In the rush to capture the billions of dollars displaced by the demise of bank hybrids, ASX-listed private credit funds are pushing different models.
Written by: Jonathan Shapiro, Senior Reporter, Financial Review
Kapstream is the latest fixed income fund manager to target new investors on the Australian Securities Exchange after appointing brokers to raise up to $300 million via a listed investment trust.
The $12 billion Sydney-based fixed income manager says the transaction was in direct response to its clients looking for clients looking for an alternative to bank hybrids, which are being phased out by the prudential regulator. The deal adds to the already $10 billion of ASX-listed securities issued by debt funds.
The new LIT is targeting a return of 3.5 per cent above the Reserve Bank of Australia’s cash rate. It plans to invest half the capital in public market debt and the other half in private credit, or more specifically secured funding to other lenders via so-called warehouses. With brokers targeting up to $300 million, they have already attracted a cornerstone investment of at least $145 million. But Kapstream’s decision to opt for a LIT over an increasingly popular $2 billion listed note structure is worthy of discussion.
It demonstrates the different views on the best way to structure and sell fixed income securities on the exchange so that costs are managed and investors are less exposed to the dreaded trading discounts that have plagued LITs and their close cousins, listed investment companies. Until last year, private credit funds that wanted to raise money on the ASX only really had one option: the listed investment trust.
Managers such as Metrics, Gryphon and Qualitas hired brokers and raised hundreds of millions of dollars via primary and secondary raisings, tapping demand for high and reliable income.
These funds are closed-end structures, which means once the money is raised it never really leaves.
An investor can only exit the investment by finding another buyer on the listed exchange. This means when demand is strong the price can trade above the net asset value, or at a premium. But when demand is weak and markets are wobbly, the price can fall below the asset value. While debt LITs have delivered on their promises of stable income, there have been prolonged periods where they have traded at material discounts. This has effectively prevented investors from pulling their money without copping the penalty, and left a tinge of bitterness, particularly for those who bought in at the initial raising. In fact, two international managers – Partners Group and Neuberger Berman – relented to that pressure and wound down their LITs because of the persistent discounts.
In demand
So fund managers have tried to come up with solutions to this problem, and in 2025 the listed note market was created, basically from scratch.
Last year alone, the likes of Realm, Challenger, Real Asset Management, MA Financial and Stonepeak raised $2 billion via listed notes. In this instance, they issued securities that pay a fixed margin over the cash rate for a set period of time, typically five years.
The proceeds are then invested in a portfolio of fixed income assets while the manager sets aside some capital for potential losses. And instead of charging a management fee, the fund simply keeps the difference between the interest earned on its fixed income investments and agreed interest paid to investors.
The fixed maturity date means that eventually investors will be repaid their full amount, and so the securities aren’t likely to trade at a material discount to the underlying assets.
Kapstream portfolio managers Dylan Bourke and Mark Bayley say they considered the note structure, but opted for the LIT instead.
One of the reasons is that they believe the overall returns to investors tends to be higher in the LIT structure because there is no excess interest retained by the manager.
A LIT structure, they argue, avoids “splitting liquidity”, as investors trade in and out of various notes searching for the best relative value, rather than attracting buyers and sellers to a single fund product.
Kapstream also believes that a relatively new feature that allows investors to redeem up to 5 per cent of the fund each quarter at the net asset value will also help keep discounts in check.
The trusts versus notes debate will likely continue throughout the year as more funds tap the listed market and capture the $43 billion of capital invested in bank hybrids that is seeking a new home.
So far, the demand among investors for high-income means both notes and LITs are trading at or above their net asset value. Among the 10 listed investment trusts with a combined market value of $8 billion, the average trading price is 0.5 percentage points above the NAV.
As for listed notes, the average trading price is $99.73 – a quarter of a percentage point below the $100 face value.
So both structures appear to be working as intended. But there will inevitably be stress tests ahead.
Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking. He is based in Sydney.