Analysis: Americans are betting big on Australian mortgages

Back in August, Pepper accepted a takeover offer from California-based investment manager KKR. The non-bank was sold for approximately $675 million.

The actual KKR-owned entity that bought Pepper is known as Red Hot Australia Bidco. The federal court approved the deal on 21 November.

KKR is a major player, with $153 billion in assets under management and over a hundred companies in its private equity portfolio.

But it’s not the only American firm looking for a slice of Australia’s $1.7 trillion home loan market.

New York-based global asset management firm Blackstone acquired 80 per cent of La Trobe Financial in the third week of December for an undisclosed sum. The American behemoth manages $521 billion in assets and has a market cap of $38 billion.

Both KKR and Blackstone have been coy about their recent transactions, leaving most of the talking to the Australian non-bank lenders they’ve acquired.

Queensland-based Better Mortgage Management (BMM), which uses Pepper and La Trobe Financial for wholesale funding, is confident about US players entering the space.

“It is great to see interest in the sector from new parties,” BMM managing director Murray Cowan told Mortgage Business.

“The GFC and post-GFC period was tough for all lenders that were not a big four bank, or a subsidiary of the big four, and particularly tough on non-bank lenders,” Mr Cowan said.

“Looking at the size of the groups involved (KKR and Blackstone), their Balance Sheets could help with additional funding and expanding their loan books.

“The events of 2016 and 2017 have finally seen some market forces moving things in our favour.”

Timing the market

The impact of APRA’s macro-prudential measures on the Australian mortgage market over the last two years has been significant. While the banks have been forced to tighten credit and raise rates to stem the flow of investor and interest-only mortgages, non-banks like Pepper and La Trobe have caught the spill over.

Speaking to Mortgage Business earlier this year, La Trobe Financial’s chief lending officer, Cory Bannister, said that APRA’s actions have certainly been a benefit to the group, but not in the way that many people think.

“Yes, we have seen a rise in investor loans, but it has been complemented in the number of owner-occupied and other mortgages we offer as well. What it has actually done is encourage consumers to look outside the banks to look for different solutions in the marketplace. Pleasingly for us, it has been an increase across the board.”

Blackstone will be well aware of the increased volumes La Trobe has seen since APRA’s actions took effect.

But it isn’t just lending curbs that are sending consumers to alternative mortgage providers. The media attention given to the home loan market over the last two years has been profound. The media lends tens to follow the regulatory one: news about FOFA was quickly replaced by stories in the mainstream media explaining APRA’s macro-prudential measures, the consequent rate hikes and then the press about what else is on offer. The complexities of the mortgage market are no longer confined to the business pages or industry rags. They are now part of our daily news diet.

“The fact that this issue has been reported so widely in the mainstream media has certainly helped everyone in the non-bank space,” La Trobe’s Cory Bannister said.

APRA has accidentally given non-bank lending a decent boost. But the PR play is also significant. The reputation of the big four is in the toilet right now, and an upcoming Royal Commission won’t help. The non-bank lenders look primed for more growth in 2018 as the negative news surrounding the major lenders plays on the minds of Australian borrowers. American firms have clearly considered this and see the opportunity in the non-bank sector.

This week, the AFR’s Street Talk section reported that Rothschild is advising the sale of Bluestone, with New Yorker-based firms Moelis & Co. and Cerberus Capital Management tipped as potential buyers.

The upside for Australian consumers is huge: big American money can fund innovation, new product lines and, potentially, sharper pricing. It may prove a winning formula for competition, particularly at a time when the big four are under attack.