HMC Capital enters private credit market with $127.5m purchase of Payton Capital

Sydney-headquartered HMC Capital, which first listed on the ASX in 2019 as HomeCo with retail properties that used to be Woolworths Group's (ASX: WOW) masters stores, has branched out into numerous asset classes over the past few years and will now try its hand at real estate, corporate, mezzanine and infrastructure loans.

The $127.5 million acquisition of commercial real estate (CRE) private credit fund manager Payton Capital is expected to be earnings accretive, and will form part of a planned $5 billion-plus private credit asset management platform to be led by former Macquarie Group (ASX: MQG) senior managing director Matthew Lancaster as chair.

The acquisition marks the first step in HMC's private credit platform strategy, with $500 million worth of new credit funding approved from global investment banks to support growth in Payton's established funds, which currently have $1.5 billion in assets under management.

HMC has highlighted deep in-house expertise and capability in asset origination, fundraising and asset management at Payton, with more than 70 employees across its Melbourne, Sydney and Brisbane offices.

The acquirer notes that Payton operates a high-margin and capital-light funds management business model that earns management fees as a percentage of AUM, in contrast to balance sheet lenders like traditional banks which look to earn a spread over their funding costs.

"Following over 12 months of due diligence and planning, we are excited to announce the establishment of our private credit platform," says HMC managing director and CEO David Di Pilla.

"We see the growth opportunity in this sector as too big to ignore with private credit asset managers playing an increasingly larger role in Australia’s $1.2 trillion credit market."

HMC says the strategic rationale for this move is underpinned by the current environment of high risk-free rates plus strong credit risk premiums, creating a “golden period” for private credit with the addressable market opportunity in Australia set to rise to $350 billion over the next five years according to Ernst & Young estimates.

"The acquisition of Payton provides HMC with an attractive entry into the private credit sector via a highly profitable and scalable platform," says Di Pilla.

"This will enable HMC to take advantage of attractive industry fundamentals and investor appetite for CRE private credit.

"Non-bank CRE is experiencing strong growth which is supported by the growing role of private credit asset managers in Australia and the significant need for new housing supply to address Australia’s strong population growth and lack of affordable housing."

HMC has agreed to terms with Payton to acquire the business for the $127.5 million upfront consideration, comprising $70.5 million at financial close, $28.5 million in shares around that same time under escrow for a couple of years, and $28.5 million to be invested in the Payton Pooled Investment Fund for a minimum of two years.

The group plans to raise up to $130 million to fund the acquisition with the bulk coming from a $100 million fully underwritten institutional placement, followed by a share purchase plan (SPP) of up to $30 million.

This capital will be raised at $6.50 per share, representing a 6.1 per cent discount to the last traded price before the announcement of $6.92 yesterday. The placement is set to dilute existing shareholdings by around 4.4 per cent.

As a further liquidity boost, the group has also netted $50 million from an on-market sell-down of its co-investment in the HomeCo Daily Needs REIT (ASX: HDN) from 14 per cent to 12.1 per cent.

HMC anticipates the Payton acquisition will settle in July and will therefore not contribute to FY24 results, whereby operating earnings per share (EPS) have been tracking at 40 cents, which is 21 per cent above the 33-cent guidance provided in February.

The company's operating earnings doubled to $57.8 million in the December half - a period in which HMC announced the US$28.5 million acquisition of North American Digital infrastructure development platform StratCap, completed in March, as well as the establishment of new platforms relating Capital Solutions and Energy Transition assets.

For the latter, earlier this month HMC revealed former Prime Minister Julia Gillard would chair its Energy Transition Fund, which will focus on investing in a portfolio of assets across the energy value chain, including wind, solar, battery, bio-fuels and emerging technologies.

The aim will be to build a portfolio of 15GW across the energy value chain over the medium term, with plans to raise up to $2 billion from institutional and wholesale investors in the second half of 2024.

"I am excited and honoured to be appointed Chair of HMC’s Energy Transition Fund. Its design and HMC’s investment management capabilities will position the Fund to be a genuine driver of Australia’s transition to zero net carbon by 2050," Gillard said earlier this month.

"It is in our nation’s interests to better harness our abundant opportunities in solar, wind and other renewable sources of energy. In addition, our nation has made commitments to the world on combatting climate change, which we need to honour.

"To create a clean energy future we must urgently unlock the full potential of private investment and business acumen. Based on HMC’s significant achievements to date, I have great confidence that the Fund I will chair has the ability to make a genuine impact, while delivering for investors at the same time."