1 00:00:00,000 --> 00:00:23,280 Welcome back to the Rated Change with York Wealth Management. 2 00:00:23,280 --> 00:00:27,720 As advisors to some of the wealthiest families in the country, the Rated Change is a podcast 3 00:00:27,720 --> 00:00:33,120 designed to help you in the pursuit of building long-term wealth through the insights of some 4 00:00:33,120 --> 00:00:36,120 of the brightest minds in asset management. 5 00:00:36,120 --> 00:00:40,120 I'm your host Murdoch Gatty and in today's Rockcast, we're speaking with Andrew Lockhart, 6 00:00:40,120 --> 00:00:42,040 the managing director of Metrix. 7 00:00:42,040 --> 00:00:48,400 Metrix are a leading Australian non-bank corporate lender and alternative asset manager specializing 8 00:00:48,400 --> 00:00:52,680 in fixed income, private credit, equity and capital markets. 9 00:00:52,680 --> 00:00:58,880 Metrix currently manages roughly $14 billion and gives investors access to these strategies 10 00:00:58,880 --> 00:01:03,080 via a range of unlisted and listed managed funds. 11 00:01:03,080 --> 00:01:08,040 With this approach, the flagship Metrix Direct Income Fund targets a return of RBA cash rate 12 00:01:08,040 --> 00:01:15,960 plus 3.25% and as of the 28th of July, the fund has returned 7.93% for the past year 13 00:01:15,960 --> 00:01:20,080 and has averaged 6.77% since inception. 14 00:01:20,080 --> 00:01:25,760 Andrew gives his insights of the origins of Metrix, their process and lending philosophy. 15 00:01:25,760 --> 00:01:31,520 He also outlines the private lending universe, the overall health of the loans in the portfolios 16 00:01:31,520 --> 00:01:35,320 and gives his thoughts on the outlook for private lending in current markets. 17 00:01:35,320 --> 00:01:40,360 In particular, I found the conversation on commercial property to be quite insightful. 18 00:01:40,360 --> 00:01:45,080 So before we get into the podcast, I'd also like to encourage you to listen to the disclaimer 19 00:01:45,080 --> 00:01:49,520 at the end of the Rockcast and to keep your feedback coming. 20 00:01:49,520 --> 00:01:53,800 You can reach me at mgaddy at ywm.com.au. 21 00:01:53,800 --> 00:01:58,000 So with that being said, I hope you enjoy this conversation as much as I did. 22 00:01:58,000 --> 00:02:10,560 So sit back, relax and enjoy it. 23 00:02:10,560 --> 00:02:14,400 Andrew Lockhart, welcome to the Rate of Change with York Wealth Management. 24 00:02:14,400 --> 00:02:16,200 Thank you very much for having me. 25 00:02:16,200 --> 00:02:20,440 Why don't we kick things off by telling our listeners a little bit about yourself, your 26 00:02:20,440 --> 00:02:24,080 formative years and how you got into financial markets. 27 00:02:24,080 --> 00:02:25,080 Sure. 28 00:02:25,080 --> 00:02:28,200 Well, I'm probably pretty stable. 29 00:02:28,200 --> 00:02:31,720 I actually worked for National Australia Bank for 26 years. 30 00:02:31,720 --> 00:02:33,600 So really, you might know my dad. 31 00:02:33,600 --> 00:02:34,600 I'm so sorry. 32 00:02:34,600 --> 00:02:35,600 Do you know Peter Gaddy? 33 00:02:35,600 --> 00:02:37,320 Yes, I know Peter very well. 34 00:02:37,320 --> 00:02:38,320 Yeah, he's my dad. 35 00:02:38,320 --> 00:02:39,320 He was there. 36 00:02:39,320 --> 00:02:43,840 In fact, your sister used to babysit my kids. 37 00:02:43,840 --> 00:02:44,840 What Saskia or Senya? 38 00:02:44,840 --> 00:02:45,840 Seriously? 39 00:02:45,840 --> 00:02:46,840 Saskia. 40 00:02:46,840 --> 00:02:47,840 I was not expecting that. 41 00:02:47,840 --> 00:02:48,840 That was years ago. 42 00:02:48,840 --> 00:02:49,840 Yeah, I used to drop Saskia home over at Chatswood there. 43 00:02:49,840 --> 00:02:50,840 Really? 44 00:02:50,840 --> 00:02:51,840 She's going to laugh about this. 45 00:02:51,840 --> 00:02:52,840 I'm about to send it through the podcast. 46 00:02:52,840 --> 00:02:55,840 It's because I think I'm finance, but I think you should listen to this. 47 00:02:55,840 --> 00:02:56,840 You might have a giggle. 48 00:02:56,840 --> 00:02:57,840 What a small world. 49 00:02:57,840 --> 00:03:02,840 I think she would have been, I don't know how old she was then, but she couldn't drive 50 00:03:02,840 --> 00:03:03,840 obviously. 51 00:03:03,840 --> 00:03:06,840 She must have been 15 or 16 years old. 52 00:03:06,840 --> 00:03:15,840 Wow. 53 00:03:15,840 --> 00:03:20,840 That's so funny. 54 00:03:20,840 --> 00:03:25,840 You probably know more about my family than I do. 55 00:03:25,840 --> 00:03:26,840 Your dad's a good fella. 56 00:03:26,840 --> 00:03:27,840 Excellent. 57 00:03:27,840 --> 00:03:28,840 All right. 58 00:03:28,840 --> 00:03:29,840 Well, let's get back on track. 59 00:03:29,840 --> 00:03:30,840 It's not a podcast about me. 60 00:03:30,840 --> 00:03:31,840 It's a podcast about you, mate. 61 00:03:31,840 --> 00:03:41,840 All right, so how did you get into finance after now? 62 00:03:41,840 --> 00:03:42,840 Yeah. 63 00:03:42,840 --> 00:03:52,800 I basically just finished school at the time and just had an opportunity to get a job working 64 00:03:52,800 --> 00:03:53,800 for NAB. 65 00:03:53,800 --> 00:03:58,560 I took the job, worked for NAB full-time and studied part-time. 66 00:03:58,560 --> 00:04:06,280 I went to university and did my first degree part-time while working full-time at the bank. 67 00:04:06,280 --> 00:04:11,920 I'm often doing lectures at night and all of those sorts of fun things. 68 00:04:11,920 --> 00:04:18,440 I was based in Brisbane when I first started and moved through a range of different roles 69 00:04:18,440 --> 00:04:24,560 within the bank and then moved into the corporate and institutional part of the bank and was 70 00:04:24,560 --> 00:04:28,720 relocated down to Sydney in the early 2000s. 71 00:04:28,720 --> 00:04:37,920 So moved to Sydney in about 2002 and then worked in, again, a number of different roles 72 00:04:37,920 --> 00:04:39,920 within the bank. 73 00:04:39,920 --> 00:04:45,200 One of my last roles was in what they call leverage and acquisition finance, which is 74 00:04:45,200 --> 00:04:50,280 acquisition financing to support private equity firms where they're buying companies. 75 00:04:50,280 --> 00:04:56,600 So in that role, went through the global financial crisis in that role. 76 00:04:56,600 --> 00:05:01,200 I guess at that time I saw what was really happening in terms of companies' ability 77 00:05:01,200 --> 00:05:07,040 to get access to debt financing and how reliant they were on the banks. 78 00:05:07,040 --> 00:05:15,200 As a result of that, I put a proposal to the NAB to set up what has become Metrix. 79 00:05:15,200 --> 00:05:23,560 In 2008 to 2012, spent a fair bit of time trying to work through the different channels 80 00:05:23,560 --> 00:05:30,800 within NAB's business to finally get to a position where National Australia Bank acquired 81 00:05:30,800 --> 00:05:35,960 35% equity interest in the business that was Metrix credit partners and myself and two 82 00:05:35,960 --> 00:05:42,360 of my partners then proceeded to try and raise capital from investors. 83 00:05:42,360 --> 00:05:47,840 So we spent, we thought we'd been discovered, we thought all this institutional money from 84 00:05:47,840 --> 00:05:54,960 superannuation funds would be desperate to get access to good quality lending assets 85 00:05:54,960 --> 00:05:55,960 and private markets. 86 00:05:55,960 --> 00:06:01,000 And fortunately for 12 months, we weren't able to raise a cent and it wasn't until the 87 00:06:01,000 --> 00:06:07,960 back end of 2012, off the back of a cold call that I made, we were able to secure our first 88 00:06:07,960 --> 00:06:13,160 institutional investor that committed an amount of $75 million. 89 00:06:13,160 --> 00:06:19,920 And then in 2013, after only securing that one investor, he was a bit frustrated that 90 00:06:19,920 --> 00:06:24,280 we hadn't set up the fund and threatened to withdraw his commitment if we didn't set 91 00:06:24,280 --> 00:06:25,280 up the fund. 92 00:06:25,280 --> 00:06:29,160 And so we immediately resigned and launched the business. 93 00:06:29,160 --> 00:06:36,240 So we had one investor who invested $75 million and that's how we started in June of 2013. 94 00:06:36,240 --> 00:06:39,920 Now 10 years later, we've been very fortunate. 95 00:06:39,920 --> 00:06:44,800 We've now been able to build a business that manages in excess of $15 billion. 96 00:06:44,800 --> 00:06:49,400 We provide financing to over 300 individual companies in Australia. 97 00:06:49,400 --> 00:06:55,040 We've become the largest private debt manager in the Australian market and we employ 120 98 00:06:55,040 --> 00:06:59,720 odd people in the business based in Sydney, Melbourne and expanded into Auckland and New 99 00:06:59,720 --> 00:07:01,800 Zealand. 100 00:07:01,800 --> 00:07:07,240 And now we've even started raising money from offshore investors and so we've got investors 101 00:07:07,240 --> 00:07:13,680 from Japan and starting to attract interest from European and Canadian and American investors 102 00:07:13,680 --> 00:07:14,680 as well. 103 00:07:14,680 --> 00:07:17,120 So it's been a fun 10 years. 104 00:07:17,120 --> 00:07:20,120 It's been a very, very fun 10 years. 105 00:07:20,120 --> 00:07:25,320 So there's three structures currently around, two listed, one's the direct fund. 106 00:07:25,320 --> 00:07:30,520 Do you want to give a bit of colour around the different strategies and how they're structured? 107 00:07:30,520 --> 00:07:36,520 Yeah, I've always from the view that investors, if they understand what they're trying to 108 00:07:36,520 --> 00:07:43,200 achieve, what return objective does an investor want to achieve, then really that return objective 109 00:07:43,200 --> 00:07:48,680 needs to marry up with the risk and then for an investment to be successful, investors 110 00:07:48,680 --> 00:07:50,920 need to know how do they control their money. 111 00:07:50,920 --> 00:07:55,360 So if they're investing in managed funds, they can invest in a fund if it's delivering 112 00:07:55,360 --> 00:08:00,800 on the target return or their circumstances change, they might want to withdraw their 113 00:08:00,800 --> 00:08:01,800 money. 114 00:08:01,800 --> 00:08:07,440 And so how investors gain the right risk adjusted return but also maintaining access to their 115 00:08:07,440 --> 00:08:11,600 capital and the power over that capital I think is important. 116 00:08:11,600 --> 00:08:18,960 And so we back in October of 2017 launched what is the Metrics Master Income Trust or 117 00:08:18,960 --> 00:08:27,000 MXT, which was the first ASX listed credit fund or private debt fund. 118 00:08:27,000 --> 00:08:34,080 That was really at the time we launched that in response to the fact that most investors 119 00:08:34,080 --> 00:08:40,080 really had only had the opportunity to buy hybrids or put money on term deposit as the 120 00:08:40,080 --> 00:08:45,320 way in which they could get an income from sort of more stable assets. 121 00:08:45,320 --> 00:08:49,600 And so we thought that it would be a good opportunity for investors to gain exposure 122 00:08:49,600 --> 00:08:55,680 to private market loans to Australian companies, but do it in a way where they could buy and 123 00:08:55,680 --> 00:08:59,360 sell those units on the exchange as a means to get liquidity. 124 00:08:59,360 --> 00:09:04,320 So if you think about our market, most Australian companies don't have a credit rating. 125 00:09:04,320 --> 00:09:07,280 So they're not rated by S&P or Moody's. 126 00:09:07,280 --> 00:09:11,640 We don't have a bond market of any substantial size or scale. 127 00:09:11,640 --> 00:09:15,600 Most borrowers are pretty heavily reliant on the banks for funding. 128 00:09:15,600 --> 00:09:20,560 And so when you go through a period like the GFC, you realise how risky that is for Australian 129 00:09:20,560 --> 00:09:23,720 companies in terms of how they've diversified their funding sources. 130 00:09:23,720 --> 00:09:25,960 They're heavily reliant on the banks. 131 00:09:25,960 --> 00:09:29,760 And so if the banks choose not to be in a position or can't be in a position to lend 132 00:09:29,760 --> 00:09:35,680 because regulatory changes impact their business and becomes less appealing, those companies 133 00:09:35,680 --> 00:09:39,520 have got limited options in terms of how they finance their activities. 134 00:09:39,520 --> 00:09:45,400 And so one thing we wanted to do was to provide an important source of non-bank finance to 135 00:09:45,400 --> 00:09:51,480 Australian companies, but equally creating investment product that catered to that sort 136 00:09:51,480 --> 00:09:56,440 of need for people to be able to invest and get stability of capital with an attractive 137 00:09:56,440 --> 00:10:03,200 income that does better than, say, alternative assets like a hybrid or a deposit or a bond. 138 00:10:03,200 --> 00:10:06,000 And so that's the reason we launched MXT. 139 00:10:06,000 --> 00:10:09,480 And so we launched MXT in October 2017. 140 00:10:09,480 --> 00:10:15,960 MXT seeks to deliver investors the RBA cash rate plus 3.25 net to an investor. 141 00:10:15,960 --> 00:10:21,160 At the moment, in the last 12 months, it's yielding in excess of close on 5% over the 142 00:10:21,160 --> 00:10:22,160 RBA cash rate. 143 00:10:22,160 --> 00:10:29,040 So RBA cash rate today, 4.1 plus around 5% in excess of 9% net. 144 00:10:29,040 --> 00:10:35,000 When you look at, you know, I was looking at a 12-month term deposit just before I came 145 00:10:35,000 --> 00:10:40,400 on the show, and there are around high 4s to 5% was about the best rate that you could 146 00:10:40,400 --> 00:10:42,840 get for a 12-month term deposit. 147 00:10:42,840 --> 00:10:48,280 Now, obviously, an investment in MXT is not equivalent to a cash deposit. 148 00:10:48,280 --> 00:10:53,960 Certainly, those that have got the benefit of a government guarantee of less than $250,000, 149 00:10:53,960 --> 00:10:54,960 it's not a cash deposit. 150 00:10:54,960 --> 00:10:57,240 So there's a greater element of risk. 151 00:10:57,240 --> 00:11:02,400 What an investor hopefully is picking up is excess return. 152 00:11:02,400 --> 00:11:07,320 And what we've also tried to do is demonstrate our skill set in terms of how we manage credit 153 00:11:07,320 --> 00:11:13,440 risk and diversify the portfolio so investors are not exposed to any one single large borrower 154 00:11:13,440 --> 00:11:14,440 exposure. 155 00:11:14,440 --> 00:11:17,920 So investors can invest in MXT. 156 00:11:17,920 --> 00:11:23,760 They get exposure to over 300 individual companies that we lend to, where the average exposure 157 00:11:23,760 --> 00:11:27,680 to any one individual company is around about half a percent. 158 00:11:27,680 --> 00:11:33,720 Income is distributed every month, so unlike that deposit example or a hybrid where income 159 00:11:33,720 --> 00:11:39,720 distributions are less frequent, with MXT or MOT, the investor receives their income 160 00:11:39,720 --> 00:11:43,600 every month, and they can buy and sell whenever they want on the stock exchange. 161 00:11:43,600 --> 00:11:52,240 So really, it's giving them a daily liquid tradable investment that is a higher yielding, 162 00:11:52,240 --> 00:11:56,840 higher returning instrument than they would in other alternative assets. 163 00:11:56,840 --> 00:11:58,600 So that's the reason for it. 164 00:11:58,600 --> 00:12:02,320 It's really being designed to give investors an alternative. 165 00:12:02,320 --> 00:12:09,680 And I sort of think that whilst the traded price of MXT or MOT may change because of 166 00:12:09,680 --> 00:12:14,440 liquidity on the stock exchange, so people are buying and selling, the traded price may 167 00:12:14,440 --> 00:12:18,880 trade away from the quoted NAV of the fund. 168 00:12:18,880 --> 00:12:23,040 But the quoted NAV of the funds have been very stable since we launched them. 169 00:12:23,040 --> 00:12:31,880 It listed at $2, and basically the NAV of MXT has been stable at $2 since it's listed. 170 00:12:31,880 --> 00:12:35,800 Traded prices varied, like shares and other investments. 171 00:12:35,800 --> 00:12:39,240 Sometimes it trades at a premium, sometimes it's at a discount. 172 00:12:39,240 --> 00:12:43,640 But the fundamentals of what we've invested in have been very, very stable for investors. 173 00:12:43,640 --> 00:12:49,520 And I think one of the reasons for that is if you think about a loan, where you sit in 174 00:12:49,520 --> 00:12:52,160 the capital structure, it actually reduces risk. 175 00:12:52,160 --> 00:12:56,440 Obviously, equity is the asset class that is more volatile. 176 00:12:56,440 --> 00:13:01,240 Equity in people investing in shares or equity to get growth in earnings and growth in capital 177 00:13:01,240 --> 00:13:03,000 values. 178 00:13:03,000 --> 00:13:09,000 And equity is the asset class that is the highest risk in the context of the capital 179 00:13:09,000 --> 00:13:10,080 structure. 180 00:13:10,080 --> 00:13:17,360 So a loan or debt, particularly a secured debt, ranks in priority to all other creditors 181 00:13:17,360 --> 00:13:20,040 or claims against the company. 182 00:13:20,040 --> 00:13:25,720 And so if a company was to deteriorate, the impact in declining valuations or the fortunes 183 00:13:25,720 --> 00:13:31,320 of that company would be borne first by shareholders and then unsecured creditors, and then finally 184 00:13:31,320 --> 00:13:32,320 by a lender. 185 00:13:32,320 --> 00:13:38,680 So that equity really provides that buffer that protects our capital against the risk 186 00:13:38,680 --> 00:13:41,960 of loss. 187 00:13:41,960 --> 00:13:46,240 So a lot of people ask, and you're seeing it quite a lot, because everyone's used to 188 00:13:46,240 --> 00:13:47,240 essentially the bank's lending. 189 00:13:47,240 --> 00:13:51,400 You've got a business idea, you go to the bank, you give your pitch, and they give you 190 00:13:51,400 --> 00:13:52,400 a loan, right? 191 00:13:52,400 --> 00:13:56,560 But ever since the GFC, they've kind of spun out that risk component, which is, I suppose, 192 00:13:56,560 --> 00:13:57,560 your business. 193 00:13:57,560 --> 00:14:00,920 So there's a lot of listeners that really understand the context of this. 194 00:14:00,920 --> 00:14:04,080 But do you mind giving a bit of color for people that really don't understand exactly 195 00:14:04,080 --> 00:14:05,520 what the opportunity is? 196 00:14:05,520 --> 00:14:09,640 Because when I'm discussing some of these strategies in the year in 9, 10, 11, and as 197 00:14:09,640 --> 00:14:14,080 you said correctly, they're looking at the term deposit and going, how could it be double? 198 00:14:14,080 --> 00:14:15,080 Isn't this risky? 199 00:14:15,080 --> 00:14:20,800 Can you actually explain exactly what the opportunity is and why it exists? 200 00:14:20,800 --> 00:14:27,360 So if you think about a bank, what a bank is actually doing is they're taking money 201 00:14:27,360 --> 00:14:31,720 from retail or depositors, and they'll pay you a rate. 202 00:14:31,720 --> 00:14:36,840 They borrow money in wholesale funding markets issuing bonds to investors, and they pay a 203 00:14:36,840 --> 00:14:37,840 rate. 204 00:14:37,840 --> 00:14:43,040 And then what they do is they then add a margin on top of that, which is paid to shareholders 205 00:14:43,040 --> 00:14:45,480 in the form of returns, right? 206 00:14:45,480 --> 00:14:52,160 Whereas what we're actually doing is providing to our investors the full return associated 207 00:14:52,160 --> 00:14:55,000 with the loan that we've made, less our management fee. 208 00:14:55,000 --> 00:15:01,960 Now, our management fee is materially lower than the excess NIM that's paid to shareholders. 209 00:15:01,960 --> 00:15:06,520 So if you think about when you put money on deposit or you buy a bond and it's a bank 210 00:15:06,520 --> 00:15:13,480 bond, you're effectively providing financing to allow the bank to lend to the company. 211 00:15:13,480 --> 00:15:18,080 And then they will charge a higher fee and margin to that company, and the excess return 212 00:15:18,080 --> 00:15:19,080 goes to shareholders. 213 00:15:19,080 --> 00:15:24,520 Whereas in our case, hopefully the excess return is going to the investor. 214 00:15:24,520 --> 00:15:30,000 And so we raise capital through the issuing units. 215 00:15:30,000 --> 00:15:32,520 That capital gets aggregated and we lend to companies. 216 00:15:32,520 --> 00:15:39,240 And so the returns, the areas that we lend to corporates are both large scale, publicly 217 00:15:39,240 --> 00:15:41,360 listed and private companies. 218 00:15:41,360 --> 00:15:49,480 So if you think about companies like Woolworths, Origin Energy, Ramsey Healthcare, Steadfast, 219 00:15:49,480 --> 00:15:56,880 Brickworks, Metcash, they're examples of companies that have borrowed money from banks and lenders. 220 00:15:56,880 --> 00:16:00,600 And we also provide financing to those companies. 221 00:16:00,600 --> 00:16:08,640 There's a range of private equity firm owned companies, so companies like Arnott's, TimeZone, 222 00:16:08,640 --> 00:16:14,760 a bunch of privately owned companies, HealthScope, the private hospital group and others. 223 00:16:14,760 --> 00:16:19,760 There's a range of property related transactions where involved in real estate, so residential 224 00:16:19,760 --> 00:16:25,840 high rise apartment buildings or land subdivisions or big industrial developments. 225 00:16:25,840 --> 00:16:29,040 And then there's project financing, which is the fourth area where we lend. 226 00:16:29,040 --> 00:16:35,720 And that's usually toll roads like West Connex or the Mornington Peninsula Motorway or the 227 00:16:35,720 --> 00:16:42,360 Victorian Cancer Centre are examples of Perth Stadium is an example where these are companies 228 00:16:42,360 --> 00:16:46,160 or projects that have borrowed money from banks and from other lenders. 229 00:16:46,160 --> 00:16:51,320 And they've used that to build their business or their project, undertake the project. 230 00:16:51,320 --> 00:16:58,040 And that debt financing together with shareholders capital is what is used to own the asset. 231 00:16:58,040 --> 00:17:06,120 Now the risk to an investor in the equity is that the value of the company or the project 232 00:17:06,120 --> 00:17:08,640 might go up and down. 233 00:17:08,640 --> 00:17:14,520 For us as a lender, what we're trying to do is make sure that the value doesn't go below 234 00:17:14,520 --> 00:17:16,520 how much we have lent. 235 00:17:16,520 --> 00:17:22,680 So equity wears that risk before we as a lender are exposed to any potential risk of loss. 236 00:17:22,680 --> 00:17:27,520 So I don't think it's ever been as easy as you've got a business plan, you go to the 237 00:17:27,520 --> 00:17:29,600 bank and the banks are going to fund you. 238 00:17:29,600 --> 00:17:35,960 I think over time, banks and lenders like myself are pretty cautious in terms of thinking 239 00:17:35,960 --> 00:17:37,320 about what the risk is. 240 00:17:37,320 --> 00:17:43,760 And so what our role is as a lender is really to look at every business or project that 241 00:17:43,760 --> 00:17:46,200 we're involved in financing. 242 00:17:46,200 --> 00:17:50,240 And we undertake a lot of what we call due diligence. 243 00:17:50,240 --> 00:17:57,120 So you're looking at financials, tax, legal structure, legal risks within the business, 244 00:17:57,120 --> 00:18:01,400 the commercial risk, what's management strategy, what's the position of the company and its 245 00:18:01,400 --> 00:18:07,160 industry, what is really going to drive the revenue associated with that company. 246 00:18:07,160 --> 00:18:13,400 So if you think about it, a company's got a thousand customers, customers pay a certain 247 00:18:13,400 --> 00:18:19,360 amount each, a thousand customers by $10 gives you the revenue that that company is going 248 00:18:19,360 --> 00:18:20,360 to generate. 249 00:18:20,360 --> 00:18:21,360 Simplistically. 250 00:18:21,360 --> 00:18:26,320 You're mainly lending to property backed or essentially where you lend to a business that 251 00:18:26,320 --> 00:18:27,320 has no property. 252 00:18:27,320 --> 00:18:31,560 I know it takes a lot more work, but what's the split? 253 00:18:31,560 --> 00:18:38,360 We lend about 60% of the loans that we've made to for property purposes. 254 00:18:38,360 --> 00:18:40,840 So we have direct security over the property. 255 00:18:40,840 --> 00:18:45,440 So mortgage over the property, we're fixing floating charge over the company, personal 256 00:18:45,440 --> 00:18:48,720 guarantees from equity sponsors. 257 00:18:48,720 --> 00:18:50,120 That's part of that security mix. 258 00:18:50,120 --> 00:18:55,000 But there are other companies where there are no hard assets in real estate and we're 259 00:18:55,000 --> 00:18:57,360 funding against the cashflow of that business. 260 00:18:57,360 --> 00:19:02,200 So invariably what you're looking for there are companies that are generating good, strong 261 00:19:02,200 --> 00:19:07,240 earnings, well diversified business models, well positioned in their industry or structure. 262 00:19:07,240 --> 00:19:16,200 So if you think about services business like dental care or medical pathology businesses 263 00:19:16,200 --> 00:19:21,600 or there are sorts of companies where they may not own any property, but we're providing 264 00:19:21,600 --> 00:19:27,200 funding against those businesses and you're looking at what is the level of earnings that 265 00:19:27,200 --> 00:19:29,480 can be generated by that company. 266 00:19:29,480 --> 00:19:34,340 What's the cash that can be generated to be able to service and repay your debt? 267 00:19:34,340 --> 00:19:39,640 So with those areas, you mentioned 60% in property, what's the sector risks in the portfolio? 268 00:19:39,640 --> 00:19:43,960 Because you said it covers quite narrow, what's the breakdown? 269 00:19:43,960 --> 00:19:44,960 It's interesting. 270 00:19:44,960 --> 00:19:49,320 Sector exposure is less of the less relevant metrics. 271 00:19:49,320 --> 00:19:54,280 So the most important thing is what exposure do you have to any one individual counterparty? 272 00:19:54,280 --> 00:19:59,360 So for instance, if I say to you that we've got about 60% of our exposure in property 273 00:19:59,360 --> 00:20:08,440 related debt, that gets then broken down into a mix of industrial, residential hotels. 274 00:20:08,440 --> 00:20:12,960 For instance, we're involved in the financing of the Soffertel Wentworth Hotel or the Hilton 275 00:20:12,960 --> 00:20:16,120 Hotel in Sydney. 276 00:20:16,120 --> 00:20:21,000 We might be financing 300 apartments being built in Western Sydney. 277 00:20:21,000 --> 00:20:23,680 It can be a whole range of things. 278 00:20:23,680 --> 00:20:26,360 And it's then spread geographically. 279 00:20:26,360 --> 00:20:30,080 So you've got to look at it in terms of what's the... 280 00:20:30,080 --> 00:20:34,120 And each individual loan has different terms and conditions. 281 00:20:34,120 --> 00:20:42,680 So for instance, say I'm financing an industrial property in the Port of Brisbane, it's going 282 00:20:42,680 --> 00:20:49,040 to be quite different risk profile to say residential high density apartment building 283 00:20:49,040 --> 00:20:57,480 being built in Sydney, which will be different again to say a land subdivision in Melbourne. 284 00:20:57,480 --> 00:21:01,440 You've got three different borrowers, three different locations. 285 00:21:01,440 --> 00:21:05,180 The risk profile of each of those transactions will be quite different. 286 00:21:05,180 --> 00:21:11,000 So it's not like we lend the same loan to valuation ratio across each individual asset. 287 00:21:11,000 --> 00:21:13,040 What we're looking for is... 288 00:21:13,040 --> 00:21:17,080 So in the case of the residential apartment building being built in Sydney, it might be 289 00:21:17,080 --> 00:21:21,880 that all of the apartments have been sold, they've been pre-sold. 290 00:21:21,880 --> 00:21:26,840 And so we're looking for completion of the project, on completion of the project, the 291 00:21:26,840 --> 00:21:32,160 consumers that are buying those apartments to live in, buy those apartments and they're 292 00:21:32,160 --> 00:21:34,600 the source of repayment of our facility. 293 00:21:34,600 --> 00:21:40,960 So unlike a bank that will provide a 25, 30 year mortgage to a consumer, it might be lending 294 00:21:40,960 --> 00:21:47,160 85, 90% of the value of the property for us, what we're lending is maybe 60% of the value 295 00:21:47,160 --> 00:21:53,120 of that property on completion and our source of repayment inside two years is from the 296 00:21:53,120 --> 00:21:56,480 completion of the project and the sale of the assets. 297 00:21:56,480 --> 00:21:58,640 So it's quite different. 298 00:21:58,640 --> 00:22:03,240 The driver for us is what's the driver of the cashflow? 299 00:22:03,240 --> 00:22:04,880 What's our source of repayment? 300 00:22:04,880 --> 00:22:08,080 What's the risk to that source of repayment? 301 00:22:08,080 --> 00:22:12,480 And then what are the ways in which we can structure the loan to mitigate any potential 302 00:22:12,480 --> 00:22:14,760 risk of loss of capital to us? 303 00:22:14,760 --> 00:22:15,760 So that might be... 304 00:22:15,760 --> 00:22:19,520 Well, I think you just touched on the main thing, loss of capital. 305 00:22:19,520 --> 00:22:23,160 So essentially, and that's why I was asking the question, what's the breakdown? 306 00:22:23,160 --> 00:22:27,520 Because I'm speaking to lots of clients, people up Gold Coast Way, there's families, very 307 00:22:27,520 --> 00:22:31,520 big families up there that probably the biggest families associated with building Rezzy, they've 308 00:22:31,520 --> 00:22:33,000 just refused, they've just stopped. 309 00:22:33,000 --> 00:22:37,000 I was speaking to a mate the other day, I'm associated with a company up there that's 310 00:22:37,000 --> 00:22:38,800 running 52 cranes. 311 00:22:38,800 --> 00:22:41,840 No cranes are working, operational, no one's turning soil. 312 00:22:41,840 --> 00:22:44,280 Yes, you've got the Olympics coming in. 313 00:22:44,280 --> 00:22:48,320 And then you have a number of people talking about rates rising. 314 00:22:48,320 --> 00:22:49,720 And then everyone's like, oh, no, I'll be fine. 315 00:22:49,720 --> 00:22:50,720 They'll pause. 316 00:22:50,720 --> 00:22:53,120 The Fed just paused, but they're secretly going to keep on going. 317 00:22:53,120 --> 00:22:57,960 So no one's seen it for a while, but people mentioned it in a whisper. 318 00:22:57,960 --> 00:22:58,960 They don't want it to happen. 319 00:22:58,960 --> 00:23:01,120 But people are discussing credit crisis. 320 00:23:01,120 --> 00:23:04,640 And you're starting to see a number of large builders go under. 321 00:23:04,640 --> 00:23:08,920 You've seen them in Sydney, the MLC Centre, heaps of places. 322 00:23:08,920 --> 00:23:11,600 And then the domino impact. 323 00:23:11,600 --> 00:23:16,880 So that's why I was asking what percentage of houses are broken up in the fund? 324 00:23:16,880 --> 00:23:18,600 What's the liability there? 325 00:23:18,600 --> 00:23:25,000 I'm very interested to hear your opinion on what's going on there. 326 00:23:25,000 --> 00:23:27,760 I think the market conditions are pretty tough. 327 00:23:27,760 --> 00:23:33,920 If I look at residential markets around the country, you've got very low supply, you've 328 00:23:33,920 --> 00:23:39,320 got very low vacancy rates, you've got rising rents, and you've got a very difficult construction 329 00:23:39,320 --> 00:23:40,320 market. 330 00:23:40,320 --> 00:23:43,800 You've had rising construction costs really since 2021. 331 00:23:43,800 --> 00:23:50,080 So 2022 saw material construction costs rises. 332 00:23:50,080 --> 00:23:55,600 You've got issues around government planning approvals and the speed of councils and governments 333 00:23:55,600 --> 00:24:00,400 to approve residential development sites and those sorts of things. 334 00:24:00,400 --> 00:24:08,240 You've had a lot of very wet weather through 2021 and 2022 on the east coast of Australia, 335 00:24:08,240 --> 00:24:09,640 which delayed a lot of projects. 336 00:24:09,640 --> 00:24:15,400 So all of those sorts of things are things that can impact the viability or the profitability 337 00:24:15,400 --> 00:24:16,400 of a project. 338 00:24:16,400 --> 00:24:21,680 Our role as a lender, though, is to make sure that when we lend those projects, that our 339 00:24:21,680 --> 00:24:22,920 risk is mitigated. 340 00:24:22,920 --> 00:24:28,640 And so if I'm lending for construction, you'll have a construction contingency that says, 341 00:24:28,640 --> 00:24:33,760 okay, if there are cost overruns, we've already accommodated that in the project budget and 342 00:24:33,760 --> 00:24:35,160 it's funded. 343 00:24:35,160 --> 00:24:40,560 If there are delays to the delivery of the project because of inclement weather or union 344 00:24:40,560 --> 00:24:49,000 stoppages or COVID disruptions to supply chains, the project can sustain an extended period 345 00:24:49,000 --> 00:24:51,320 of time where it can't be completed. 346 00:24:51,320 --> 00:24:56,860 And so what you're doing is as you assess those risks and you build in contingencies 347 00:24:56,860 --> 00:25:03,320 for time, for costs, for finance costs and everything, that has to be funded by equity. 348 00:25:03,320 --> 00:25:07,800 And so you're 100% right, there are builders, there's a lot of pressure and a lot of stress 349 00:25:07,800 --> 00:25:10,880 in different parts of the market. 350 00:25:10,880 --> 00:25:15,520 But largely what's occurred is the risk has been borne by those that have ended into fixed 351 00:25:15,520 --> 00:25:20,400 price contracts and then been subjected to increasing build and material prices that 352 00:25:20,400 --> 00:25:21,720 have flowed through. 353 00:25:21,720 --> 00:25:26,280 So as a lender, one of the things that we want is to make sure that when we lend money, 354 00:25:26,280 --> 00:25:31,200 we're lending against a fixed price contract so we know what the cost is going to be. 355 00:25:31,200 --> 00:25:36,000 We want to see an alignment between the interests of ourselves as a lender and the borrower. 356 00:25:36,000 --> 00:25:40,020 So we want to know that the borrower has got deep pockets and got the financial wherewithal. 357 00:25:40,020 --> 00:25:47,080 So if something goes wrong, it's the borrower who is going to put in the cash to correct 358 00:25:47,080 --> 00:25:49,520 any shortfall. 359 00:25:49,520 --> 00:25:57,920 So if you think about it, say weather causes a delay in a project or rising interest rates 360 00:25:57,920 --> 00:26:03,600 force the finance costs higher, means that the project margin might be squeezed and the 361 00:26:03,600 --> 00:26:08,840 project might not be as profitable as what was originally forecast when the developer 362 00:26:08,840 --> 00:26:09,840 entered into the project. 363 00:26:09,840 --> 00:26:13,040 But it doesn't mean that we as a lender should be wearing any risk. 364 00:26:13,040 --> 00:26:18,540 That has to be borne by those that are intended to profit from it, which is equity. 365 00:26:18,540 --> 00:26:21,760 So if you're coming to a project, you're thinking, I'm going to do this project and 366 00:26:21,760 --> 00:26:28,240 I'm going to make 20% plus and it doesn't turn out that way, then our role as a lender 367 00:26:28,240 --> 00:26:34,040 is to make sure that we've protected our investors' capital and forecast those potential 368 00:26:34,040 --> 00:26:39,880 deteriorations or declines and that we can complete the project and hopefully the client 369 00:26:39,880 --> 00:26:43,680 will make money on the project, but they may not have made as much as they might have thought 370 00:26:43,680 --> 00:26:46,720 when they first went into the deal. 371 00:26:46,720 --> 00:26:52,960 To give you an idea, to bring on a residential development project in, say in Sydney, you're 372 00:26:52,960 --> 00:26:55,680 talking five plus years. 373 00:26:55,680 --> 00:26:59,960 By the time you've bought the land, you've got the planning outcome, you've sold the 374 00:26:59,960 --> 00:27:03,760 project, you've negotiated all your construction costs and everything. 375 00:27:03,760 --> 00:27:10,540 These are long term projects and that's why they should be rewarded with good margins 376 00:27:10,540 --> 00:27:12,560 and they should be profitable projects. 377 00:27:12,560 --> 00:27:19,560 In times when market conditions deteriorate, unfortunately, it may not always be the case. 378 00:27:19,560 --> 00:27:23,160 It's very different lending for a project compared to say lending to the contractor 379 00:27:23,160 --> 00:27:24,800 that's wearing that risk. 380 00:27:24,800 --> 00:27:27,680 So we don't lend to construction contractors. 381 00:27:27,680 --> 00:27:31,680 Generally a construction contractor works on a much finer margin. 382 00:27:31,680 --> 00:27:36,280 Like if you're thinking about the property developer, he's bought the land, he's secured 383 00:27:36,280 --> 00:27:41,320 the development approval, he's negotiated the construction contracts, delivered the 384 00:27:41,320 --> 00:27:44,720 project, sold and marketed the property to purchases. 385 00:27:44,720 --> 00:27:50,440 There's a lot of work that goes into that as opposed to the one aspect which is the 386 00:27:50,440 --> 00:27:55,560 delivery of the construction which might be undertaken by a third party builder. 387 00:27:55,560 --> 00:28:00,560 Now those third party builders have a role in maybe coordinating all of the various trades 388 00:28:00,560 --> 00:28:04,760 and monitoring the trades and working through that. 389 00:28:04,760 --> 00:28:10,720 But their margins are much finer than say the developer who's taking more risk over 390 00:28:10,720 --> 00:28:14,480 a longer period of time and trying to generate a return on their capital. 391 00:28:14,480 --> 00:28:19,000 Where say we don't lend to the construction contractor, we want to lend to the landowner, 392 00:28:19,000 --> 00:28:21,480 the owner of the property. 393 00:28:21,480 --> 00:28:23,600 This is why I enjoy chatting to people over you Ilk. 394 00:28:23,600 --> 00:28:26,640 You're pretty much at the finger in the pulse. 395 00:28:26,640 --> 00:28:30,600 If you're looking after the money, you can see exactly what's happening across most industries. 396 00:28:30,600 --> 00:28:32,880 So that's essentially. 397 00:28:32,880 --> 00:28:34,360 Yeah. 398 00:28:34,360 --> 00:28:38,000 So as you can appreciate the questions, it's on there. 399 00:28:38,000 --> 00:28:41,560 It's in every single newspaper right now, the pressure is starting to build up. 400 00:28:41,560 --> 00:28:43,720 What's going to happen on the credit side? 401 00:28:43,720 --> 00:28:46,920 But this lovely podcast is not about the negatives. 402 00:28:46,920 --> 00:28:48,960 We'd also like to discuss the opportunities out there. 403 00:28:48,960 --> 00:28:53,880 So since you're seeing a lot of other companies coming through, what interesting opportunities 404 00:28:53,880 --> 00:28:58,200 are you seeing in spaces right now that you're lending to that you thought you may not have 405 00:28:58,200 --> 00:29:01,840 that evolved in the past six months? 406 00:29:01,840 --> 00:29:09,760 I think as a lender, I'm naturally risk averse and so we're not looking to lend to a company 407 00:29:09,760 --> 00:29:12,160 that's going to shoot the lights out and make a lot of money. 408 00:29:12,160 --> 00:29:18,560 And at the end of it, we want to get well paid and generate a good return for our investors' 409 00:29:18,560 --> 00:29:19,560 capital. 410 00:29:19,560 --> 00:29:23,560 But at the same time, we're providing capital to support the growth or the project that's 411 00:29:23,560 --> 00:29:26,880 being undertaken by those that are taking the risk, which is equity. 412 00:29:26,880 --> 00:29:32,040 And so what I want to do is make sure that when we lend, we're lending to good quality 413 00:29:32,040 --> 00:29:39,160 companies, good quality management teams that are going to be able to execute on their strategy. 414 00:29:39,160 --> 00:29:43,600 And so it's more about avoiding things that might go wrong. 415 00:29:43,600 --> 00:29:50,120 And so if you think about, say, more cyclical industries, they're areas where we avoid them 416 00:29:50,120 --> 00:29:53,240 because the earnings can be more volatile. 417 00:29:53,240 --> 00:30:00,200 So if you think about, say, a cyclical industry like agri, you can have issues around commodity 418 00:30:00,200 --> 00:30:05,560 prices, production volumes, foreign currency, weather, trade disputes between government 419 00:30:05,560 --> 00:30:13,600 can all impact the price and the earnings that you can generate as an agricultural company. 420 00:30:13,600 --> 00:30:18,560 It doesn't mean that they're not good companies or that they're not a great investment. 421 00:30:18,560 --> 00:30:22,840 Their cash flows are more volatile and therefore, as a lender, you're not willing to take as 422 00:30:22,840 --> 00:30:26,480 much risk in terms of how much debt you would provide to those companies. 423 00:30:26,480 --> 00:30:28,760 So you'd have a very low level of debt. 424 00:30:28,760 --> 00:30:32,560 That's the kind of thing that we think about in terms of how we go about lending. 425 00:30:32,560 --> 00:30:36,120 We're looking at over long periods of time. 426 00:30:36,120 --> 00:30:44,880 And your point about market conditions, because we're privy to private information from a 427 00:30:44,880 --> 00:30:49,560 whole range of companies and the information that those companies provide to us as a lender 428 00:30:49,560 --> 00:30:53,120 is confidential between the lender and a borrower. 429 00:30:53,120 --> 00:30:57,800 And so we respect the privacy of all the various companies that we provide financing to. 430 00:30:57,800 --> 00:31:01,040 But it does help inform your view of market risk. 431 00:31:01,040 --> 00:31:04,120 You're lending to a wide range of companies. 432 00:31:04,120 --> 00:31:11,960 And I would say if you're waking up in the morning and reading that there's an event 433 00:31:11,960 --> 00:31:19,120 like rising construction costs or the builders are going broke and we hadn't been aware of 434 00:31:19,120 --> 00:31:22,160 that for some time in advance. 435 00:31:22,160 --> 00:31:27,840 I think I sort of started seeing construction costs rising in 2021 and it kind of really 436 00:31:27,840 --> 00:31:33,160 started making mainstream media in sort of mid to late 2022. 437 00:31:33,160 --> 00:31:38,800 And so we've already adjusted to that. 438 00:31:38,800 --> 00:31:43,800 And what we tend to prefer to do is to back clients or borrowers where we've got an existing 439 00:31:43,800 --> 00:31:48,960 relationship with a group that have demonstrated a prior track record of performance and we 440 00:31:48,960 --> 00:31:52,920 have a relationship and we've got good access to information to be able to assess and manage 441 00:31:52,920 --> 00:31:54,240 the risk. 442 00:31:54,240 --> 00:32:02,080 We have over the last 12, 18 months, naturally, been more cautious in terms of companies that 443 00:32:02,080 --> 00:32:07,280 we lent to because business or economic conditions were forecast to deteriorate. 444 00:32:07,280 --> 00:32:12,720 And so therefore you adjust the terms and conditions, market liquidity becomes tighter, 445 00:32:12,720 --> 00:32:16,680 which means it's actually a great environment for a lender because the risk that you take 446 00:32:16,680 --> 00:32:21,760 in lending to a company reduces, you're able to negotiate tighter terms and conditions and 447 00:32:21,760 --> 00:32:26,920 covenants and you're also able to pass through a higher cost of funding or higher margin. 448 00:32:26,920 --> 00:32:32,520 And so you're actually getting better lending opportunities now than you did say 12 to 24 449 00:32:32,520 --> 00:32:33,520 months ago. 450 00:32:33,520 --> 00:32:36,920 And that's borne out in terms of the spreads that we've been delivering for our investors 451 00:32:36,920 --> 00:32:42,560 both in MXT and MOT, the returns for investors in those funds have improved reflecting that 452 00:32:42,560 --> 00:32:44,400 sort of market dynamic. 453 00:32:44,400 --> 00:32:52,000 But importantly, what we have to look at is if things deteriorate in terms of business 454 00:32:52,000 --> 00:32:56,320 or economic conditions, then we just need to make sure that when we're lending to a 455 00:32:56,320 --> 00:33:00,840 company that we've got a very strong basis on which we believe that that company is going 456 00:33:00,840 --> 00:33:03,720 to perform regardless of the deterioration. 457 00:33:03,720 --> 00:33:08,360 And interesting, when we look at our portfolio, people sort of say, oh, sub-investment grade 458 00:33:08,360 --> 00:33:11,320 borrowers represent the greatest level of risk. 459 00:33:11,320 --> 00:33:17,880 Well, as of the end of May, I can sort of say that about 70% of the companies that we 460 00:33:17,880 --> 00:33:23,000 lend to that are rated sub-investment grade are actually doing better financially this 461 00:33:23,000 --> 00:33:28,480 year than they did in 2022, notwithstanding the increase in interest rates. 462 00:33:28,480 --> 00:33:35,160 And so we have seen from May of 2022, conditions deteriorated, a number of the companies that 463 00:33:35,160 --> 00:33:39,120 we were lending to were not doing as well as they had the prior 12 months. 464 00:33:39,120 --> 00:33:42,960 And then in recent months, that trend has turned around. 465 00:33:42,960 --> 00:33:48,240 Whether or not that's companies responding in the form of cutting costs. 466 00:33:48,240 --> 00:33:53,280 And in this environment, it's hard to get top-line revenue growth. 467 00:33:53,280 --> 00:33:59,520 So management teams to have flat to declining earnings would be expected unless management 468 00:33:59,520 --> 00:34:00,520 teams can adjust. 469 00:34:00,520 --> 00:34:06,840 They might be pushing through price rises or they might be cutting costs to preserve 470 00:34:06,840 --> 00:34:08,320 or grow earnings. 471 00:34:08,320 --> 00:34:14,440 And so good quality management teams are able to deliver that even in difficult market conditions. 472 00:34:14,440 --> 00:34:16,440 And that's what we're seeing across our portfolio. 473 00:34:16,440 --> 00:34:18,320 Yeah, I'm seeing that quite a lot as well. 474 00:34:18,320 --> 00:34:22,120 A lot of people I'm speaking to, there's businesses that used to be growth at any price. 475 00:34:22,120 --> 00:34:25,320 And now it's all about watching the bottom line, tighten that belt. 476 00:34:25,320 --> 00:34:29,600 I had a conversation with a friend of mine the other day and they're perhaps the entire 477 00:34:29,600 --> 00:34:33,960 strategy is essentially wait for that turn in a thematic and looking for the company 478 00:34:33,960 --> 00:34:34,960 that survives. 479 00:34:34,960 --> 00:34:39,080 Scrap at the bottom and then it's rational. 480 00:34:39,080 --> 00:34:40,400 They survive at the bottom. 481 00:34:40,400 --> 00:34:44,840 They're hardened like after a war, then they essentially pick up whatever's left. 482 00:34:44,840 --> 00:34:46,920 And I think it's a fantastic strategy. 483 00:34:46,920 --> 00:34:49,440 You have to have a lot of patience to be able to do that. 484 00:34:49,440 --> 00:34:51,440 But yeah, I can understand. 485 00:34:51,440 --> 00:34:55,240 That's the difference between debt and equity. 486 00:34:55,240 --> 00:35:01,760 As a lender, I'm looking for companies that can generate earnings and cash flow. 487 00:35:01,760 --> 00:35:06,880 I was in the most recent sort of market run work, we're prepared to lend money or invest 488 00:35:06,880 --> 00:35:11,200 money in companies that had not yet proven a business plan or a business strategy, had 489 00:35:11,200 --> 00:35:14,120 no point of difference and we're losing money. 490 00:35:14,120 --> 00:35:18,520 And those companies have obviously struggled in terms of gaining continued access to capital 491 00:35:18,520 --> 00:35:19,520 to fund their operations. 492 00:35:19,520 --> 00:35:21,120 And that's where they fail. 493 00:35:21,120 --> 00:35:25,880 When you lend to a company, what's the type of what's the ideal type of company? 494 00:35:25,880 --> 00:35:27,120 That's a terrible question. 495 00:35:27,120 --> 00:35:31,920 Like what's the minimum size of a company you would look to lend to? 496 00:35:31,920 --> 00:35:33,800 What are the size loans? 497 00:35:33,800 --> 00:35:35,400 What's the cost of money? 498 00:35:35,400 --> 00:35:39,360 What's essentially, give us an example. 499 00:35:39,360 --> 00:35:45,440 We would sort of do everything sort of from 25 million to 250 million in terms of loan 500 00:35:45,440 --> 00:35:47,720 size. 501 00:35:47,720 --> 00:35:54,680 And most companies that we would lend to would be sort of 15 to 20 million dollars in earnings 502 00:35:54,680 --> 00:36:06,840 as a minimum and large property projects, 200 plus apartments, 400 land subdivisions, 503 00:36:06,840 --> 00:36:09,640 large scale industrial development projects and the like. 504 00:36:09,640 --> 00:36:12,400 So they're not small companies. 505 00:36:12,400 --> 00:36:17,080 And often it might be that it might be ourselves together with one or two other banks that 506 00:36:17,080 --> 00:36:20,280 might be providing the financing to the company. 507 00:36:20,280 --> 00:36:26,200 It might be very rarely would we do transactions where there are other non-bank lenders. 508 00:36:26,200 --> 00:36:30,120 Most of the transactions that we enter into would be ourselves and banks providing the 509 00:36:30,120 --> 00:36:32,840 debt financing to companies. 510 00:36:32,840 --> 00:36:37,720 Or if it's a property transaction, it might be ourselves on a sole basis providing funding 511 00:36:37,720 --> 00:36:40,160 for the whole of the project. 512 00:36:40,160 --> 00:36:43,960 What's the current cost for money for these projects currently? 513 00:36:43,960 --> 00:36:44,960 It varies, right? 514 00:36:44,960 --> 00:36:47,640 So it's such an interesting question, right? 515 00:36:47,640 --> 00:36:52,080 Because depending on the credit quality and the availability of capital for a particular 516 00:36:52,080 --> 00:36:59,720 borrower, high investment grade borrowers might be borrowing at say a margin of 2%, 517 00:36:59,720 --> 00:37:06,480 whereas a sub-investment grade borrower might be paying 500 or 5 to 6% as a margin. 518 00:37:06,480 --> 00:37:12,520 Or if it's a mezzanine transaction, it might be 15 to 20%. 519 00:37:12,520 --> 00:37:16,480 It really just depends on where you sit in the capital structure, the availability of 520 00:37:16,480 --> 00:37:22,120 capital, the risk that a lender thinks they're taking, and then what is the appropriate return 521 00:37:22,120 --> 00:37:24,840 that should be negotiated with that borrower. 522 00:37:24,840 --> 00:37:30,680 We're seeing a lot of private lending running around to like 12 to 15% currently. 523 00:37:30,680 --> 00:37:33,280 And then on the conservative side, it's RBA plus five. 524 00:37:33,280 --> 00:37:36,120 That's why I was just curious, because the deals that you're doing are a substantially 525 00:37:36,120 --> 00:37:37,680 larger size. 526 00:37:37,680 --> 00:37:41,920 And these are the things that people are coming to ask for on the private side or other friends. 527 00:37:41,920 --> 00:37:43,520 But this is what you do. 528 00:37:43,520 --> 00:37:44,520 So I was just very curious. 529 00:37:44,520 --> 00:37:52,120 I've seen a lot of lenders say that you should be generating X return. 530 00:37:52,120 --> 00:37:56,000 Well, it doesn't work that way. 531 00:37:56,000 --> 00:38:04,480 As a private market fund manager, at the end of it, it's credit quality that is the most 532 00:38:04,480 --> 00:38:07,480 important thing that you can deliver for investors. 533 00:38:07,480 --> 00:38:12,560 Protection, preservation of capital, and then making sure you're generating it. 534 00:38:12,560 --> 00:38:13,560 Don't lose money. 535 00:38:13,560 --> 00:38:14,560 What's rule number one? 536 00:38:14,560 --> 00:38:15,560 Don't lose money. 537 00:38:15,560 --> 00:38:16,560 What's rule number two? 538 00:38:16,560 --> 00:38:17,560 Don't lose money. 539 00:38:17,560 --> 00:38:18,560 Don't forget number one. 540 00:38:18,560 --> 00:38:19,560 And then big inflation. 541 00:38:19,560 --> 00:38:20,560 That's all that matters. 542 00:38:20,560 --> 00:38:21,560 Yeah. 543 00:38:21,560 --> 00:38:22,560 And that's at the end of it. 544 00:38:22,560 --> 00:38:23,560 That's what we're about. 545 00:38:23,560 --> 00:38:32,720 We've been very clear that at the end of it, we need to first and foremost is protect 546 00:38:32,720 --> 00:38:39,160 and preserve investor capital and take appropriate action to lend to good companies on appropriate 547 00:38:39,160 --> 00:38:41,720 terms, protecting the downside risk. 548 00:38:41,720 --> 00:38:48,600 But at the same time, use our skill set in terms of the relationships, networks, and 549 00:38:48,600 --> 00:38:54,800 speed and service to be able to generate a return for investors through fees and margins 550 00:38:54,800 --> 00:38:57,000 that can be charged to those companies. 551 00:38:57,000 --> 00:38:58,000 We're not trying to... 552 00:38:58,000 --> 00:39:03,280 At the end of it, our role is to provide a service to the companies that we lend money 553 00:39:03,280 --> 00:39:04,400 to. 554 00:39:04,400 --> 00:39:06,680 We believe that we provide a high level of service. 555 00:39:06,680 --> 00:39:07,680 We're responsive. 556 00:39:07,680 --> 00:39:11,880 We've got a range of different solutions that can be provided to that company to support 557 00:39:11,880 --> 00:39:13,200 their activities. 558 00:39:13,200 --> 00:39:17,480 But we do that and we invest in the relationship with the companies because we believe it delivers 559 00:39:17,480 --> 00:39:19,680 good outcomes for our investors. 560 00:39:19,680 --> 00:39:24,880 And so that relationship, that service is important in terms of making sure that you're 561 00:39:24,880 --> 00:39:28,720 charging a fair price for the credit that you're providing. 562 00:39:28,720 --> 00:39:33,400 We think that our investors provide a valuable source of non-bank finance to a company as 563 00:39:33,400 --> 00:39:39,320 a means to help those companies diversify their sources of risk away from the banks. 564 00:39:39,320 --> 00:39:44,480 And so therefore, we believe that our investors should be rewarded appropriately with an appropriate 565 00:39:44,480 --> 00:39:47,340 return for that risk. 566 00:39:47,340 --> 00:39:49,640 So on the interest rates, thank you very much for that. 567 00:39:49,640 --> 00:39:53,840 On the interest rates, the cash rate is 4.1 right now. 568 00:39:53,840 --> 00:39:54,840 If that... 569 00:39:54,840 --> 00:39:58,000 I just remember the GFC, everyone's like, oh, it's never going to get to where it got 570 00:39:58,000 --> 00:39:59,800 and then it got there. 571 00:39:59,800 --> 00:40:04,000 So I'm just going on the logic that it's anchoring theory, right? 572 00:40:04,000 --> 00:40:06,760 I can't go there because of what happened last time. 573 00:40:06,760 --> 00:40:11,720 So on the basis that potentially an event occurs that everyone's like, oh, that can't 574 00:40:11,720 --> 00:40:12,720 happen. 575 00:40:12,720 --> 00:40:15,800 What do you think the impact of markets will be? 576 00:40:15,800 --> 00:40:22,320 Sorry, in the lending space and property, what do you think the actual impact will be? 577 00:40:22,320 --> 00:40:25,880 I think there are a lot of people that didn't think rates would get as high as they are 578 00:40:25,880 --> 00:40:26,880 today. 579 00:40:26,880 --> 00:40:35,440 At the end of it, the Reserve Bank is clearly attempting to slow economic activity. 580 00:40:35,440 --> 00:40:39,720 We haven't seen any material lift in unemployment levels. 581 00:40:39,720 --> 00:40:44,640 We've got a lot of companies that are in strong financial position. 582 00:40:44,640 --> 00:40:49,280 We've got a very tight housing market. 583 00:40:49,280 --> 00:40:52,800 We've got increasing immigration flows. 584 00:40:52,800 --> 00:40:55,280 There's a range of pressures in the economy. 585 00:40:55,280 --> 00:41:04,720 But I think that anyone that makes decisions based on it can't get any worse than it is 586 00:41:04,720 --> 00:41:10,080 today or they didn't forecast a material change is not taking appropriate action. 587 00:41:10,080 --> 00:41:18,520 At the end of it, we don't lend on the basis of she'll be right or that it's only going 588 00:41:18,520 --> 00:41:19,520 to be one basis. 589 00:41:19,520 --> 00:41:22,440 Yeah, but people borrow on the basis of, yeah, she'll be right. 590 00:41:22,440 --> 00:41:24,240 I can't go much higher, can I, surely? 591 00:41:24,240 --> 00:41:28,240 And then you can't go to a barbecue now without someone going, I didn't think my mortgage 592 00:41:28,240 --> 00:41:31,520 is going to go up 200% in the past six months. 593 00:41:31,520 --> 00:41:33,520 Surely it's not going to go up any higher. 594 00:41:33,520 --> 00:41:37,760 And then like, yes, it's just normal human beings at the lower level, but the domino 595 00:41:37,760 --> 00:41:41,880 impact decreases the capacity of what they could spend, their discretionary income. 596 00:41:41,880 --> 00:41:43,520 It just ticks and ticks and ticks. 597 00:41:43,520 --> 00:41:44,520 And this is the companies. 598 00:41:44,520 --> 00:41:48,120 And then all of a sudden, it's just a material slowdown. 599 00:41:48,120 --> 00:41:49,120 So that's all right. 600 00:41:49,120 --> 00:41:50,560 Look, this is what you do. 601 00:41:50,560 --> 00:41:55,360 So I'm very curious of what you're seeing the impacts will be in your area and then 602 00:41:55,360 --> 00:41:58,000 the domino effect of what you think the outcome will be. 603 00:41:58,000 --> 00:42:03,280 Oh, look, I think it's too much of a crystal ball, but I'm just very curious to hear what 604 00:42:03,280 --> 00:42:04,280 you're seeing. 605 00:42:04,280 --> 00:42:08,040 No, no, no, I think it's fair, because at the end of it, I look at it and sort of say, 606 00:42:08,040 --> 00:42:11,040 revenue should slow. 607 00:42:11,040 --> 00:42:16,640 Valuation should be declining because of rising interest rates. 608 00:42:16,640 --> 00:42:18,480 Some of that hasn't flowed through yet. 609 00:42:18,480 --> 00:42:25,200 So the way management teams will respond to the demands from shareholders to generate 610 00:42:25,200 --> 00:42:28,160 increased earnings will be to address costs. 611 00:42:28,160 --> 00:42:32,320 And generally, to address costs means rising unemployment. 612 00:42:32,320 --> 00:42:35,560 And we haven't really seen that yet. 613 00:42:35,560 --> 00:42:48,440 So I think we may be fortunate that as a result of some sort of easing of supply chain pressures, 614 00:42:48,440 --> 00:42:51,720 things may not continue to be as inflationary. 615 00:42:51,720 --> 00:42:58,080 But I think realistically, while we've got a war in Ukraine and while we've got continuing 616 00:42:58,080 --> 00:43:02,580 supply chain disruptions coming off the back of COVID, I think that it's going to take 617 00:43:02,580 --> 00:43:03,580 some time. 618 00:43:03,580 --> 00:43:12,560 If I look at the delays in certain industries in terms of access to supplies and those sorts 619 00:43:12,560 --> 00:43:15,600 of things, they're still materially impacted. 620 00:43:15,600 --> 00:43:17,360 Market conditions haven't restored. 621 00:43:17,360 --> 00:43:19,120 The conditions haven't restored. 622 00:43:19,120 --> 00:43:23,400 So there's still disruption flowing through and that may take some time. 623 00:43:23,400 --> 00:43:31,240 And then I think from our perspective, we remain cautious in terms of how we see the 624 00:43:31,240 --> 00:43:32,240 market. 625 00:43:32,240 --> 00:43:39,800 And over the last 12, 18 months, we've really been giving priority to existing borrow relationships 626 00:43:39,800 --> 00:43:45,640 to help us manage the risk across our portfolios. 627 00:43:45,640 --> 00:43:50,440 And I think that's a sensible approach in any period where you've got volatile business 628 00:43:50,440 --> 00:43:56,020 or economic or uncertain business or economic conditions for a lender. 629 00:43:56,020 --> 00:43:57,020 It's pretty interesting. 630 00:43:57,020 --> 00:44:01,580 Now, because of the time, we'll get into a bit of the mechanics. 631 00:44:01,580 --> 00:44:05,080 So what are the fees for the fund? 632 00:44:05,080 --> 00:44:07,080 And how's the fee structured? 633 00:44:07,080 --> 00:44:08,080 Yep. 634 00:44:08,080 --> 00:44:09,080 Yep. 635 00:44:09,080 --> 00:44:13,000 So MXT and the Metrics Direct Income Fund. 636 00:44:13,000 --> 00:44:17,280 So MXT is the Metrics Master Income Trust ASX listed. 637 00:44:17,280 --> 00:44:23,440 MDIF or the Metrics Direct Income Fund is an unlisted managed fund version of MXT. 638 00:44:23,440 --> 00:44:28,880 Bit of a convoluted way to say it, but that's the reality of it. 639 00:44:28,880 --> 00:44:33,680 Both of them are similar in terms of fee construct, which is around about total cost of about 640 00:44:33,680 --> 00:44:37,000 60 basis points to an investor. 641 00:44:37,000 --> 00:44:43,240 And there are some performance fees if we outperform various return targets. 642 00:44:43,240 --> 00:44:52,520 MOT is really more of a high yielding fund where we also seek to deliver equity upside. 643 00:44:52,520 --> 00:44:57,960 And so that particular fund, not only do we lend money to companies, but if we can secure 644 00:44:57,960 --> 00:45:02,800 warrants or options or take an equity stake in the company, we'll do that to drive additional 645 00:45:02,800 --> 00:45:04,240 value for our investors. 646 00:45:04,240 --> 00:45:08,680 So it might be that we've negotiated a profit share or something. 647 00:45:08,680 --> 00:45:14,480 So in that particular fund, the management fee is around about 125 basis points and the 648 00:45:14,480 --> 00:45:20,880 total cost to an investor is around about 140 basis points, so 1.4% total cost to an 649 00:45:20,880 --> 00:45:21,880 investor. 650 00:45:21,880 --> 00:45:27,920 That fund seeks to deliver a minimum return of cash, a cash coupon of 7%. 651 00:45:27,920 --> 00:45:32,880 And that was being delivered when the RBA cash rate was 10 basis points. 652 00:45:32,880 --> 00:45:36,000 So the target was set back in 2019. 653 00:45:36,000 --> 00:45:41,960 But obviously, we obviously think that given the market conditions, we'll exceed that now 654 00:45:41,960 --> 00:45:45,400 with a total return for investors between 8% to 10%. 655 00:45:45,400 --> 00:45:50,280 And again, given where market conditions are, that target return should be exceeded as a 656 00:45:50,280 --> 00:45:56,680 result of just the general uptick in terms of rates and opportunities set for us. 657 00:45:56,680 --> 00:45:59,400 And the direct income fund? 658 00:45:59,400 --> 00:46:05,400 The metrics direct income fund is about 60 basis points total cost. 659 00:46:05,400 --> 00:46:10,320 So the difference between the metrics direct income fund and the Metrics Master Income 660 00:46:10,320 --> 00:46:15,800 Trust, Metrics Master Income Trust, ASX listed, people can buy and sell on the stock exchange 661 00:46:15,800 --> 00:46:16,800 daily. 662 00:46:16,800 --> 00:46:19,980 Metrics Direct Income Fund, it's unlisted. 663 00:46:19,980 --> 00:46:24,280 So you reduce the risk around how it might trade on the stock exchange. 664 00:46:24,280 --> 00:46:29,760 So more likely to trade at the NAV, but liquidity is available monthly. 665 00:46:29,760 --> 00:46:31,760 So you've got two different options. 666 00:46:31,760 --> 00:46:33,680 Are they the same portfolios? 667 00:46:33,680 --> 00:46:41,160 So essentially, the MXT is what a trust that essentially owns shares in the funds to provide 668 00:46:41,160 --> 00:46:42,160 liquidity to the trades. 669 00:46:42,160 --> 00:46:43,160 Yeah, OK. 670 00:46:43,160 --> 00:46:46,160 Yeah, and MDIF is the same. 671 00:46:46,160 --> 00:46:53,480 So MXT at the moment is about a 5% discount to its NAV, whereas people buying on the unlisted 672 00:46:53,480 --> 00:46:57,680 fund are paying 5% more for the same portfolio. 673 00:46:57,680 --> 00:47:02,440 But they're doing that on the basis they believe it's less risk because of the traded price 674 00:47:02,440 --> 00:47:03,440 on the ASX. 675 00:47:03,440 --> 00:47:07,400 Yeah, we discuss that quite a lot with clients. 676 00:47:07,400 --> 00:47:13,600 So with alignment, how the reason why we ask the question of remuneration is what we've 677 00:47:13,600 --> 00:47:16,960 learned with behavioral psychology we've seen in the years is how people are remunerated 678 00:47:16,960 --> 00:47:20,500 generally derives the decisions they make when they're making investments. 679 00:47:20,500 --> 00:47:23,760 So essentially, how's the remuneration structured? 680 00:47:23,760 --> 00:47:27,360 For metrics, for myself and my partners. 681 00:47:27,360 --> 00:47:29,360 How does it all work? 682 00:47:29,360 --> 00:47:32,000 Whole airline with the interests of our investors. 683 00:47:32,000 --> 00:47:35,000 We own 65% of the business. 684 00:47:35,000 --> 00:47:38,960 We pay ourselves a wage and a dividend if we're successful. 685 00:47:38,960 --> 00:47:41,880 But it's the same with our employees. 686 00:47:41,880 --> 00:47:47,200 They pay the wage and they pay the bonus based on performance. 687 00:47:47,200 --> 00:47:51,640 That performance is determined over a three year period so their bonus is paid out over 688 00:47:51,640 --> 00:47:52,640 a number of years. 689 00:47:52,640 --> 00:47:53,640 So over a three year period. 690 00:47:53,640 --> 00:47:59,600 Yeah, now that's why I'm interested because sometimes if you do well in a quarter, you 691 00:47:59,600 --> 00:48:06,480 get that bump, you shoot that extra 1% and then it incentivizes some managers to throw 692 00:48:06,480 --> 00:48:10,120 in a bit of the juice, so to speak, a virgin bond here or there or something equivalent 693 00:48:10,120 --> 00:48:11,640 and that's when things go awry. 694 00:48:11,640 --> 00:48:12,640 So that's very interesting. 695 00:48:12,640 --> 00:48:19,040 So you do a three year, where did that idea come from because that long term average is 696 00:48:19,040 --> 00:48:21,120 very interesting. 697 00:48:21,120 --> 00:48:29,040 It's very much the way APRA has formed the view that that's best practice for banks. 698 00:48:29,040 --> 00:48:32,920 And you remember most of the people that work in our business have worked in banks or have 699 00:48:32,920 --> 00:48:37,480 come from financial services and so that's the culture. 700 00:48:37,480 --> 00:48:43,680 So the culture is very much designed to align the interests of the employee and the management 701 00:48:43,680 --> 00:48:47,160 firm with the longer term interests of our investors. 702 00:48:47,160 --> 00:48:51,360 So I think all of, I'd be very disappointed if there was a position that people said that 703 00:48:51,360 --> 00:48:53,680 metrics funds are not investor friendly. 704 00:48:53,680 --> 00:48:59,760 I think all of the funds in terms of the fee rates, the way in which we've structured them, 705 00:48:59,760 --> 00:49:04,640 the way in which we've delivered on returns for investors is all designed to deliver a 706 00:49:04,640 --> 00:49:09,200 great outcome for people that have invested in our funds and I'm pretty pleased to say 707 00:49:09,200 --> 00:49:11,880 that's what's been delivered over the last 10 years. 708 00:49:11,880 --> 00:49:13,400 No, it really has. 709 00:49:13,400 --> 00:49:14,720 That's very interesting. 710 00:49:14,720 --> 00:49:15,720 Thank you for that. 711 00:49:15,720 --> 00:49:23,080 So is there anything, any other thoughts that you want to leave our listeners with? 712 00:49:23,080 --> 00:49:28,240 No, I think it's been a pretty good summary. 713 00:49:28,240 --> 00:49:32,880 Obviously if anyone's interested, there's a lot more information that can be obtained. 714 00:49:32,880 --> 00:49:40,160 But I think, like all of these things, I think it's really important to assess the skill 715 00:49:40,160 --> 00:49:45,000 set, the quality of the management team, their track record. 716 00:49:45,000 --> 00:49:49,240 You've asked all the right questions in terms of size, scale, the types of transactions, 717 00:49:49,240 --> 00:49:53,800 what drives the investment decision from a risk and return perspective? 718 00:49:53,800 --> 00:49:54,800 What are the fees? 719 00:49:54,800 --> 00:49:55,800 What can an investor expect? 720 00:49:55,800 --> 00:49:57,240 What are the risks? 721 00:49:57,240 --> 00:50:02,560 So I think we've covered an awful lot of ground and I hope that's been helpful for your listeners. 722 00:50:02,560 --> 00:50:04,320 I think it's been very, very helpful. 723 00:50:04,320 --> 00:50:07,640 Specifically, where can they reach you if they want more information? 724 00:50:07,640 --> 00:50:14,680 They can go to our website and we'll speak to a good financial planner, financial advisor 725 00:50:14,680 --> 00:50:16,480 and get information. 726 00:50:16,480 --> 00:50:21,800 Obviously we have a relationship with Pinnacle Investments who also assist on the distribution 727 00:50:21,800 --> 00:50:27,440 and so there's a number of ways in which people can get in contact with us or via Pinnacle 728 00:50:27,440 --> 00:50:29,920 or via their financial advisor. 729 00:50:29,920 --> 00:50:34,640 We've had a real commitment also in terms of providing research material to the market 730 00:50:34,640 --> 00:50:36,240 to help investors understand. 731 00:50:36,240 --> 00:50:43,420 So on our website there's a lot of different video clips and material on different conferences 732 00:50:43,420 --> 00:50:48,800 and things like that that we've presented, LinkedIn or through some of the research groups 733 00:50:48,800 --> 00:50:54,400 like Zenith and Lonsec and Bond Advisor and others that have researched our funds as well. 734 00:50:54,400 --> 00:50:55,400 Fantastic. 735 00:50:55,400 --> 00:51:00,080 And of course being publicly listed on the ASX means that we're subject to continuous 736 00:51:00,080 --> 00:51:01,080 disclosure obligations. 737 00:51:01,080 --> 00:51:04,320 So there's always good information via the ASX as well. 738 00:51:04,320 --> 00:51:06,000 It always helps. 739 00:51:06,000 --> 00:51:08,000 Andrew Lockhart, thank you very much for your time. 740 00:51:08,000 --> 00:51:11,960 I found that very, very interesting and definitely came to catch up again in the news to see 741 00:51:11,960 --> 00:51:12,960 how things get going. 742 00:51:12,960 --> 00:51:13,960 Thanks very much. 743 00:51:13,960 --> 00:51:14,960 Really appreciate your time. 744 00:51:14,960 --> 00:51:15,960 All right. 745 00:51:15,960 --> 00:51:16,960 Thanks. 746 00:51:16,960 --> 00:51:29,040 Thank you. 747 00:51:29,040 --> 00:51:33,000 Any views expressed in this recording do not represent the view of any other third party 748 00:51:33,000 --> 00:51:35,680 and other sole personal opinions of the speaker. 749 00:51:35,680 --> 00:51:39,680 Any reference to financial product does not constitute advice or recommendation and before 750 00:51:39,680 --> 00:51:43,680 any action you should seek proper advice from your financial professional. 751 00:51:43,680 --> 00:51:50,480 Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial 752 00:51:50,480 --> 00:51:51,480 advice. 753 00:51:51,480 --> 00:52:14,200 To get in touch with York head to our website www.yorkwelf.com.au.