‘It’s a bit of a golden age of private credit’

The fund – the first the US pension fund’s investment manager has set up in this country – would likely grow to $750 million with the addition of one or more other institutions, reflecting the growing wish of large investors to tap Australia’s increasing need for investment capital, Mr Marr said.

“It’s a bit of a golden age of private credit,” he told The Australian Financial Review.

“We’re talking potentially double-digit returns for our investors with stable yields and cash flows, secured positions, we have first rank of security against all of our loans, and therefore you have just significant downside protection.”

Private credit – in which groups of investors pool funds to lend, rather than banks – is riding a $200 billion wave as banks reduce their exposure to a lending market in which they were already over-represented relative to other countries.

But Australia’s continued growth meant credit from non-traditional sources would have to play an increasing role in funding productive investment, Mr Marr said.

“As the Australian market grows, real estate market grows – and it is growing significantly in terms of based on our population growth here – the Australian banks simply cannot continue to keep up with that growth or take on as much of that growth as the markets demanding,” he said.

“Outside of the headwinds for banks, this funding gap is only going to increase.”

The closed-ended fund, which will be seeded with more than $300 million worth of loans already in TIAA’s $1.6 billion Australian lending book, will focus on industrial and residential developments and take a “selective” approach to retail, office and alternatives, Mr Marr said.

One asset initially backed by the fund was ESR’s last-mile logistics hub at Radford Road in northern Melbourne’s Reservoir.

“It was going to be smaller tenancies that were hard to get pre-commitments for two years out from completion,” he said. “That struggled a bit from the banks, but we’ve gone and supported them on that, supported them on the strategy of lending against that project.”

The site had recently completed and was now leasing up, so was now likely to be refinanced with more conventional funding, he said.

While the Reserve Bank of Australia hasn’t yet followed other central banks in cutting rates, it was likely to do so next year, and this could reduce the returns for debt investors in other third-party funds Nuveen is planning, Mr Marr said.

“We’re not to say that for fund two, we may not have to revisit what the returns are and what we think we can earn if interest rates come back down,” he said.

But the demand by borrowers for funds to push ahead projects that may not be able to secure cheaper bank finance would keep this lending profitable, he said.

“We build in a lot of buffer against those forecasts in terms of making sure that the returns would still act stack up,” Mr Marr said.