Wingate’s Nick Jacobson and CapitaLand’s Arjun Pandit discuss consolidation and regulation in the private credit space
by Larry Schlesinger
Amid a wave of consolidation sweeping the private credit sector in Australia, Singapore-based real estate giant CapitaLand Investment bought non-bank lending pioneer Wingate late last year for $200m.
The Melbourne-based company, founded in 2004 by investment banker Farrel Meltzer from his home office, now has $8bn of funds under management and had funded $20bn of property end value over two decades.
Over this time, not only did Wingate navigate the challenges of the global financial crisis, but also the 2019 collapse of major developer Ralan, for which Wingate was a major financial backer.
The firm’s new owner, CapitaLand, is listed on the Singapore exchange and majority owned by Singapore state inves- tor Temasek. Through its various funds and platforms, CapitaL- and manages $157bn of real estate assets in markets including Singapore, Malaysia, China, Australia and India.
CapitaLand’s big move into Australia’s private credit market followed New York-based Apollo Global acquiring 50% of prominent real estate financier MaxCap in 2021. Last year, ASX-listed HMC Capital paid $144m for private firm Payton Capital, while ASX-listed Regal Partners bought lender Merricks Capital, backed by the Liberman family, for $235m.
The private credit – or non-bank lending – sector is estimated to be worth as much as $200bn and is expected to continue expanding as a nimbler and more flexible alternative to the more constrained banking sector. At the same time, private credit is facing greater scrutiny from regulators following the launch of an in-depth capital markets discussion paper by ASIC on Feb 26.
Green Street News caught up with Wingate managing director Nick Jacobson and CapitaLand managing director of private credit funds Arjun Pandit to find out about the firm’s growth plans post takeover, where private credit is heading in Australia and the Asia Pacific region, and which sectors of the market look most attractive. This an edited extract of a longer discussion:
What does the acquisition of Wingate by CapitaLand mean for both companies?
Nick Jacobson: The significant negating item to our business [growth] has always been access to capital, but also the cost of capital. The combination of the skills and the reputation and network of CapitaLand combined with our product knowledge, local understanding and ability to originate, probably implies that there’s plenty of scale in our business to grow without [the need for] bolt-on [acquisitions]. Not to say that won’t happen, but there are very few of the more scalable platforms left in Australia.
Arjun Pandit: We look at acquisitions as strategic rather than financial investments. So, we are not looking at buying and then selling a platform in five years’ time for a profit. [Rather] we are adding capabilities that are missing. Wingate brings us a full-fledged platform of loan origination, asset management and funds management and allows us to react very quickly to a particular situation that covers a whole area of borrowers. So, it’s not just about us bringing in [our own] capital, we will also bring in capital partners and some of our corporate relationships [to grow the business].
Do you think there will be more M&A activity and consolidation in private credit?
AP: Generally speaking, the funds management industry is moving towards consolidation. You have to be at a certain scale to be relevant. That scale also brings you diversification of products. For us, consolidation is something that is going to be ongoing in the industry
NJ: You’ve seen the performance of the private credit market globally, and the appetite for investment in only growing. So there is bound to be further consolidation globally, as the market evolves and matures.
What makes Australia an attractive market, and will there be more offshore investment?
AP: I think for any credit business, you need three or four basic things. You need a borrower and a lender base which is sophisticated, you must have a legal jurisdiction and framework that actually works for private credit players, and then you need transparency of transaction, in this case the transparency of the real estate sector.
When you look at all these factors, Australia ticks the boxes on all of them. For us, Australia was very attractive because it mimics those three basic elements that we require. Some markets in Asia Pacific may be very large compared to Australia, but have legal and regulatory framework issues, which become a hurdle for players like us to operate in efficiently.
What will the CapitaLand investment mean for Wingate’s investor base?
NJ: [The deal] is a logical expansion of the geographic base of our investors, which has historically been very concentrated in Australia but with some exposures offshore. We expect that to radically change as we benefit from the deep pool of relationships that CapitaLand has built up over its very long history.
ASIC released a discussion paper on the risk and opportunities in private capital markets, including private credit, at the end of February, with a view to potentially increasing regulation to mitigate risk. Do we need more regulation of private credit in Australia and regionally?
NJ: [The ASIC discussion paper] doesn’t feel like doom and gloom. It shows that ASIC is willing to be informed and guided and they want feedback to prioritise the work they do and as a tool to update policy settings. ASIC’s mandate is to regulate the financial system and promote confidence in market participants.
With the growth of global credit globally, there has been increased scrutiny over the past 12 months. ASIC is trying to get its head around the broad private capital market, which is a big ecosystem here and includes areas that are not heavily scrutinised. As a pioneer in the private credit space, we have focused on the preservation of investor capital. Wingate was set up with very robust governance and risk management structures. No one wins from market failures.
AP: For us the important point is what should be regulated. CapitaLand manages large institutional capital on behalf of sovereign wealth funds, pension funds and university endowments, so we have a very high bar as a listed company in Singapore and being owned by Temasek. We have very high standards of self-regulation because we are working for the savers of the world, and our borrowers are generally speaking sophisticated borrowers with relevant experience in the market. I think in that context, you know, regulations can be more about fine tuning, in terms of the transparency of reporting, which we are happy to be part of.
But there is a segment of the market where we see lending and borrowing relationships between people who may not be sophisticated, and capital being raised from investors who may not understand the risks that they are taking. So, in those cases, I think it’s incumbent upon not just the regulators but the industries themselves to call this out because ultimately any debacle in this industry affects all of us. And so, for me I think regulations should be based around transparency.
NJ: The private credit market is becoming a lot more institutionalised, and as a portion of the total [lending] market, it is growing. By virtue of these [trends] alone, it is going to attract a greater amount of a regulatory oversight. It’s no longer a niche [market], and it’s also attracting a range of participants and not many are set up with compliance functions and with the levels of governance compared with those [like Wingate] that have been around for 20 years. [Also], we are fundamentally a research-driven shop, that is perhaps a distinct difference from some of our peers. We have our own in-house research capability.
What does a rate cut and an easing interest rate cycle mean for private credit?
NJ: It’s probably not a gamechanger. Bank credit policies won’t change because of rate cuts. Price is not the sole determinant of lender discussions. Rate cuts will partially lower returns but won’t push people away from private credit as a sector. Returns on bank term deposits have reduced from 4% to 5% to below 4%, and thus private credit becomes more attractive for income than secured bank deposits.
AP: From our perspective, it’s not about rate cuts, but credit risk and whether the credit spreads we can achieve are adequate compensation for risk. We don’t see that [dynamic] changing in a disciplined market like Australia and other markets because banks can do certain things and there are certain things they just won’t do.
NJ: If I was to say that the banks are our biggest source of clients that would tell you [something]. The quality of covenants coming to us from the banks because [the banks] haven’t been able to solve their client’s particular requirements will tell you it’s not just about the cost of the capital, but also the quality of the service, the reliability, the time, all those elements [that drive demand for private credit].
How do you think the residential sector will go over the next 12 months?
NJ: We are a specialist [in residential] having done over 400 loans in that subspace. It’s our bread and butter. I think more activity is likely for various reasons: the [project] feasibilities are improving, and inflation is definitely abating, with the exception of labour costs. There is also a big push Australia-wide to improve decision-making processes in the development life cycle. We are already starting to see that in some of the states, where state governments have got involved to accelerate projects.
In January, the Australian Bureau of Statistics published a 5% increase in new dwelling commencements, so that was a big tick up, but we are still 30% behind the [federal government’s] housing accord target [of building 1.2m homes by mid-2029]. So structurally we are playing catch up. However, the availability of labour is being challenged by the infrastructure spend, which is only set to peak in late 2027. Until that peak is reached, [housing] will still compete with infrastructure for trade and skills. [Overall], I expect there to be renewed market confidence as rates start to abate. That is the tipping point to [developers] making investment and purchasing decisions.
AP: I think the next few years will be very exciting for the [housing sector]. I mean, Australia needs it. But we [at CapitaLand] talk about the [broader] “living sector”. It’s not just built- to-sell, there is the whole area of build-to-rent [or multifamily]. There is a student housing sector that is mature but still has a lot further to go, and then we have the co-living sector.
So, when we approach Australia, we are looking at the living sector, which we are very optimistic about. Wingate is also expanding its focus into [lending against] commercial assets like logistics, data centres and mixed-use [projects] so there is a lot more we are focused on doing.
Which sectors of the market do you view as attractive at the moment?
NJ: We are still very anchored around residential and adjacent sectors like co-living, purpose-built student accommodation, hotels, serviced accommodation and build-to-rent. Commercial real estate is going to stabilise in the next year, so we see further activity in those markets.
Our number one pick, and what we do a fair bit of already is mixed-use development. So, the development may have an element of residential or hotel but also has offices and retail. Our loan book already has substantial exposure to commercial assets including last-mile logistics and neighbourhood shopping centres anchored by supermarkets, healthcare and daily needs retail. It will be a while before pure office becomes a major target.
AP: The only other sector I would add that could be interesting in Australia, and we see this in the Asia Pacific, is life sciences. It’s certainly one we will be looking at from a credit perspective.
Wingate has been an equity investor in the past where it has partnered with developers on projects. Is that something you will be doing in the future?
NJ: I think we will be materially more focused on credit – when you look at the bandwidth and appetite we’ve got for credit. If we were to look at the nature of our business model prior to CapitaLand’s acquisition, there was a fair bit of dabbling across co-investing and joint venture development. But it’s more likely than not, our focus will be on growing the exposure we have in private credit.