribution to investors, paid monthly. This, it hopes, will increase fully franked dividends by 56 per cent.
The structure is unusual but made possible by the listed investment company (LIC) status, which allows the board to approve the taking on of leverage with its captive capital.
Pengana will set a 4.5 per cent target return for its private credit investment above the cost of debt. The manager will cover investors if the private credit portfolio returns are less than the costs of debt, underwriting and paying the difference.
This is not the first time a LIC has taken on debt. In 2011, Australian Foundation Investment Co issued a convertible note to take advantage of depressed equity markets and buy stock. Wilson Asset Management has also gone down the debt route, albeit in a different manner, mixing debt and equity investments in its new Income Maximiser LIC.
All this comes as the race to plug a hole in the $43 billion hybrid market continues, with private credit managers coming up with novel ways to capture the funds searching for a new home.
Corporate debt funds Realm and Challenger have both found strong investor support via deals in which they pay investors a fixed margin over the bank rate, and retain the excess income generated by the portfolio unless there is a shortfall or a capital loss in prior years.
The private credit proposal will be put to PIA shareholders for approval. This includes joint venture partner Washington H Soul Pattinson and Co, Geoff Wilson’s Wilson Asset Management and New York-based activist hedge fund Saba Capital. WHSP put up $200 million in seed funding to help Pengana establish a portfolio of private credit investments in 2023.
Gooch is a former Macquarie Bank and Milton Corporation executive and served as chair of LIC body Australian Listed Investment Companies Association.
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