Welcome back to the Rated Change with York Wealth Management.
As advisors to some of the wealthiest families in the country, the Rated Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gatty and in today's Rockcast, we're speaking with Andrew Lockhart,
the managing director of Metrix.
Metrix are a leading Australian non-bank corporate lender and alternative asset manager specializing
in fixed income, private credit, equity and capital markets.
Metrix currently manages roughly $14 billion and gives investors access to these strategies
via a range of unlisted and listed managed funds.
With this approach, the flagship Metrix Direct Income Fund targets a return of RBA cash rate
plus 3.25% and as of the 28th of July, the fund has returned 7.93% for the past year
and has averaged 6.77% since inception.
Andrew gives his insights of the origins of Metrix, their process and lending philosophy.
He also outlines the private lending universe, the overall health of the loans in the portfolios
and gives his thoughts on the outlook for private lending in current markets.
In particular, I found the conversation on commercial property to be quite insightful.
So before we get into the podcast, I'd also like to encourage you to listen to the disclaimer
at the end of the Rockcast and to keep your feedback coming.
You can reach me at mgaddy at ywm.com.au.
So with that being said, I hope you enjoy this conversation as much as I did.
So sit back, relax and enjoy it.
Andrew Lockhart, welcome to the Rate of Change with York Wealth Management.
Thank you very much for having me.
Why don't we kick things off by telling our listeners a little bit about yourself, your
formative years and how you got into financial markets.
Sure.
Well, I'm probably pretty stable.
I actually worked for National Australia Bank for 26 years.
So really, you might know my dad.
I'm so sorry.
Do you know Peter Gaddy?
Yes, I know Peter very well.
Yeah, he's my dad.
He was there.
In fact, your sister used to babysit my kids.
What Saskia or Senya?
Seriously?
Saskia.
I was not expecting that.
That was years ago.
Yeah, I used to drop Saskia home over at Chatswood there.
Really?
She's going to laugh about this.
I'm about to send it through the podcast.
It's because I think I'm finance, but I think you should listen to this.
You might have a giggle.
What a small world.
I think she would have been, I don't know how old she was then, but she couldn't drive
obviously.
She must have been 15 or 16 years old.
Wow.
That's so funny.
You probably know more about my family than I do.
Your dad's a good fella.
Excellent.
All right.
Well, let's get back on track.
It's not a podcast about me.
It's a podcast about you, mate.
All right, so how did you get into finance after now?
Yeah.
I basically just finished school at the time and just had an opportunity to get a job working
for NAB.
I took the job, worked for NAB full-time and studied part-time.
I went to university and did my first degree part-time while working full-time at the bank.
I'm often doing lectures at night and all of those sorts of fun things.
I was based in Brisbane when I first started and moved through a range of different roles
within the bank and then moved into the corporate and institutional part of the bank and was
relocated down to Sydney in the early 2000s.
So moved to Sydney in about 2002 and then worked in, again, a number of different roles
within the bank.
One of my last roles was in what they call leverage and acquisition finance, which is
acquisition financing to support private equity firms where they're buying companies.
So in that role, went through the global financial crisis in that role.
I guess at that time I saw what was really happening in terms of companies' ability
to get access to debt financing and how reliant they were on the banks.
As a result of that, I put a proposal to the NAB to set up what has become Metrix.
In 2008 to 2012, spent a fair bit of time trying to work through the different channels
within NAB's business to finally get to a position where National Australia Bank acquired
35% equity interest in the business that was Metrix credit partners and myself and two
of my partners then proceeded to try and raise capital from investors.
So we spent, we thought we'd been discovered, we thought all this institutional money from
superannuation funds would be desperate to get access to good quality lending assets
and private markets.
And fortunately for 12 months, we weren't able to raise a cent and it wasn't until the
back end of 2012, off the back of a cold call that I made, we were able to secure our first
institutional investor that committed an amount of $75 million.
And then in 2013, after only securing that one investor, he was a bit frustrated that
we hadn't set up the fund and threatened to withdraw his commitment if we didn't set
up the fund.
And so we immediately resigned and launched the business.
So we had one investor who invested $75 million and that's how we started in June of 2013.
Now 10 years later, we've been very fortunate.
We've now been able to build a business that manages in excess of $15 billion.
We provide financing to over 300 individual companies in Australia.
We've become the largest private debt manager in the Australian market and we employ 120
odd people in the business based in Sydney, Melbourne and expanded into Auckland and New
Zealand.
And now we've even started raising money from offshore investors and so we've got investors
from Japan and starting to attract interest from European and Canadian and American investors
as well.
So it's been a fun 10 years.
It's been a very, very fun 10 years.
So there's three structures currently around, two listed, one's the direct fund.
Do you want to give a bit of colour around the different strategies and how they're structured?
Yeah, I've always from the view that investors, if they understand what they're trying to
achieve, what return objective does an investor want to achieve, then really that return objective
needs to marry up with the risk and then for an investment to be successful, investors
need to know how do they control their money.
So if they're investing in managed funds, they can invest in a fund if it's delivering
on the target return or their circumstances change, they might want to withdraw their
money.
And so how investors gain the right risk adjusted return but also maintaining access to their
capital and the power over that capital I think is important.
And so we back in October of 2017 launched what is the Metrics Master Income Trust or
MXT, which was the first ASX listed credit fund or private debt fund.
That was really at the time we launched that in response to the fact that most investors
really had only had the opportunity to buy hybrids or put money on term deposit as the
way in which they could get an income from sort of more stable assets.
And so we thought that it would be a good opportunity for investors to gain exposure
to private market loans to Australian companies, but do it in a way where they could buy and
sell those units on the exchange as a means to get liquidity.
So if you think about our market, most Australian companies don't have a credit rating.
So they're not rated by S&P or Moody's.
We don't have a bond market of any substantial size or scale.
Most borrowers are pretty heavily reliant on the banks for funding.
And so when you go through a period like the GFC, you realise how risky that is for Australian
companies in terms of how they've diversified their funding sources.
They're heavily reliant on the banks.
And so if the banks choose not to be in a position or can't be in a position to lend
because regulatory changes impact their business and becomes less appealing, those companies
have got limited options in terms of how they finance their activities.
And so one thing we wanted to do was to provide an important source of non-bank finance to
Australian companies, but equally creating investment product that catered to that sort
of need for people to be able to invest and get stability of capital with an attractive
income that does better than, say, alternative assets like a hybrid or a deposit or a bond.
And so that's the reason we launched MXT.
And so we launched MXT in October 2017.
MXT seeks to deliver investors the RBA cash rate plus 3.25 net to an investor.
At the moment, in the last 12 months, it's yielding in excess of close on 5% over the
RBA cash rate.
So RBA cash rate today, 4.1 plus around 5% in excess of 9% net.
When you look at, you know, I was looking at a 12-month term deposit just before I came
on the show, and there are around high 4s to 5% was about the best rate that you could
get for a 12-month term deposit.
Now, obviously, an investment in MXT is not equivalent to a cash deposit.
Certainly, those that have got the benefit of a government guarantee of less than $250,000,
it's not a cash deposit.
So there's a greater element of risk.
What an investor hopefully is picking up is excess return.
And what we've also tried to do is demonstrate our skill set in terms of how we manage credit
risk and diversify the portfolio so investors are not exposed to any one single large borrower
exposure.
So investors can invest in MXT.
They get exposure to over 300 individual companies that we lend to, where the average exposure
to any one individual company is around about half a percent.
Income is distributed every month, so unlike that deposit example or a hybrid where income
distributions are less frequent, with MXT or MOT, the investor receives their income
every month, and they can buy and sell whenever they want on the stock exchange.
So really, it's giving them a daily liquid tradable investment that is a higher yielding,
higher returning instrument than they would in other alternative assets.
So that's the reason for it.
It's really being designed to give investors an alternative.
And I sort of think that whilst the traded price of MXT or MOT may change because of
liquidity on the stock exchange, so people are buying and selling, the traded price may
trade away from the quoted NAV of the fund.
But the quoted NAV of the funds have been very stable since we launched them.
It listed at $2, and basically the NAV of MXT has been stable at $2 since it's listed.
Traded prices varied, like shares and other investments.
Sometimes it trades at a premium, sometimes it's at a discount.
But the fundamentals of what we've invested in have been very, very stable for investors.
And I think one of the reasons for that is if you think about a loan, where you sit in
the capital structure, it actually reduces risk.
Obviously, equity is the asset class that is more volatile.
Equity in people investing in shares or equity to get growth in earnings and growth in capital
values.
And equity is the asset class that is the highest risk in the context of the capital
structure.
So a loan or debt, particularly a secured debt, ranks in priority to all other creditors
or claims against the company.
And so if a company was to deteriorate, the impact in declining valuations or the fortunes
of that company would be borne first by shareholders and then unsecured creditors, and then finally
by a lender.
So that equity really provides that buffer that protects our capital against the risk
of loss.
So a lot of people ask, and you're seeing it quite a lot, because everyone's used to
essentially the bank's lending.
You've got a business idea, you go to the bank, you give your pitch, and they give you
a loan, right?
But ever since the GFC, they've kind of spun out that risk component, which is, I suppose,
your business.
So there's a lot of listeners that really understand the context of this.
But do you mind giving a bit of color for people that really don't understand exactly
what the opportunity is?
Because when I'm discussing some of these strategies in the year in 9, 10, 11, and as
you said correctly, they're looking at the term deposit and going, how could it be double?
Isn't this risky?
Can you actually explain exactly what the opportunity is and why it exists?
So if you think about a bank, what a bank is actually doing is they're taking money
from retail or depositors, and they'll pay you a rate.
They borrow money in wholesale funding markets issuing bonds to investors, and they pay a
rate.
And then what they do is they then add a margin on top of that, which is paid to shareholders
in the form of returns, right?
Whereas what we're actually doing is providing to our investors the full return associated
with the loan that we've made, less our management fee.
Now, our management fee is materially lower than the excess NIM that's paid to shareholders.
So if you think about when you put money on deposit or you buy a bond and it's a bank
bond, you're effectively providing financing to allow the bank to lend to the company.
And then they will charge a higher fee and margin to that company, and the excess return
goes to shareholders.
Whereas in our case, hopefully the excess return is going to the investor.
And so we raise capital through the issuing units.
That capital gets aggregated and we lend to companies.
And so the returns, the areas that we lend to corporates are both large scale, publicly
listed and private companies.
So if you think about companies like Woolworths, Origin Energy, Ramsey Healthcare, Steadfast,
Brickworks, Metcash, they're examples of companies that have borrowed money from banks and lenders.
And we also provide financing to those companies.
There's a range of private equity firm owned companies, so companies like Arnott's, TimeZone,
a bunch of privately owned companies, HealthScope, the private hospital group and others.
There's a range of property related transactions where involved in real estate, so residential
high rise apartment buildings or land subdivisions or big industrial developments.
And then there's project financing, which is the fourth area where we lend.
And that's usually toll roads like West Connex or the Mornington Peninsula Motorway or the
Victorian Cancer Centre are examples of Perth Stadium is an example where these are companies
or projects that have borrowed money from banks and from other lenders.
And they've used that to build their business or their project, undertake the project.
And that debt financing together with shareholders capital is what is used to own the asset.
Now the risk to an investor in the equity is that the value of the company or the project
might go up and down.
For us as a lender, what we're trying to do is make sure that the value doesn't go below
how much we have lent.
So equity wears that risk before we as a lender are exposed to any potential risk of loss.
So I don't think it's ever been as easy as you've got a business plan, you go to the
bank and the banks are going to fund you.
I think over time, banks and lenders like myself are pretty cautious in terms of thinking
about what the risk is.
And so what our role is as a lender is really to look at every business or project that
we're involved in financing.
And we undertake a lot of what we call due diligence.
So you're looking at financials, tax, legal structure, legal risks within the business,
the commercial risk, what's management strategy, what's the position of the company and its
industry, what is really going to drive the revenue associated with that company.
So if you think about it, a company's got a thousand customers, customers pay a certain
amount each, a thousand customers by $10 gives you the revenue that that company is going
to generate.
Simplistically.
You're mainly lending to property backed or essentially where you lend to a business that
has no property.
I know it takes a lot more work, but what's the split?
We lend about 60% of the loans that we've made to for property purposes.
So we have direct security over the property.
So mortgage over the property, we're fixing floating charge over the company, personal
guarantees from equity sponsors.
That's part of that security mix.
But there are other companies where there are no hard assets in real estate and we're
funding against the cashflow of that business.
So invariably what you're looking for there are companies that are generating good, strong
earnings, well diversified business models, well positioned in their industry or structure.
So if you think about services business like dental care or medical pathology businesses
or there are sorts of companies where they may not own any property, but we're providing
funding against those businesses and you're looking at what is the level of earnings that
can be generated by that company.
What's the cash that can be generated to be able to service and repay your debt?
So with those areas, you mentioned 60% in property, what's the sector risks in the portfolio?
Because you said it covers quite narrow, what's the breakdown?
It's interesting.
Sector exposure is less of the less relevant metrics.
So the most important thing is what exposure do you have to any one individual counterparty?
So for instance, if I say to you that we've got about 60% of our exposure in property
related debt, that gets then broken down into a mix of industrial, residential hotels.
For instance, we're involved in the financing of the Soffertel Wentworth Hotel or the Hilton
Hotel in Sydney.
We might be financing 300 apartments being built in Western Sydney.
It can be a whole range of things.
And it's then spread geographically.
So you've got to look at it in terms of what's the...
And each individual loan has different terms and conditions.
So for instance, say I'm financing an industrial property in the Port of Brisbane, it's going
to be quite different risk profile to say residential high density apartment building
being built in Sydney, which will be different again to say a land subdivision in Melbourne.
You've got three different borrowers, three different locations.
The risk profile of each of those transactions will be quite different.
So it's not like we lend the same loan to valuation ratio across each individual asset.
What we're looking for is...
So in the case of the residential apartment building being built in Sydney, it might be
that all of the apartments have been sold, they've been pre-sold.
And so we're looking for completion of the project, on completion of the project, the
consumers that are buying those apartments to live in, buy those apartments and they're
the source of repayment of our facility.
So unlike a bank that will provide a 25, 30 year mortgage to a consumer, it might be lending
85, 90% of the value of the property for us, what we're lending is maybe 60% of the value
of that property on completion and our source of repayment inside two years is from the
completion of the project and the sale of the assets.
So it's quite different.
The driver for us is what's the driver of the cashflow?
What's our source of repayment?
What's the risk to that source of repayment?
And then what are the ways in which we can structure the loan to mitigate any potential
risk of loss of capital to us?
So that might be...
Well, I think you just touched on the main thing, loss of capital.
So essentially, and that's why I was asking the question, what's the breakdown?
Because I'm speaking to lots of clients, people up Gold Coast Way, there's families, very
big families up there that probably the biggest families associated with building Rezzy, they've
just refused, they've just stopped.
I was speaking to a mate the other day, I'm associated with a company up there that's
running 52 cranes.
No cranes are working, operational, no one's turning soil.
Yes, you've got the Olympics coming in.
And then you have a number of people talking about rates rising.
And then everyone's like, oh, no, I'll be fine.
They'll pause.
The Fed just paused, but they're secretly going to keep on going.
So no one's seen it for a while, but people mentioned it in a whisper.
They don't want it to happen.
But people are discussing credit crisis.
And you're starting to see a number of large builders go under.
You've seen them in Sydney, the MLC Centre, heaps of places.
And then the domino impact.
So that's why I was asking what percentage of houses are broken up in the fund?
What's the liability there?
I'm very interested to hear your opinion on what's going on there.
I think the market conditions are pretty tough.
If I look at residential markets around the country, you've got very low supply, you've
got very low vacancy rates, you've got rising rents, and you've got a very difficult construction
market.
You've had rising construction costs really since 2021.
So 2022 saw material construction costs rises.
You've got issues around government planning approvals and the speed of councils and governments
to approve residential development sites and those sorts of things.
You've had a lot of very wet weather through 2021 and 2022 on the east coast of Australia,
which delayed a lot of projects.
So all of those sorts of things are things that can impact the viability or the profitability
of a project.
Our role as a lender, though, is to make sure that when we lend those projects, that our
risk is mitigated.
And so if I'm lending for construction, you'll have a construction contingency that says,
okay, if there are cost overruns, we've already accommodated that in the project budget and
it's funded.
If there are delays to the delivery of the project because of inclement weather or union
stoppages or COVID disruptions to supply chains, the project can sustain an extended period
of time where it can't be completed.
And so what you're doing is as you assess those risks and you build in contingencies
for time, for costs, for finance costs and everything, that has to be funded by equity.
And so you're 100% right, there are builders, there's a lot of pressure and a lot of stress
in different parts of the market.
But largely what's occurred is the risk has been borne by those that have ended into fixed
price contracts and then been subjected to increasing build and material prices that
have flowed through.
So as a lender, one of the things that we want is to make sure that when we lend money,
we're lending against a fixed price contract so we know what the cost is going to be.
We want to see an alignment between the interests of ourselves as a lender and the borrower.
So we want to know that the borrower has got deep pockets and got the financial wherewithal.
So if something goes wrong, it's the borrower who is going to put in the cash to correct
any shortfall.
So if you think about it, say weather causes a delay in a project or rising interest rates
force the finance costs higher, means that the project margin might be squeezed and the
project might not be as profitable as what was originally forecast when the developer
entered into the project.
But it doesn't mean that we as a lender should be wearing any risk.
That has to be borne by those that are intended to profit from it, which is equity.
So if you're coming to a project, you're thinking, I'm going to do this project and
I'm going to make 20% plus and it doesn't turn out that way, then our role as a lender
is to make sure that we've protected our investors' capital and forecast those potential
deteriorations or declines and that we can complete the project and hopefully the client
will make money on the project, but they may not have made as much as they might have thought
when they first went into the deal.
To give you an idea, to bring on a residential development project in, say in Sydney, you're
talking five plus years.
By the time you've bought the land, you've got the planning outcome, you've sold the
project, you've negotiated all your construction costs and everything.
These are long term projects and that's why they should be rewarded with good margins
and they should be profitable projects.
In times when market conditions deteriorate, unfortunately, it may not always be the case.
It's very different lending for a project compared to say lending to the contractor
that's wearing that risk.
So we don't lend to construction contractors.
Generally a construction contractor works on a much finer margin.
Like if you're thinking about the property developer, he's bought the land, he's secured
the development approval, he's negotiated the construction contracts, delivered the
project, sold and marketed the property to purchases.
There's a lot of work that goes into that as opposed to the one aspect which is the
delivery of the construction which might be undertaken by a third party builder.
Now those third party builders have a role in maybe coordinating all of the various trades
and monitoring the trades and working through that.
But their margins are much finer than say the developer who's taking more risk over
a longer period of time and trying to generate a return on their capital.
Where say we don't lend to the construction contractor, we want to lend to the landowner,
the owner of the property.
This is why I enjoy chatting to people over you Ilk.
You're pretty much at the finger in the pulse.
If you're looking after the money, you can see exactly what's happening across most industries.
So that's essentially.
Yeah.
So as you can appreciate the questions, it's on there.
It's in every single newspaper right now, the pressure is starting to build up.
What's going to happen on the credit side?
But this lovely podcast is not about the negatives.
We'd also like to discuss the opportunities out there.
So since you're seeing a lot of other companies coming through, what interesting opportunities
are you seeing in spaces right now that you're lending to that you thought you may not have
that evolved in the past six months?
I think as a lender, I'm naturally risk averse and so we're not looking to lend to a company
that's going to shoot the lights out and make a lot of money.
And at the end of it, we want to get well paid and generate a good return for our investors'
capital.
But at the same time, we're providing capital to support the growth or the project that's
being undertaken by those that are taking the risk, which is equity.
And so what I want to do is make sure that when we lend, we're lending to good quality
companies, good quality management teams that are going to be able to execute on their strategy.
And so it's more about avoiding things that might go wrong.
And so if you think about, say, more cyclical industries, they're areas where we avoid them
because the earnings can be more volatile.
So if you think about, say, a cyclical industry like agri, you can have issues around commodity
prices, production volumes, foreign currency, weather, trade disputes between government
can all impact the price and the earnings that you can generate as an agricultural company.
It doesn't mean that they're not good companies or that they're not a great investment.
Their cash flows are more volatile and therefore, as a lender, you're not willing to take as
much risk in terms of how much debt you would provide to those companies.
So you'd have a very low level of debt.
That's the kind of thing that we think about in terms of how we go about lending.
We're looking at over long periods of time.
And your point about market conditions, because we're privy to private information from a
whole range of companies and the information that those companies provide to us as a lender
is confidential between the lender and a borrower.
And so we respect the privacy of all the various companies that we provide financing to.
But it does help inform your view of market risk.
You're lending to a wide range of companies.
And I would say if you're waking up in the morning and reading that there's an event
like rising construction costs or the builders are going broke and we hadn't been aware of
that for some time in advance.
I think I sort of started seeing construction costs rising in 2021 and it kind of really
started making mainstream media in sort of mid to late 2022.
And so we've already adjusted to that.
And what we tend to prefer to do is to back clients or borrowers where we've got an existing
relationship with a group that have demonstrated a prior track record of performance and we
have a relationship and we've got good access to information to be able to assess and manage
the risk.
We have over the last 12, 18 months, naturally, been more cautious in terms of companies that
we lent to because business or economic conditions were forecast to deteriorate.
And so therefore you adjust the terms and conditions, market liquidity becomes tighter,
which means it's actually a great environment for a lender because the risk that you take
in lending to a company reduces, you're able to negotiate tighter terms and conditions and
covenants and you're also able to pass through a higher cost of funding or higher margin.
And so you're actually getting better lending opportunities now than you did say 12 to 24
months ago.
And that's borne out in terms of the spreads that we've been delivering for our investors
both in MXT and MOT, the returns for investors in those funds have improved reflecting that
sort of market dynamic.
But importantly, what we have to look at is if things deteriorate in terms of business
or economic conditions, then we just need to make sure that when we're lending to a
company that we've got a very strong basis on which we believe that that company is going
to perform regardless of the deterioration.
And interesting, when we look at our portfolio, people sort of say, oh, sub-investment grade
borrowers represent the greatest level of risk.
Well, as of the end of May, I can sort of say that about 70% of the companies that we
lend to that are rated sub-investment grade are actually doing better financially this
year than they did in 2022, notwithstanding the increase in interest rates.
And so we have seen from May of 2022, conditions deteriorated, a number of the companies that
we were lending to were not doing as well as they had the prior 12 months.
And then in recent months, that trend has turned around.
Whether or not that's companies responding in the form of cutting costs.
And in this environment, it's hard to get top-line revenue growth.
So management teams to have flat to declining earnings would be expected unless management
teams can adjust.
They might be pushing through price rises or they might be cutting costs to preserve
or grow earnings.
And so good quality management teams are able to deliver that even in difficult market conditions.
And that's what we're seeing across our portfolio.
Yeah, I'm seeing that quite a lot as well.
A lot of people I'm speaking to, there's businesses that used to be growth at any price.
And now it's all about watching the bottom line, tighten that belt.
I had a conversation with a friend of mine the other day and they're perhaps the entire
strategy is essentially wait for that turn in a thematic and looking for the company
that survives.
Scrap at the bottom and then it's rational.
They survive at the bottom.
They're hardened like after a war, then they essentially pick up whatever's left.
And I think it's a fantastic strategy.
You have to have a lot of patience to be able to do that.
But yeah, I can understand.
That's the difference between debt and equity.
As a lender, I'm looking for companies that can generate earnings and cash flow.
I was in the most recent sort of market run work, we're prepared to lend money or invest
money in companies that had not yet proven a business plan or a business strategy, had
no point of difference and we're losing money.
And those companies have obviously struggled in terms of gaining continued access to capital
to fund their operations.
And that's where they fail.
When you lend to a company, what's the type of what's the ideal type of company?
That's a terrible question.
Like what's the minimum size of a company you would look to lend to?
What are the size loans?
What's the cost of money?
What's essentially, give us an example.
We would sort of do everything sort of from 25 million to 250 million in terms of loan
size.
And most companies that we would lend to would be sort of 15 to 20 million dollars in earnings
as a minimum and large property projects, 200 plus apartments, 400 land subdivisions,
large scale industrial development projects and the like.
So they're not small companies.
And often it might be that it might be ourselves together with one or two other banks that
might be providing the financing to the company.
It might be very rarely would we do transactions where there are other non-bank lenders.
Most of the transactions that we enter into would be ourselves and banks providing the
debt financing to companies.
Or if it's a property transaction, it might be ourselves on a sole basis providing funding
for the whole of the project.
What's the current cost for money for these projects currently?
It varies, right?
So it's such an interesting question, right?
Because depending on the credit quality and the availability of capital for a particular
borrower, high investment grade borrowers might be borrowing at say a margin of 2%,
whereas a sub-investment grade borrower might be paying 500 or 5 to 6% as a margin.
Or if it's a mezzanine transaction, it might be 15 to 20%.
It really just depends on where you sit in the capital structure, the availability of
capital, the risk that a lender thinks they're taking, and then what is the appropriate return
that should be negotiated with that borrower.
We're seeing a lot of private lending running around to like 12 to 15% currently.
And then on the conservative side, it's RBA plus five.
That's why I was just curious, because the deals that you're doing are a substantially
larger size.
And these are the things that people are coming to ask for on the private side or other friends.
But this is what you do.
So I was just very curious.
I've seen a lot of lenders say that you should be generating X return.
Well, it doesn't work that way.
As a private market fund manager, at the end of it, it's credit quality that is the most
important thing that you can deliver for investors.
Protection, preservation of capital, and then making sure you're generating it.
Don't lose money.
What's rule number one?
Don't lose money.
What's rule number two?
Don't lose money.
Don't forget number one.
And then big inflation.
That's all that matters.
Yeah.
And that's at the end of it.
That's what we're about.
We've been very clear that at the end of it, we need to first and foremost is protect
and preserve investor capital and take appropriate action to lend to good companies on appropriate
terms, protecting the downside risk.
But at the same time, use our skill set in terms of the relationships, networks, and
speed and service to be able to generate a return for investors through fees and margins
that can be charged to those companies.
We're not trying to...
At the end of it, our role is to provide a service to the companies that we lend money
to.
We believe that we provide a high level of service.
We're responsive.
We've got a range of different solutions that can be provided to that company to support
their activities.
But we do that and we invest in the relationship with the companies because we believe it delivers
good outcomes for our investors.
And so that relationship, that service is important in terms of making sure that you're
charging a fair price for the credit that you're providing.
We think that our investors provide a valuable source of non-bank finance to a company as
a means to help those companies diversify their sources of risk away from the banks.
And so therefore, we believe that our investors should be rewarded appropriately with an appropriate
return for that risk.
So on the interest rates, thank you very much for that.
On the interest rates, the cash rate is 4.1 right now.
If that...
I just remember the GFC, everyone's like, oh, it's never going to get to where it got
and then it got there.
So I'm just going on the logic that it's anchoring theory, right?
I can't go there because of what happened last time.
So on the basis that potentially an event occurs that everyone's like, oh, that can't
happen.
What do you think the impact of markets will be?
Sorry, in the lending space and property, what do you think the actual impact will be?
I think there are a lot of people that didn't think rates would get as high as they are
today.
At the end of it, the Reserve Bank is clearly attempting to slow economic activity.
We haven't seen any material lift in unemployment levels.
We've got a lot of companies that are in strong financial position.
We've got a very tight housing market.
We've got increasing immigration flows.
There's a range of pressures in the economy.
But I think that anyone that makes decisions based on it can't get any worse than it is
today or they didn't forecast a material change is not taking appropriate action.
At the end of it, we don't lend on the basis of she'll be right or that it's only going
to be one basis.
Yeah, but people borrow on the basis of, yeah, she'll be right.
I can't go much higher, can I, surely?
And then you can't go to a barbecue now without someone going, I didn't think my mortgage
is going to go up 200% in the past six months.
Surely it's not going to go up any higher.
And then like, yes, it's just normal human beings at the lower level, but the domino
impact decreases the capacity of what they could spend, their discretionary income.
It just ticks and ticks and ticks.
And this is the companies.
And then all of a sudden, it's just a material slowdown.
So that's all right.
Look, this is what you do.
So I'm very curious of what you're seeing the impacts will be in your area and then
the domino effect of what you think the outcome will be.
Oh, look, I think it's too much of a crystal ball, but I'm just very curious to hear what
you're seeing.
No, no, no, I think it's fair, because at the end of it, I look at it and sort of say,
revenue should slow.
Valuation should be declining because of rising interest rates.
Some of that hasn't flowed through yet.
So the way management teams will respond to the demands from shareholders to generate
increased earnings will be to address costs.
And generally, to address costs means rising unemployment.
And we haven't really seen that yet.
So I think we may be fortunate that as a result of some sort of easing of supply chain pressures,
things may not continue to be as inflationary.
But I think realistically, while we've got a war in Ukraine and while we've got continuing
supply chain disruptions coming off the back of COVID, I think that it's going to take
some time.
If I look at the delays in certain industries in terms of access to supplies and those sorts
of things, they're still materially impacted.
Market conditions haven't restored.
The conditions haven't restored.
So there's still disruption flowing through and that may take some time.
And then I think from our perspective, we remain cautious in terms of how we see the
market.
And over the last 12, 18 months, we've really been giving priority to existing borrow relationships
to help us manage the risk across our portfolios.
And I think that's a sensible approach in any period where you've got volatile business
or economic or uncertain business or economic conditions for a lender.
It's pretty interesting.
Now, because of the time, we'll get into a bit of the mechanics.
So what are the fees for the fund?
And how's the fee structured?
Yep.
So MXT and the Metrics Direct Income Fund.
So MXT is the Metrics Master Income Trust ASX listed.
MDIF or the Metrics Direct Income Fund is an unlisted managed fund version of MXT.
Bit of a convoluted way to say it, but that's the reality of it.
Both of them are similar in terms of fee construct, which is around about total cost of about
60 basis points to an investor.
And there are some performance fees if we outperform various return targets.
MOT is really more of a high yielding fund where we also seek to deliver equity upside.
And so that particular fund, not only do we lend money to companies, but if we can secure
warrants or options or take an equity stake in the company, we'll do that to drive additional
value for our investors.
So it might be that we've negotiated a profit share or something.
So in that particular fund, the management fee is around about 125 basis points and the
total cost to an investor is around about 140 basis points, so 1.4% total cost to an
investor.
That fund seeks to deliver a minimum return of cash, a cash coupon of 7%.
And that was being delivered when the RBA cash rate was 10 basis points.
So the target was set back in 2019.
But obviously, we obviously think that given the market conditions, we'll exceed that now
with a total return for investors between 8% to 10%.
And again, given where market conditions are, that target return should be exceeded as a
result of just the general uptick in terms of rates and opportunities set for us.
And the direct income fund?
The metrics direct income fund is about 60 basis points total cost.
So the difference between the metrics direct income fund and the Metrics Master Income
Trust, Metrics Master Income Trust, ASX listed, people can buy and sell on the stock exchange
daily.
Metrics Direct Income Fund, it's unlisted.
So you reduce the risk around how it might trade on the stock exchange.
So more likely to trade at the NAV, but liquidity is available monthly.
So you've got two different options.
Are they the same portfolios?
So essentially, the MXT is what a trust that essentially owns shares in the funds to provide
liquidity to the trades.
Yeah, OK.
Yeah, and MDIF is the same.
So MXT at the moment is about a 5% discount to its NAV, whereas people buying on the unlisted
fund are paying 5% more for the same portfolio.
But they're doing that on the basis they believe it's less risk because of the traded price
on the ASX.
Yeah, we discuss that quite a lot with clients.
So with alignment, how the reason why we ask the question of remuneration is what we've
learned with behavioral psychology we've seen in the years is how people are remunerated
generally derives the decisions they make when they're making investments.
So essentially, how's the remuneration structured?
For metrics, for myself and my partners.
How does it all work?
Whole airline with the interests of our investors.
We own 65% of the business.
We pay ourselves a wage and a dividend if we're successful.
But it's the same with our employees.
They pay the wage and they pay the bonus based on performance.
That performance is determined over a three year period so their bonus is paid out over
a number of years.
So over a three year period.
Yeah, now that's why I'm interested because sometimes if you do well in a quarter, you
get that bump, you shoot that extra 1% and then it incentivizes some managers to throw
in a bit of the juice, so to speak, a virgin bond here or there or something equivalent
and that's when things go awry.
So that's very interesting.
So you do a three year, where did that idea come from because that long term average is
very interesting.
It's very much the way APRA has formed the view that that's best practice for banks.
And you remember most of the people that work in our business have worked in banks or have
come from financial services and so that's the culture.
So the culture is very much designed to align the interests of the employee and the management
firm with the longer term interests of our investors.
So I think all of, I'd be very disappointed if there was a position that people said that
metrics funds are not investor friendly.
I think all of the funds in terms of the fee rates, the way in which we've structured them,
the way in which we've delivered on returns for investors is all designed to deliver a
great outcome for people that have invested in our funds and I'm pretty pleased to say
that's what's been delivered over the last 10 years.
No, it really has.
That's very interesting.
Thank you for that.
So is there anything, any other thoughts that you want to leave our listeners with?
No, I think it's been a pretty good summary.
Obviously if anyone's interested, there's a lot more information that can be obtained.
But I think, like all of these things, I think it's really important to assess the skill
set, the quality of the management team, their track record.
You've asked all the right questions in terms of size, scale, the types of transactions,
what drives the investment decision from a risk and return perspective?
What are the fees?
What can an investor expect?
What are the risks?
So I think we've covered an awful lot of ground and I hope that's been helpful for your listeners.
I think it's been very, very helpful.
Specifically, where can they reach you if they want more information?
They can go to our website and we'll speak to a good financial planner, financial advisor
and get information.
Obviously we have a relationship with Pinnacle Investments who also assist on the distribution
and so there's a number of ways in which people can get in contact with us or via Pinnacle
or via their financial advisor.
We've had a real commitment also in terms of providing research material to the market
to help investors understand.
So on our website there's a lot of different video clips and material on different conferences
and things like that that we've presented, LinkedIn or through some of the research groups
like Zenith and Lonsec and Bond Advisor and others that have researched our funds as well.
Fantastic.
And of course being publicly listed on the ASX means that we're subject to continuous
disclosure obligations.
So there's always good information via the ASX as well.
It always helps.
Andrew Lockhart, thank you very much for your time.
I found that very, very interesting and definitely came to catch up again in the news to see
how things get going.
Thanks very much.
Really appreciate your time.
All right.
Thanks.
Thank you.
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