Thank you. Please go ahead.
Good morning, and thank you for joining us. I am Todd Barlow, and with me is Dean Price, who leads the investment team at Soul Patts and has run our credit strategy since it started. Credit is a growing segment of our portfolio, and we get a lot of questions from shareholders about the strategy. It is also one of the best illustrations of how our flexible mandate lets us invest right across the capital stack. At the full-year presentation, we do not have the time to go into a huge amount of detail on each and every asset class, so in response to ongoing interest about credit, we thought we would host this webinar.
Our aim today is to give you insights and information about the way we think about credit, including our views on the market generally and why we like credit for its downside-protecting qualities, our approach and how we generate returns, the book itself and how we value it, and finally, our offshore strategies and deployment outlook. We have time for questions at the end. Feel free to submit at any time in the question box at the bottom of the screen. I will kick off with, why do we invest in credit, and what role does it play in our portfolio? If we start by thinking about the typical risk and return trade-off, obviously, the lower the risk, the lower the return. We are trying to construct a portfolio that has a range of different risk and return profiles that act in different ways through the cycle.
What we are seeing at the moment is the returns from fixed income and credit are increasing in line with increases in the base interest rates. That has the effect of lifting those left-hand boxes at the expense of the right-hand boxes. Equities are impacted by higher funding costs, higher cost of equity, and any attempt to slow the economy should impact on general profitability. Through increased exposure to credit instruments, we are trying to shield the portfolio from lower equity returns and de-risk the portfolio as a whole. We see credit as a de-risking strategy. Credit reduces risk because it has the structural protection from being paid back ahead of equity. Lenders to a company have contractual rights that shareholders do not have. In the event that a company experiences challenges, lenders are paid back first, and equity is paid last.
It is also an opportunity for us to earn outsized returns. In fact, our credit portfolio has been returning greater than 14% consistently for the last five years. That is well in excess of the total return from ASX equities. Equity is our margin of safety, and we utilize our skills in valuing equities to assess the value of that buffer. We are still undertaking analysis on the underlying quality of the business and would be happy to own the equity, and in some cases, we already do. However, credit provides us with an alternative structure which may be useful in certain situations, particularly where a fast and flexible solution is required. For us, we get to limit our downside risk and gain contractual cash flow above the yield on most equities.
When we talk about downside protection, we ask ourselves, "If things go badly wrong, what will it actually cost?" The answer starts with where we sit in the capital structure. Most of our book is senior secured. We are paid first, and we have security over the company's assets. As I mentioned on the previous slide, we see the equity as our buffer or our margin of safety. The right-hand side of this slide puts historical context into that protection. Let's take 2009, the depths of the global financial crisis, as an example. That year, about one in 10 borrowers in the U.S., where the GFC hit hardest, defaulted on speculative-grade loans. Speculative grade means loans below investment grade, which are rated BB+ and below. However, just because a loan defaults doesn't mean credit loses all of its money. On those defaulted loans, lenders lost AUD 0.37 in every dollar.
Multiply those together, and in the worst year in recent memory, lenders lost less than AUD 4 for every AUD 100 of loans. That is far less than the interest and fees that would have been earned in that year. Every loan we write, we expect to get our money back. However, we make a provision upfront for the possibility that we don't. This provision is called an expected credit loss. We will talk a little bit more about how we arrive at that provision when we get to that valuation, but right now, we are carrying an expected credit loss of 4.5% across the book, which is higher than the worst year during the GFC. However, due to our selectivity in our book, we would hope the actual losses to be less than the entire market.
The first point I will make here is that we are investing our own balance sheet. We have not raised third-party funds that we have to deploy. We will only make new loans if we believe they provide superior risk-adjusted returns to anything else we could be doing. We do not have a predetermined allocation to a credit bucket that we have to fill. That means we can maintain the quality of what we do without having to chase deals. Our credit book is primarily in Australia, and that is about AUD 1 billion. The Australian market is estimated to be about AUD 200 billion and has been growing rapidly and continues to see growth of around 13%, despite what you might read in the papers.
Large institutions are continuing to allocate to this asset class. Private credit in Australia is only about 3% of the entire banking system, so there continues to be opportunity for growth. Private credit in the U.S. is approaching $ 2 trillion and growing at a similarly strong rate to Australia. It is a much more established market, and there are lots of good opportunities for us to deploy through partnerships. However, as money has been pouring into private credit, the large fund managers who have been given the capital need to deploy it. If you want to deploy a lot of money, you have to go to the areas of the market that provide you with the most scale. In Australia, that largely means real estate development. Around 50% of the market is this segment where the banks have pulled back in recent years.
We have typically avoided this segment because we felt it was over-serviced, requires specialist skills in the event that something goes wrong, and is also the asset class that typically sees defaults in downturns. In the U.S., the scale product is leveraged finance to private equity sponsors, which accounts for more than 70% of private credit deals. These are loans to private equity-owned companies where there is typically a high amount of leverage that adds risk. In addition, the terms that a highly sophisticated private equity borrower can extract are often very unfavorable to the lender. These are broadly marketed term sheets that get passed around town, where lots of capital forces faster deployment, sharper pricing, and looser structures. A bigger concern is the ownership model. A private equity firm with dozens of companies can treat each one like an option.
We prefer borrowers whose owners stand behind the business and have the capability to inject capital in periods of distress. What we do look for are discrete deals where we can provide bespoke solutions. We build a relationship so that we can understand the needs of the borrower and design a solution around it. We are seeking to earn a premium for our flexibility, ability to move quickly, and the work we put into the design of the solutions. Our preference is to negotiate bilaterally where we set the price and terms. The trade-off is that there are only so many of these opportunities in the Australian market. Origination, not capital, is our constraint, which is one of the reasons why we are growing this asset strategy offshore.
Apart from the relative attraction of credit in a portfolio, we also see credit as a natural extension of what we already do. Our equity skillset, picking quality businesses, is rewarded even better when applied through structured lending, and it diversifies how the portfolio generates cash. We scaled this strategy following the Milton merger around the start of financial year 2022. Our larger balance sheet scale made a direct lending book attractive. That balance sheet, or what we call permanent capital, is one of the biggest structural differences between Soul Patts and the credit funds in the headlines. We have no fund structure, no duration mismatch, no redemption pressure, no pressure to deploy. Borrowers we back are typically businesses with a strong asset base that may be looking for an alternative solution to raising equity.
For example, a growing company may see us as a bridge to a higher equity value where they can raise capital on better terms at a later date. By targeting good-quality companies, this provides us with structural downside protection. The origination, diligence, structuring, and decision-making is not vastly different from our approach to making equity investments. Our preferred sourcing is proprietary through our network. We conduct due diligence on the company and determine the credit score in-house. Approval runs through three gates where a deal is debated with our specialist advisory committee, then scrutinized by the investment committee, and larger investments require approval by the board. Another point of differentiation is that we maintain active monitoring of each position, and we are often proactive about where we can play a role in the future funding needs of our counterparty. I will now hand over to Dean.
Thanks, Todd. Our returns are the result of strong relationship-led origination, thoughtful and sometimes complex structuring, and deep underwriting. We are not taking excessive risk to determine predetermined hurdles. Starting with sourcing, our deals come through reputation and relationships, not marketed processes. Of the AUD 1.1 billion we originated in FY 2026, half of this was directly sourced, negotiated, and structured by our team. Senior secured loans are the largest part of the book, with tight covenants, information rights, and active oversight. We get paid for this hard work, with around AUD 86 million of fees generated from these investments over the last five years. Realization happens quickly because the book is short and self-liquidating. Borrowers often repay us early. In FY 2026, this amounted to about AUD 1.2 billion. This is healthy, but it means we have to work very hard to constantly originate new ideas to remain invested in this portfolio.
A quick realization is healthy and leads to higher rates of investment return, but there is also a natural tension where we want to hold onto our investments for longer and not be repaid. Putting all this together explains how we have delivered 14.3% per annum for five years. These returns have been generated in a lower but rising rate environment, and as rates increase, so do our returns from this portfolio. Whilst we have been writing loans for a longer period, we now have five years of this particular strategy behind us, having deployed AUD 3.7 billion and been repaid about AUD 2 billion. Over that period, 23 positions have been repaid, and every single one repaid in full with no capital losses. Internal rate of return across this portfolio is 14.3% per annum.
Today, the book stands at AUD 1.9 billion of net asset value, which is around 13% of the total Soul Patts portfolio. The chart here illustrates how that capital has moved each year. You will see that repayments have grown every year, and for the first time in FY 2026, we were repaid more than we deployed. This is a sign of good health and good discipline for our portfolio. With an average tenure of about three years, there is significant turnover in this portfolio, with a meaningful share of investments coming back to us every year. Again, it takes a lot of hard work to keep finding new and quality investments. This is one of the reasons we are building our offshore partnerships, to supplement what we are doing domestically, but without lowering the quality of our portfolio.
This is a slide showing the direct book, summarized by where we rank in the capital structure. You can see that the book is predominantly senior secured and anchoring around a mid-teen IRR. This is the margin of safety we described earlier, represented in numbers. We earn an average IRR of about 13% with senior security. This is why we don't need to go down the capital stack or take excessive risk to generate strong returns. The portfolio turns over quickly and means we're constantly re-underwriting at the current market conditions. How we value the book is important. The majority of our direct positions are held at amortised cost, less an expected credit loss provision, as the accounting standards require. That provision currently stands at around 4.5% of the book. As Todd said earlier, the GFC cost senior lenders 3.7% of their capital.
We're currently provisioned above a GFC scale loss year, whilst our realized losses to date are zero. The right-hand chart demonstrates how this provision is set. It is built bottom up from a credit rating review of each borrower, with market and country risk factors overlaid. Our investment team sets this provision, and then it's challenged three ways. First, the ratings are independently reviewed externally by consultants. Then it's reported internally to audit and risk committees and to the board. Finally, it's tested through our external audit in the financial statements. Behind all of this, our team of eight investment professionals, averaging about 15 years across credit and restructuring. This is the same team running the same process onshore as offshore. A AUD 100 million fund allocation gets the same diligence and thought process, structuring, and relationship development as a AUD 100 million direct loan in Australia.
Let me demonstrate our approach and how we source these investments using four examples. The first slide uses Electro Optic Systems and Aeris Resources, both examples of where we are both a lender and an existing equity holder. EOS is a nine-year relationship that helped form the proof of concept for our portfolio. Our relationship started many years as an equity holder in 2017. Our credit relationship started more recently through an emergency requirement for AUD 70 million provided by us as a loan. The company's board did not want to dilute shareholders with a discounted equity raise. As we knew the business very well, we were able to move at a speed no other capital provider could. This relationship continues.
As EOS's largest shareholder, we've been approached by them multiple times since, and most recently for a AUD 100 million bridge loan facility to help them finance their latest acquisition. This is a great demonstration of our relationships and reputation helping our origination. Aeris Resources is another long-term investment where we held an equity holding first, and we knew the assets very well. The company needed AUD 40 million to fund the closure of the zinc mine after a seismic event, an unusual and time-critical need that we built a facility around. We secured our facility against assets worth, in our view, multiples of our loan. Again, this was a proprietary relationship-sourced deal. The loan was repaid years later following the equity raise by Aeris. The bank guarantees we provide still remain in place today.
The company's equity raise was conducted at a time of its choosing and at a share price higher than when the loan was initiated. That is a win for the company's shareholders to avoid share count dilution. Next slide shows two examples of deals that show our willingness to lend into complexity where security protects our downside. Star Entertainment Group was a widely covered restructuring. We participated for around AUD 200 million in a AUD 400 million syndicate, secured over real assets worth well in excess of the loan, with structural protections negotiated at entry and improved by us along the way. We were eventually repaid in full with an IRR of around 23% over three years. We were not taking equity risk. We had security the whole way through, which we continued to improve, and we bought when others were forced to sell.
Our final example was of a global online shopping retailer, a more recent investment that was sourced via one of our offshore partners. We are part of a broader package that is financing this retailer's exit from a restructuring. It is a revolving loan secured against short-term receivables. Receivables turn to cash in short order, a matter of weeks. We are lending against the receivables, not the business's success. This investment was sourced by one of our global partners, a specialist in these situations, off the back of our relationship. This is a low-risk loan investment secured by receivables, and the receivables are well in excess of our loan. This investment has a projected 13%+ IRR, and it demonstrates the partnerships flywheel working, which now takes us to the following slides on our global partnerships.
Thanks, Dean. As we said earlier, there is only so many opportunities in Australia for our direct book. We are picking discrete opportunities where we can be relevant to a borrower. Borrower needs to meet our quality requirements, and the loan needs to achieve our hurdle rates. However, globally, the pool is very deep, and that is where we are seeing opportunities for growth. We started looking at ways that we could get more exposure globally to what we like in Australia. We were blown away by the quality and depth of opportunity. We have currently made AUD 1.5 billion in commitments across 19 positions to offshore partners. AUD 854 million remains undrawn, and we expect it to be called upon over the next three years rather than deployed all at once. Discipline is in our selection process.
Each manager we partner with runs a distinct strategy with a strong track record through more than one credit cycle. They think and act like us, with strong reputations and networks in their regions. There are two additional features making these economics even better for Soul Patts. First, co-investments. We get access to deals alongside our partners on preferential terms, and this increases our deal sourcing capability. We already hold two positions on this basis. Secondly, franking. Due to the nature of these investments offshore, income comes back to Australia, we are able to attach franking credits from our existing AUD 1 billion of franking credits. That means a 10% net return offshore is worth roughly the same to shareholders as a 14% pre-tax return domestically. Importantly, the target returns we have shown you exclude this benefit. These are all additional upside for shareholders.
We're often asked who the partners are. We don't think naming them gives much insight to shareholders, and the way we source these relationships is our own IP. The strategies are outlined here. I'll draw out the top three where we have the most exposure. Opportunistic credit is our largest allocation at around 30%. This is flexible capital that buys good loans at discounted prices when others are forced sellers. As an example, we talked earlier about the actual losses incurred in the GFC, but at that time, many loans could have been bought for much larger discounts. It's our countercyclical strategy, meaning it does its best work when markets are stressed. We've allocated around 20% of our commitments to asset-backed lending. This strategy involves lower-risk loans secured against real assets that the borrower owns, for example, property, equipment, inventory, or invoices.
We've also allocated around 20% to special situations, which describes lending to companies working through complexity or restructuring. This is something we are comfortable doing in Australia. Our EOS and Star Entertainment Group loans that Dean Price spoke about earlier are local examples of this. The four smaller strategies are deliberate diversifiers, generating return streams that don't depend on the credit cycle moving one way. One note on the returns column. These are historical ranges for these strategies and are shown to give you a sense of the expectations. They do not describe current returns of our existing commitments, which are all recently made, and most of this capital is still being drawn. As our positions mature, we will have more to share on actual performance. To close, we're answering the question, is there a ceiling before deployment dilutes returns?
Domestically, our deployment capability and capacity is constrained by the availability of quality opportunities. This is why the chart deliberately holds the domestic book flat. We're not forced deployment to hit NAV number, and permanent capital means we don't have to. However, last year was a large year for deployment, so we would expect to have the benefit of those loans for a couple of years. The average years to maturity on the direct book is around three years. Offshore is where the committed growth sits. The AUD 854 million of undrawn commitments will be called over the next three years. The chart shows an illustrative drawdown profile. However, the actual timing is set by our managers as they find opportunities. We think dislocation is working in our favor. Historically, tight spreads are repricing wider, and some of the largest funds are in outflows.
Forced sellers and constrained competitors are a good backdrop for flexible, patient capital. Higher base rates are helpful. Our book has averaged over 14% since inception during a low-rate environment. Higher base rates makes us more competitive. However, we probably compete with equity markets more than we compete with other credit providers. If equity markets are volatile and uncertain, our ability to provide a structured solution is strengthened. To finish, I'd like to summarize the key points. We believe credit is a downside-protected asset, and we have provisions above the worst year on record, and we've experienced zero losses since inception. We have a funded path to growth, and the environment is becoming more favorable. With a strong history of solid yield, Soul Patts' credit strategy provides excellent risk-adjusted returns and plays an important role in the portfolio. Thank you for attending today. Happy to move on to questions.
And just as a reminder, you can type your questions into the question box below, and we have some that are already starting to come through.
Thanks, Todd. Thanks, Dean. The first question does relate to the offshore partners. The question is, do you have high transparency with global credit partners and the loans you are making to global companies? How often is Soul Patts updated if loan repayments are not made or are non-performing?
There is a fairly high level of transparency. They are reporting to us periodically on how the portfolio is performing. But one of the things that I should have said in the presentation about each of our allocations to offshore managers is that they are in themselves a diversified portfolio. So, we would not expect any of our allocations to any of the managers to be seriously impacted by any one or two defaults. What we should see is a portfolio that is diversified across a number of positions, and the same principles that we talked about applying to our own portfolio in terms of downside protection should apply to each of the managers that we allocate to.
Thank you. A question now on returns. Will you be getting the same returns, assuming the 13% IRR, by using offshore funds?
The returns, I think, could be higher than what we see domestically, but there's a fair amount of spread in terms of what we're targeting. We've got some asset-backed strategies which are lower returning than what we do domestically, but then there's some special situations type returns that we would expect to be higher than what we do domestically. On average, I would say that we would expect to be coming out at a similar level of returns to what we see in Australia. However, there is a material difference from a tax perspective. The 14% that we earn domestically, we have to pay full tax on. The rates that we are getting or the returns that we are getting from offshore are net of fees, net of taxes, and if we receive a 14% net return from offshore, that is equivalent to 20% domestically.
It's not like for like. If we're getting 14% globally, that's equivalent to 20% domestically, and for that reason, the global opportunity actually looks better in aggregate than the domestic opportunities.
Thank you. Another return question. If Soul Patts are achieving +14% per annum, how much are the investors inside the credit fund receiving?
We are just investing our balance sheet, so we don't have funds that we're managing. We're just investing our balance sheet, and if we're receiving 14%, shareholders are getting the benefit of that 14%. There's no management leakage on that. That is the predominantly cash return that we are getting across our direct credit book. If I'm talking about offshore funds, the returns we talk about are net of fees that the manager charges us. Whatever we're talking about today is the amount that shareholders are earning from those investments.
Todd, could you please explain why Soul Patts would not offer credit as a standalone product?
Well, I think the main reason, certainly when we are talking about our direct opportunities, as we said in the presentation, they are quite hard to come by, and we want to allocate as much as we can to these strategies because we like the risk-adjusted returns. We do not really want to share them with outsiders. We are investing our balance sheet that is owned by our shareholders, and we want to be greedy for our shareholders. We do not want to share those great opportunities around because they are hard to come by. There is a deeper pool of opportunity offshore, and there might be an opportunity for us to offer co-investment with some of the investments we are making offshore, but for now, we have just been focused on maximizing the opportunity for our shareholders and investing our own balance sheet without worrying about trying to make fees on funds.
How do you deal with currency risks?
Everything across our portfolio is hedged back into Australian dollars. We take away currency risk, particularly with our credit, because it is a little bit more certain in terms of the cash flows. It is a lot easier for us to hedge that back to Australian dollars.
With private credit in Australia largely tied to the property market, which has taken a big hit with rate rises and tax changes in the budget, does Soul Patts see opportunity still in the luxury retirement villages development or more luxury apartments for downsizers? As capital is being drawn away from property development, are opportunities starting to look more attractive there?
Yeah, as I said, we have typically avoided lending to real estate development. It is not our expertise. It was something that we deliberately avoided because we felt that there were a lot of other providers in the market, and it is an area where you do see a little bit more distress through the cycle. So, it is not something that we have typically done. There are increasing opportunities coming, but we will tread very cautiously because there is a lot of funds who are in outflows, and they might need a solution. There is a lot of people who need to be refinanced, and they might need a solution. But it is something that requires specialist knowledge. And it is taking a view on the real estate market, which is a little bit more challenging to predict.
What we tend to stick to is understanding the value of companies, because that is what we do and that is what we know, and if we end up owning a company, that is just consistent with what we do elsewhere. Whereas if we end up owning residential developments, that is not something that we are particularly comfortable doing. But the question did raise the fact that we are in retirement living, which is somewhat connected to real estate residential prices. We have again been treading cautiously there. We have done one development in Cronulla. That has already been sold down, and that was very successful for us. We have another development which has not kicked off yet. But generally speaking, our exposure to residential real estate in our portfolio is very, very low.
Thank you. I have Simon Fitzgerald, the analyst at Jefferies, with a few questions here. So number one, you mentioned that there have been zero losses. Can you talk about defaults, loan extensions, and if there has ever been a situation whether we have needed to draw on that security? And the second question, with the external capital that is invested in third-party funds, what total percentage of that is private credit, and how to manage that exposure where Soul Patts is still exposed to redemptions in those funds?
I will take the first one around the defaults. We have experienced zero losses. We have never had to actually take security, underlying security of any of the borrowers that we have lent a loan to. From time to time, we do offer extensions and relief. The bilateral nature of our loans means that we can have very tight covenants so that we can have ongoing dialogue with the businesses if we ever start seeing some deterioration in the underlying performance. It would be natural for us to be in constant dialogue with companies about how they are performing. But we have never had a situation where there has actually been a default resulting in us having to take possession of security. That has been a positive experience. On the second point around external capital, Dean, did you want to touch on that one?
This relates to the investments we are making in third-party funds. The question is around private credit. I guess it depends on how, Simon, you define private credit, but if you are talking about direct lending to sponsors or real estate, then we have zero of that in our allocations.
A third question has come through from Simon. What sectors are off the table that you would not lend to? For example, data centers that rely on AI contracts, and any others?
Well, I think it is really just anything that we think has poor quality characteristics. AI contracts would be very, very difficult, because some of them are not long-term in nature. We would be concerned about risk around obsolescence and things like that. I think valuing the residual value of the equity behind that would be quite complicated for us. But we are very happy lending to data centers that are cloud-based, because we can see that there is underlying value in the real estate, where the real estate in those situations is a higher proportion of the valuation as compared to some new AI data centers that are heavily CapEx and chip-related and things like that, which we do not understand as well. Nothing is off the table.
It really is just a quality filter around what would we be happy to own equity in, what are we happy to have exposure to in our credit book.
A question now on geographical spread. There is a question here about the country of origin for our asset-backed lending, how far down the capital stack we invest for these assets.
The asset-backed strategies are predominantly in the U.S., the way those strategies or those loans are generally made is that you have security at the asset level. It is not about necessarily going down the stack. It is securitized against the particular asset.
Typically, I mean, these asset-backed loans, we are not necessarily focused on the consumer, but even to the extent that there is some consumer elements there, they have experienced relatively low defaults through the cycle. What we are looking for is a portfolio of asset-backed loans that, in aggregate, have very low risk attached to them.
Thank you. Dean, one for you. Are there any payment-in-kind loans in the book?
I mean, the nature of our loans, the bilateral and bespoke nature of the loans, is that we will at times provide for the borrower to take advantage of not paying cash interest for some period. So we will have some payment-in-kind loan in the book at any point in time. So, yeah.
They are generally focused more at the preferred equity end rather than the senior end. The preferred equity component, if we refer back to the slide that had the breakdown of the strategies, there was only a really small percentage of stuff that was in the structured equity component, which was around about 7%. Some of that will be PIKed.
Thank you. The next question, "Do you participate in loans that are offered on a syndicate basis by other market participants? If so, can you share the names of some of the market local names that you are investing alongside?
Well, I don't think it's for us to talk about who is investing in other loans. But the answer is yes. I mean, our preference is to do bilateral loans, but there's only so many of those that you can find. We do find, from time to time, syndicated loans that meet our hurdles. I think Star Entertainment Group is probably, out of the four examples that we gave, Star Entertainment Group is the best example of that. That was a syndicate of a range of different lenders, some offshore and a number of onshore lenders into that syndicate. But we were the largest one of that syndicate.
Thank you. A broader investment process question here. "Why doesn't the credit allocation mirror Soul Patts' broader capital allocation thought process, where funds flow to the best opportunity?
Well, I think it does. I think it has the same approach. I mean, we were trying to point out that we were not allocating to a bucket. There's not a predetermined allocation to credit that we hope to make. Every time a new credit opportunity comes in, it gets marked against or graded against whatever else we could be doing with that money. Whether that's real assets, equities, fixed income, we are constantly in competition. But we are deliberately growing this portfolio because we do see this as being quite strong risk-adjusted returns. So there has been a real effort to try and grow it, but that doesn't mean that we just grow for the sake of growing. The more that we learned about the asset class, the more that we wanted to go and explore how we might be able to find offshore opportunities.
Again, we took our time finding those opportunities. We looked at over 1,000 different funds and whittled that down to the small number of partnerships that we have today. So, this is something that we are deliberately trying to grow because we like it from a risk-adjusted basis. But that is not to say that it's a special class that gets funded without submitting itself to the competition that we see the rest of the portfolio exhibiting with every new investment.
Thank you. A question about the environment. "Why are credit spreads so tight, and when could we expect them to become more normalized?
Well, it is a question that we have been asking ourselves. I think we know what you know, but I think if you have looked at the spreads across the different parts of the credit universe, they have started moving in recent weeks. Right from BB B down to CC C, you will see those spreads have started moving.
Back on the global partnerships, "Does Soul Patts ever intend to reveal the names of their global private credit and private equity partners? I really feel shareholders deserve a better level of disclosure, considering these positions are becoming a bigger part of the total asset mix. As it currently stands, the whole thing is a bit of a black box.
Well, I think the point of today is to try and make it less of a black box. We are trying to articulate what our strategy is, how we think about it, how we go about portfolio construction, what are the strategies that we are engaging in, what are the expected returns look like, and how do we think about it from a downside protecting part of the portfolio. I mean, that is about as far as you could go, because, I mean, across the whole portfolio, we do not disclose name by name, because names come and go. What is more important is the strategy than the individual names. We have some constraints in this particular asset class, because when we sign up to lend money to a domestic counterparty, we do that on a confidential basis.
That is not for us to disclose to the market, how much that company is borrowing and on what terms. If we did that would make us uncompetitive with other people in the market who don't have to disclose that. We respect the confidentiality of our counterparty. When it comes to our global investments, our view is we work really hard at sourcing these arrangements with people, developing a partnership and getting an allocation to what are usually very hard to get funds. The better quality of fund, the better quality of manager, the harder it is to get an allocation. If we just disclose all of those relationships that we have with people, there's an influx of capital to those managers, it makes our job of getting allocation much harder in the future.
To be frank, I mean, if we gave the names, it wouldn't really mean a whole lot to most people anyway. These are not household names, because we're deliberately looking for boutique managers who are undertaking discrete strategies. We didn't think that it's additive to our competitive position overall, but we are trying to deal with the thirst that our shareholders have for more knowledge around how we're going about this book.
Are co-investment opportunities increasing as you are developing these relationships?
Well, they will. I mean, you certainly will see some co-investment opportunities, which adds to our sourcing, and those things can go into the funnel with all of the other opportunities that we see across every asset class. Certainly that's additive. The global opportunity is much, much larger, so we could always allocate more, but we're being very thoughtful about it, and doing it progressively over time. I do think that there's opportunity for growth, but as I said, we're not sitting here today, setting a target that we want to and desire to reach. It is very much opportunity-driven, but the market is certainly getting better for us.
The question here that shareholders suggest that having private equity and debt as an asset class is arguably more risky than the other assets in Soul Patts' portfolio. Do you agree with this? Even though you have secured positions, what is to stop you inheriting assets that are less valuable than the loan upon any default, like [Aeris]?
Well, I mean, I would say that our view is that this asset class is less risky than equities. Five years ago, 90% of our portfolio was in listed equities, and you are taking risk on the market. What we are seeing here is an asset class that protects capital through the downturn, and is obviously less volatile than equity market returns. But we are experiencing returns that are greater than ASX returns. So we think that that is pretty attractive, and that is the reason why we are doing it. So no, I do not think that this is more risky. I am constantly surprised at how many people talk about default risk on credit and the riskiness of credit, when the evidence is otherwise, and no one seems to talk about the risk of losing capital in equity markets.
It surprises me because there is a relatively high level of risk attached to that. If we talk about private equity, not our private equity, because we do not lever up our private equity investments in the way that a typical leveraged buyout fund would. But if we talk about most of the private equity assets, they have high levels of debt, so the risk in private equity is much higher, but it is not something that we do, and it is not the way that we manage our private equity assets. We put normal levels of operational leverage into our private equity investments, but we do not try to lever our returns.
Thank you. Look, if there is time for one more question before we wrap up, Todd, there is one more that has come through from Steve Sassine of Morgans. He is asking that you have mentioned eight investment professionals internally with experience in this asset class. Can you talk a little to the capability of the team as the portfolio scales up, and would additional headcount or management costs be necessary to manage a larger portfolio?
Well, the direct book has been largely unchanged for the last couple of years, and last year in particular was a very active year. We had over AUD 1 billion of deployment and over AUD 1 billion of repayments, and the team was capable of being able to execute on that. I would not see that level of activity being replicated. Particularly now that we have established the relationships with the offshore partners, a lot of that growth is already baked in. We have already done the work and the diligence, the sourcing, and the development of the partnerships, so we do not really need to do a whole lot more when they call us up and say that they want to draw down on our commitment. I actually think the workload from here gets a little bit lighter, but we are constantly assessing that.
We are not opposed to the idea of adding in new people to the team, but as I say, we have been able to execute upon a high level of activity in the last 12 months with the people that we have got.
Thank you. I think that is a good spot to wrap up the questions. For everybody online, the presentation slides are available on the ASX and our website, and a recording of today's webcast will also be in our investor center shortly. Thank you very much for your time today and for joining.
Thanks, everyone.