KKR’s $532m offer for Australia mortgage lender Pepper Group looks well placed

A packet of former U.S. President Abraham Lincoln five-dollar bill currency is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron/File Photo

Did KKR & Co. just go long Australian housing? Not quite.

The private equity firm’s A$676 million ($532 million) offer for non-bank mortgage lender Pepper Group Ltd. certainly looks like a bet that some of the world’s least-affordable housing markets can keep on growing, despite eye-popping prices and rising mortgage delinquencies.

On closer inspection, though, it might be more like an each-way bet. Less than half of Pepper’s income in the latest fiscal year came from Australia, with more than one-third from Europe and almost 20 percent from Asia. Not only that: Less than half of it derives from the riskier business of making home loans, with the bulk of the remainder coming from servicing mortgages.

Mortgage servicers tend to do rather well at times when lenders are doing badly. When people are running late on their monthly payments, the attractions of a servicer who can coax, cajole and threaten borrowers into paying up rise significantly.

Wells Fargo & Co.’s servicing business, the biggest in the U.S., expanded 38 percent in the 12 months through June 2009, at a time when the North American housing market was suffering a season in hell. Shares in Ocwen Financial Corp., one of the biggest independent U.S. servicers, almost tripled over the same period as it rebounded from the early jitters of the housing crash.

That’s not to say KKR has joined the ranks of those betting on a similar disaster in Australia. You don’t buy a company with A$7 billion or so of loans on the balance sheet if you think they’re about to turn to dust. Coupled with KKR’s involvement in the consortium that paid A$8.2 billion for General Electric Co.’s local consumer lending business in 2015, the latest deal suggests a house view that economic strength in Australia and New Zealand is stronger than many outsiders recognize.

Still, when placing a big trade like this, it’s always useful to have an offsetting hedge. Having a foot in both lending and servicing makes a great deal of sense.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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