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B. G., Opalesque Geneva:

The Aura High Yield SME Fund is an open-ended unlisted fund that provides funding to non-bank lenders who offer finance to SMEs (small and medium enterprises with less than 200 employees) in Australia. It is managed by the Aura Private Credit Team.

The Fund collaborates with seven SME loan originators - and through them has exposure to nearly 11,000 loans - using proprietary due diligence and deal structuring/negotiating structures.

As of the end of September 2023, the Fund has returned 76% (cumulative net of fees) since its August 2017 inception, with a net IRR of 9.6%. The fund has outperformed the S&P/ASX200 and the S&P Australia High Yield Corporate bond index on a cumulative return basis.

In this interview, Brett Craig, director of Private Credit at Aura Group, talks about the opportunity set and the rationale of the Fund. He will expand on the topic during Opalesque's upcoming interactive webinar on Wednesday 8th November (details below).

Opalesque: Why do you think of the Australian market as a huge addressable market?

Brett Craig: There is A$420 billion worth of SME money that is deducted annually in the Australian market. We have seen circa A$120 billion of unfunded demand for smaller SMEs and around A$240 billion of unfunded demand for larger SMEs. That is a significant market with respect to the actual assets to which we can gain access (1) (2).

And on top of that, the regulatory environment has been tightening whereby the banks are stepping back from funding small corporate loans and are instead looking for larger ones. Loans of A$2 million (US$1.27m) have not really grown in volume in the banking sector from 2010 through to the present day. So there is a massive opportunity set there (2).

Another thing to note is that SMEs essentially employ over 70% of the Australian workforce. This is a systemically important component of the economy. Throughout COVID, the government pushed stimulus through the business sector, so the SME sector (3).

Opalesque: What is the state of debt funding in Australia?

Brett Craig: There is a significant increase in demand for debt funding within the Australian economy. However, debt funding has not really been forthcoming from the banking sector.

Another tailwind for us, and this is part of the rationale behind our Fund: If you look in the US, over 90% of lending is done in the non-bank sector. In Europe, it is 63%. Whereas in Australia, it is 10%. We have a very immature non-bank market in Australia. So, our rationale for the Fund is that non-bank lenders have significant room to move. Non-bank lenders need capital to provide to SMEs in the market.

Opalesque: Is demographics another tailwind for the Fund?

Brett Craig: Yes, the other tailwind is the fact that we have an ageing demographic that is moving towards self-funded retirement. A huge part of the population is focused on income products with a stable capital base. We sit in the middle of those two demographic points whereby one is looking for stable capital bases and income, and the other one, the SME sector, is looking for capital to grow their businesses and increase profitability.

The other rationale for targeting Australia is the fact that we've got a very stable geopolitical environment and a growing population. We are seeing population growth there, which is also assisting the growth of SMEs.

Opalesque: How has the year been so far for the Fund?

Brett Craig: 2023 has been a very positive year, with significant growth. We have been proceeding with caution. The macroeconomic outlook has been negative globally. We have been taking very conservative positions, looking at very high levels of security and taking credit spread off the table, reducing risk in the portfolio. We have been focusing on safer assets rather than increased credit spreads within the portfolio. The primary objective within the portfolio is to retain and protect investor capital and our net asset value.

One thing to note, our net asset value has been stable at $1 since inception. Income has been paid out every month, so we have had no negative months, and our lowest distribution month has been 62 basis points. We have maintained strong returns throughout a pretty rocky economic environment.

***

Aura Group provides funds management and tailored wealth solutions to wholesale, accredited and institutional investors. Since 2009, Aura Group have developed a significant footprint across Australia and Southeast Asia, with offices in Singapore, Sydney, and Melbourne.

Upcoming Webinar

Small Managers - BIG ALPHA Episode 12

The latest episode of this ground-breaking interactive webinar series presents you with another carefully screened panel of investment managers worth taking a look at.

When: Wednesday, November 8th at 11 am ET

Who:
- Brett Craig, Director of Private Credit of Aura Group, Aura High Yield SME Fund.
- Claire Smith, founder of the humane investment platform Beyond Investing and US Vegan Climate Index Beyond Advisors.
- Stefan Tittel, founder and CEO of Quantumrock, Rough Gemstone I.
- Tony Bremness, Laureola Advisors, Laureola Fund, a life settlements fund.

Free registration here: www.opalesque.com/webinar/