Australian fund manager Merricks Capital has launched its seventh special situations fund, which for the first time it plans to invest entirely in real estate. The fund is expected to invest in mezzanine finance provided to Australian developers.
Merricks aims to raise A$150 million (€106 million; $142 million) for the fund and hopes to hold a first close within the month. A large portion of the fund’s investors are expected to be Australian institutional investors, such as superannuation funds, and high net-worth individuals and families. Global investment bank Canaccord Genuity is acting as the fund’s placement agent in both Australia and the rest of Asia.
Rather than committing equity to real estate projects in Australia, Merricks’ Special Opportunity Fund 7 is instead set up to provide mezzanine financing to developers of up to 15 percent of a project’s cost, explained Adam Lindell, the firm’s chief operating officer. If the fund hits target, it should be able to provide loans to up to 20 different projects, with an average loan size between A$5 million and A$10 million, according to a firm presentation.
Merricks identified an opening for a mezzanine real estate fund in Australia after the global financial crisis started, as European banks began to pull back from the market and smaller banks got absorbed by larger domestic banks. With four major banks holding an oligopoly over the Australian market, loans like second mortgages have been difficult to come by as all four banks reduced lending.
“The reduced competition in the Australian banking system has created a structural situation whereby the Australian banks are now lending less to development projects, requiring developers to either inject a lot more equity into a project or to find alternate sources of funding – such as mezzanine funding,” Lindell told PERE.
Fund 7 is targeting a 13 percent IRR overall and will lend capital out to developers at a 15 percent to 20 percent interest rate. The fund already has a pipeline of 12 deals in the residential or commercial sector, all of which have a majority of the property pre-sold or which have building and environmental permits already cleared, according to the Merricks presentation.
Merricks has been involved in the real estate mezzanine financing space before on a deal-by-deal basis, but this is the firm’s first fund focused on the real estate mezzanine space. As Merricks’ third credit-focused fund, it will have a two-and-a-half-year investment period, and the firm expects to return all capital to investors after four years.
Founded in 2007, Merricks currently has $630 million assets under management, with a strategy entirely focused on Asia. Its past funds have focused on a wide array of investment classes, including forestry to government bonds. Merricks is partially owned by the Melbourne-based Liberman family, which is considered Australia’s second richest family by Business Review Weekly rankings with $2.2 billion.