Tapping into the Underserved Mid-Market and SME Lending Space

Australia’s mid-market and SME lending sector presents a significant and underexplored opportunity. Traditional banks often overlook this segment due to the absence of conventional property security assets among potential borrowers. However, Causeway Asset Management, led by Founding Partner Tim Martin, recognises the immense value within this gap.

“The addressable market where we operate—the lower mid-market space—requires over half a trillion dollars in funding, with around 60,000 enterprises seeking capital,” Tim explains. “Most of these businesses don’t have the typical property security that mainstream lenders require.”

By focusing on loan sizes between $2 and $20 million, Causeway positions itself uniquely. Large local and offshore funds often overlook this market segment as they seek larger transactions, leaving room for Causeway to step in and provide debt capital. This strategic focus allows Causeway to offer attractive risk-adjusted returns to its investors.

“We believe the returns we generate, on a risk-adjusted basis, are highly attractive,” Tim notes. “We benefit from an illiquidity premium and a risk premium that adds significant value, providing equity like returns for debt risk.”

Expertise in Risk Management

With 100+ years of combined experience in Australian debt markets, Causeway’s team brings expertise to risk management and structuring. Their approach is meticulous, grounded in detailed research, and backed by a thorough due diligence process.

“We’re a control lender, meaning we source and manage our own transactions,” Tim emphasises. “We perform deep due diligence, including site visits and thorough investigations, to ensure we fully understand each investment.”

Causeway’s risk management process also involves bespoke legal documentation and ongoing monitoring. They assess each deal using their “four C’s” framework: character of the borrower, cash flow, collateral, and covenants. This approach ensures that every transaction is carefully structured and consistently monitored.

“We document, settle, and maintain rigorous oversight throughout the entire investment lifecycle, ensuring transparency control and capital preservation,” Tim adds.

Proven Track Record and Diversified Portfolio

Causeway’s track record further strengthens their offering. With 20 years in the sector, the firm has managed $1.7 billion in loans. Currently, they oversee $600 million in funds across 125 investors, including super funds, family offices, and high-net-worth individuals.

Their investment strategy is deliberately diversified across industries and geographies in Australia, maintaining a regionally and sector-agnostic approach. This broad investment reach allows Causeway to capitalise on opportunities across multiple industries and regions, ensuring flexibility and reduced risk for their investors.

Tailored Investment Strategies for Diverse Investors

Differentiation is key to Causeway’s success. Their dual-fund strategy caters to different investor profiles. The Causeway Private Debt Income Fund (PDIF) offers stability and senior secured investments, while the H&G Causeway Dynamic Credit Fund provides a higher-risk, higher-return option.

“The Causeway PDIF is designed for conservative investors, offering broad diversity across industries, geographies, and collateral types,” Tim explains. “Meanwhile, the Dynamic Credit Fund can lend across the credit capital structure and take on greater concentration risk for enhanced returns.”

Performance Metrics

Causeway’s performance metrics speak for themselves. The PDIF delivered a net return of 11.06% over the past 12 months across its best performing unit class. Meanwhile, the Dynamic Credit Fund achieved an annualised net return of 12.93% by June 2024.

These impressive returns position Causeway as a leader in Australia’s private debt space, consistently delivering value to their investors.

A Complementary Investment Option

For investors seeking alternatives to property-based private debt, Causeway’s focus on lending against business assets offers greater flexibility and potential for returns. This approach often makes it easier to restructure loans where necessary, providing added adaptability in managing investments.

Conclusion

Tim Martin’s insights illustrate how Causeway Asset Management is seizing untapped opportunities in Australia’s lower mid-market sector. With a disciplined and forward-looking approach, Causeway leverages their deep market knowledge and robust risk management practices to deliver strong returns. Their proven track record, diversified strategies, and commitment to transparency make them a compelling option for investors seeking to capitalise on this underserved market.

As traditional lenders continue to overlook this vital sector, Causeway remains poised to support businesses which enable the growth of Australia’s economic backbone and provide employment opportunities to many Australians —whilst offering investors an optimistic and rewarding opportunity to participate in the mid-market’s ongoing success.