1
00:00:00,000 --> 00:00:13,920
Welcome back to The Rated Change with York Wealth Management.

2
00:00:13,920 --> 00:00:17,600
As advisors to some of the wealthiest families in the country, The Rated Change is a podcast

3
00:00:17,600 --> 00:00:21,480
designed to help you in the pursuit of building long-term wealth through the insights of some

4
00:00:21,480 --> 00:00:23,880
of the brightest minds in asset management.

5
00:00:23,880 --> 00:00:28,560
I'm your host Murdoch Gaddi and in today's podcast, we're speaking with Bob Sahoda, the

6
00:00:28,560 --> 00:00:32,840
managing director and CIO of Revolution Asset Management.

7
00:00:32,840 --> 00:00:38,240
Revolution provides wholesale investors access to a diversified portfolio of Australian and

8
00:00:38,240 --> 00:00:42,120
New Zealand corporate loans and asset-backed securities.

9
00:00:42,120 --> 00:00:47,880
The fund currently has a total fund size of roughly 1.89 billion.

10
00:00:47,880 --> 00:00:55,640
The underlying fund holds a total of 47 loans as of the 31st of July, 2023, with an average

11
00:00:55,640 --> 00:00:59,920
expected life for the portfolio being 1.3 years.

12
00:00:59,920 --> 00:01:05,320
Revolution seeks to outperform the RBA cash ride by 4 to 5% per annum.

13
00:01:05,320 --> 00:01:12,680
The portfolio current yield is 10.1% with a credit spread of the portfolio above BBSW

14
00:01:12,680 --> 00:01:16,240
of 584 basis points.

15
00:01:16,240 --> 00:01:21,960
The average credit rating of the portfolio and the loans is BB plus as well.

16
00:01:21,960 --> 00:01:27,120
So, Bob gives his insights into that process and lending philosophy.

17
00:01:27,120 --> 00:01:32,240
He also outlines the private lending universe, the overall health of the loans in the portfolios

18
00:01:32,240 --> 00:01:38,940
and he gives his thoughts on the outlook for lending in current markets as well.

19
00:01:38,940 --> 00:01:43,160
In particular, I found the conversation of the state of the Australian economy quite

20
00:01:43,160 --> 00:01:50,660
insightful, especially how corporate company loans are fairing in comparison to commercial

21
00:01:50,660 --> 00:01:58,160
and residential property loans, especially in a post-COVID rising interest rate and lockdown

22
00:01:58,160 --> 00:02:00,440
environment.

23
00:02:00,440 --> 00:02:04,440
So before we get into the podcast, I would also like to encourage you to listen to the

24
00:02:04,440 --> 00:02:08,420
disclaimer at the end of the broadcast and to keep your feedback coming.

25
00:02:08,420 --> 00:02:12,460
You can reach me at mgatty at ywm.com.au.

26
00:02:12,460 --> 00:02:16,160
So with that being said, I hope you enjoy this conversation as much as I did.

27
00:02:16,160 --> 00:02:29,040
So sit back, relax and enjoy it.

28
00:02:29,040 --> 00:02:33,000
Bob Sahoda, welcome to the Rate of Change with York Wharf Management.

29
00:02:33,000 --> 00:02:34,740
Great Madoc, thanks for having me.

30
00:02:34,740 --> 00:02:38,840
Really appreciate the opportunity to come and speak on your famous podcast.

31
00:02:38,840 --> 00:02:39,840
Anytime.

32
00:02:39,840 --> 00:02:44,600
For many of you who may not be familiar with Bob, before co-founding Revolution, Bob was

33
00:02:44,600 --> 00:02:48,600
one of the pioneers in private credit in the Australian markets, been around the traps

34
00:02:48,600 --> 00:02:50,120
for quite some time.

35
00:02:50,120 --> 00:02:55,000
So can you tell our listeners a little bit about yourself and what attracted you to private

36
00:02:55,000 --> 00:02:56,000
credit markets?

37
00:02:56,000 --> 00:02:58,000
So essentially, how did you get into private credit?

38
00:02:58,000 --> 00:02:59,360
Yeah, great question.

39
00:02:59,360 --> 00:03:03,600
So this year marks 30 years in the markets for me.

40
00:03:03,600 --> 00:03:05,040
So quite a long time.

41
00:03:05,040 --> 00:03:08,880
I started off humbly in the banking system.

42
00:03:08,880 --> 00:03:14,600
So I worked for ANZ and NAB, learnt grassroots credit skills from really understanding how

43
00:03:14,600 --> 00:03:19,120
businesses operate and what sort of leverage you can apply to different industries, businesses

44
00:03:19,120 --> 00:03:23,760
and sectors, both in the business bank and institutional banks.

45
00:03:23,760 --> 00:03:27,360
From there, probably the biggest change in my career was when I went from banking to

46
00:03:27,360 --> 00:03:28,440
funds management.

47
00:03:28,440 --> 00:03:33,320
And I would recommend funds management industry to anyone.

48
00:03:33,320 --> 00:03:37,840
I went from National Australia Bank to National Asset Management in the late 1990s.

49
00:03:37,840 --> 00:03:42,280
And we were back then one of the pioneers of putting a loan product into fixed income

50
00:03:42,280 --> 00:03:43,560
portfolios.

51
00:03:43,560 --> 00:03:47,120
Back when the corporate bond market was nowhere near as developed, and some would say not

52
00:03:47,120 --> 00:03:52,280
even developed today, we were putting loans into those portfolios for really three key

53
00:03:52,280 --> 00:03:53,280
reasons.

54
00:03:53,280 --> 00:03:55,000
And we'll go into this throughout the podcast.

55
00:03:55,000 --> 00:03:59,600
But the fact that these loans are floating right, wonderful back in the late 90s, even

56
00:03:59,600 --> 00:04:00,600
better in 2023.

57
00:04:00,600 --> 00:04:02,920
They are secured.

58
00:04:02,920 --> 00:04:06,520
So we're now looking at the real possibility of recession.

59
00:04:06,520 --> 00:04:11,560
The fact that you've got security and you got security over good companies and good

60
00:04:11,560 --> 00:04:16,560
quality loan collateral comes to the fore when tough times hit.

61
00:04:16,560 --> 00:04:17,920
Thirdly, diversification.

62
00:04:17,920 --> 00:04:23,960
So it's very tough if you're confined to public markets to not have a high concentration

63
00:04:23,960 --> 00:04:25,780
of the banking and financials.

64
00:04:25,780 --> 00:04:30,400
So private debt gives you good access to other industries and businesses that you would not

65
00:04:30,400 --> 00:04:33,900
ordinarily find easy to get exposure to.

66
00:04:33,900 --> 00:04:37,440
So a quick whistle stop tour around the rest of my career.

67
00:04:37,440 --> 00:04:40,200
From there, I went to AMP Capital.

68
00:04:40,200 --> 00:04:48,360
Again, one of the only institutions back then, this is early 2000s, of providing loans to

69
00:04:48,360 --> 00:04:49,720
private equity.

70
00:04:49,720 --> 00:04:55,080
When they go out and acquire a company, it was generally a very bank dominated market.

71
00:04:55,080 --> 00:05:00,760
But AMP Capital were one of literally a handful of institutions that were providing that senior

72
00:05:00,760 --> 00:05:03,120
secured debt for large scale acquisition.

73
00:05:03,120 --> 00:05:06,920
So wonderful opportunity to learn all about that.

74
00:05:06,920 --> 00:05:11,560
Completely changed gears after that work to PIMCO, both in the Australian office in Sydney

75
00:05:11,560 --> 00:05:14,120
and also in Newport Beach, California.

76
00:05:14,120 --> 00:05:17,880
That was more liquid traded corporate bonds, both investment grade and high yield.

77
00:05:17,880 --> 00:05:22,560
I guess the most relevant experience to the chat we're having today came in the form of

78
00:05:22,560 --> 00:05:26,160
when I joined Challenger in February of 2005.

79
00:05:26,160 --> 00:05:31,240
Back then, the life insurance company for Challenger was only about $3 billion in size.

80
00:05:31,240 --> 00:05:35,600
And I had carriage initially of a billion dollars out of that $3 billion balance sheet.

81
00:05:35,600 --> 00:05:40,400
Now, if all your listeners are familiar with Challenger, they issue annuities, and they're

82
00:05:40,400 --> 00:05:43,580
very, very certain in terms of the liability stream.

83
00:05:43,580 --> 00:05:48,240
So I took the idea very early, given my passion for private debt, to say, well, why don't

84
00:05:48,240 --> 00:05:54,040
we put a portion of the allocation into private debt that offers you not only the right credit

85
00:05:54,040 --> 00:05:59,360
margin, but also a pretty handsome illiquidity premium for that complexity and for the fact

86
00:05:59,360 --> 00:06:01,520
that not many mandates can do it.

87
00:06:01,520 --> 00:06:05,600
To their credit, initially $200 million out of that billion dollars got allocated to private

88
00:06:05,600 --> 00:06:06,600
debt.

89
00:06:06,600 --> 00:06:11,600
And that was really my first foray into managing portfolios.

90
00:06:11,600 --> 00:06:15,000
So definitely pre-GFC.

91
00:06:15,000 --> 00:06:20,400
Throughout the course of my time at Challenger, I built that business from scratch, obviously

92
00:06:20,400 --> 00:06:21,880
with a real passion for private.

93
00:06:21,880 --> 00:06:28,160
So that became a larger portion over time as the life insurance company grew, but also

94
00:06:28,160 --> 00:06:34,200
honoring the earliest mandates in the country with Australian Super initially in 2009, followed

95
00:06:34,200 --> 00:06:36,760
by HESTA and Commonwealth Super Corporation.

96
00:06:36,760 --> 00:06:44,040
So three of the larger pension funds really embraced private debt quite early in the piece.

97
00:06:44,040 --> 00:06:50,720
So after that, I guess the road for us to keep doing what we're doing started to narrow

98
00:06:50,720 --> 00:06:52,320
because of regulation.

99
00:06:52,320 --> 00:06:57,820
So initially, global banking reform started affecting the banks, and then slowly worked

100
00:06:57,820 --> 00:07:01,320
its way into life insurance and also Challenger.

101
00:07:01,320 --> 00:07:07,400
So the idea was that myself and two of my co-founders would take the same strategy that

102
00:07:07,400 --> 00:07:14,120
had been successfully implemented and run with the test of the global financial crisis,

103
00:07:14,120 --> 00:07:16,560
but put it into an unregulated format.

104
00:07:16,560 --> 00:07:21,020
And so five and a half years ago, we started Revolution Asset Management with a concept

105
00:07:21,020 --> 00:07:28,320
on a whiteboard, a hope, a dream with $50 million seed capital from Australian Catholic

106
00:07:28,320 --> 00:07:31,280
Super who we're forever indebted to.

107
00:07:31,280 --> 00:07:37,960
Today we have $2.5 billion of committed capital in the fund with our flagship strategy approaching

108
00:07:37,960 --> 00:07:38,960
$1.9 billion.

109
00:07:38,960 --> 00:07:41,440
What's the average return?

110
00:07:41,440 --> 00:07:43,480
So the return has been an interesting one.

111
00:07:43,480 --> 00:07:46,960
So as I mentioned to you, we do everything in floating rate.

112
00:07:46,960 --> 00:07:53,360
So we have 47 loans, and those loans generally pay a credit margin above the floating rate

113
00:07:53,360 --> 00:07:59,360
of anywhere through time since inception of about 5.8% to about 6% return.

114
00:07:59,360 --> 00:08:05,960
And so as you know, with 12 successive and rapid interest rate rises, our yield on a

115
00:08:05,960 --> 00:08:08,960
look forward basis is currently 10.2%.

116
00:08:08,960 --> 00:08:14,500
So it's basically the 4.1% base rate plus roughly a 6% margin.

117
00:08:14,500 --> 00:08:17,560
So you end up with 10.2 kind of a gross yield pre-fee.

118
00:08:17,560 --> 00:08:22,720
Yeah, well, I went to an event yesterday and a gentleman up there was discussing that if

119
00:08:22,720 --> 00:08:26,720
you're looking for essentially a return above risk, well, what is essentially the most conservative

120
00:08:26,720 --> 00:08:27,720
asset you can get?

121
00:08:27,720 --> 00:08:30,720
So you'd agree you can go get a government bond these days, what, for 5.5?

122
00:08:30,720 --> 00:08:33,720
I think CBA is paying 7.2%.

123
00:08:33,720 --> 00:08:39,560
So 10.2% for essentially above that in this particular space from an investor listening

124
00:08:39,560 --> 00:08:42,040
can be perceived as quite attractive.

125
00:08:42,040 --> 00:08:46,400
So why don't we actually just touch on what actually is the universe of the private lending?

126
00:08:46,400 --> 00:08:49,920
And why I'm phrasing this way is a lot of our listeners, some of them are highly sophisticated

127
00:08:49,920 --> 00:08:51,280
understand the space.

128
00:08:51,280 --> 00:08:55,000
Some of this may be the first time they're listening to what is this space because they've

129
00:08:55,000 --> 00:08:57,180
just had legacy banks for their entire life.

130
00:08:57,180 --> 00:09:01,320
What actually is the private lending universe?

131
00:09:01,320 --> 00:09:08,240
And then secondly, as a subcategory, what underlying, as an example, commercial property,

132
00:09:08,240 --> 00:09:13,440
I know the answer, but commercial property, companies, what exactly do you like lending

133
00:09:13,440 --> 00:09:14,440
to?

134
00:09:14,440 --> 00:09:15,440
Yeah, great question.

135
00:09:15,440 --> 00:09:21,000
So look, for your listeners, you'd be forgiven to not completely understand what people mean

136
00:09:21,000 --> 00:09:23,680
by private debt or private credit.

137
00:09:23,680 --> 00:09:27,820
And you'd be forgiven because it means very different things to very different people.

138
00:09:27,820 --> 00:09:33,720
So under this broad umbrella of private credit or private debt, you've got low risk, low

139
00:09:33,720 --> 00:09:38,840
return points in the market.

140
00:09:38,840 --> 00:09:44,520
So for instance, lending money to BHP through a loan, that's private debt, rather than

141
00:09:44,520 --> 00:09:45,880
a corporate bond.

142
00:09:45,880 --> 00:09:49,500
But as you know, banks are very happy to lend to a credit quality of BHP.

143
00:09:49,500 --> 00:09:54,760
So the returns that you get on that would be sub 2% margin.

144
00:09:54,760 --> 00:09:56,220
Also infrastructure lending.

145
00:09:56,220 --> 00:10:01,120
So good, stable, transparent cash flows means that you've got very good credit profile,

146
00:10:01,120 --> 00:10:06,480
very, very efficient market to getting cheap long term funding.

147
00:10:06,480 --> 00:10:11,800
At the other end of the spectrum, however, excuse me, you've got very high risk return.

148
00:10:11,800 --> 00:10:15,680
So special situations, distress debt.

149
00:10:15,680 --> 00:10:23,680
And what we don't find attractive for us is lending to property development companies.

150
00:10:23,680 --> 00:10:26,040
Lending to property development companies.

151
00:10:26,040 --> 00:10:31,240
These sorts of opportunities come along through the cycle, but we feel as though anything

152
00:10:31,240 --> 00:10:37,240
of that cyclical nature or ones that rely simply on selling assets to pay back alone

153
00:10:37,240 --> 00:10:40,920
rather than real cash flow lending is what we're all about.

154
00:10:40,920 --> 00:10:45,800
So they belong in a high risk, high return kind of setting.

155
00:10:45,800 --> 00:10:51,060
The other one that we see quite often coming up is lending to smaller companies, SME lending.

156
00:10:51,060 --> 00:10:56,320
You should be getting a high return for those because when the cycle turns, SMEs are the

157
00:10:56,320 --> 00:11:02,240
ones that aren't the most pressure and least able to pass on input price increases to their

158
00:11:02,240 --> 00:11:03,640
end customers.

159
00:11:03,640 --> 00:11:07,040
So you might ask, what are we focused on in our strategy?

160
00:11:07,040 --> 00:11:10,000
Really we have three key subsectors.

161
00:11:10,000 --> 00:11:15,920
First and foremost in real estate is the lower end of what we consider to be the risk returned

162
00:11:15,920 --> 00:11:17,560
in our strategy.

163
00:11:17,560 --> 00:11:23,000
Because we're looking for stabilized property, i.e. built property in industrial commercial

164
00:11:23,000 --> 00:11:26,200
office with good quality tenant cash flow.

165
00:11:26,200 --> 00:11:31,120
Now that cash flow is what allows us to do our credit work to work out whether we can

166
00:11:31,120 --> 00:11:34,800
lend the money and they can pay us back through that cash flow.

167
00:11:34,800 --> 00:11:39,680
And should that not come about for whatever unforeseeable reason, we can then sell the

168
00:11:39,680 --> 00:11:41,720
property to get our money back.

169
00:11:41,720 --> 00:11:45,560
Rather than simply saying, we're going to lend money to a property developer, you've

170
00:11:45,560 --> 00:11:48,640
got the risk of it being completed on time and on budget.

171
00:11:48,640 --> 00:11:53,960
Then you have to sell the particular underlying property or properties to get your money back.

172
00:11:53,960 --> 00:11:56,480
That is in our view, not really credit risk.

173
00:11:56,480 --> 00:12:03,040
That is really taking a forward view on execution and also then the forward valuations of those

174
00:12:03,040 --> 00:12:05,660
particular properties for you to get your money back.

175
00:12:05,660 --> 00:12:06,780
So that's one element.

176
00:12:06,780 --> 00:12:09,160
The second element is leveraged by out lending.

177
00:12:09,160 --> 00:12:17,440
So this is senior secured lending to the very, very familiar and top market share companies

178
00:12:17,440 --> 00:12:20,200
that everyone would be familiar with if you're in Australia.

179
00:12:20,200 --> 00:12:26,600
So we're talking about companies like Arnott's Biscuits, MYOB, HealthScope Hospitals.

180
00:12:26,600 --> 00:12:31,480
So all of these three are Patty's Foods, 4 and 20 Pies and Nana's Apple Pies.

181
00:12:31,480 --> 00:12:35,760
We lend money to the private equity firms that have purchased those businesses, but

182
00:12:35,760 --> 00:12:40,480
then lent the money on a senior secured basis alongside other lenders.

183
00:12:40,480 --> 00:12:45,680
We take security over these wonderful companies that are through the cycle very, very stable

184
00:12:45,680 --> 00:12:46,880
in terms of their cashflow.

185
00:12:46,880 --> 00:12:52,600
They have the ability to pass on input prices to their end consumers and thereby maintain

186
00:12:52,600 --> 00:12:57,880
profitability and be able to pay our debt under all reasonable forward views of the

187
00:12:57,880 --> 00:12:58,880
world.

188
00:12:58,880 --> 00:13:05,840
So what we don't do is lend money to retail, to tourism, to hospitality, to mining.

189
00:13:05,840 --> 00:13:09,360
Any of these sorts of industries are very cyclical businesses.

190
00:13:09,360 --> 00:13:14,640
And if you lever them up, it should come as no surprise that at some points in the cycle,

191
00:13:14,640 --> 00:13:17,940
it gets very difficult for them to service their debt obligations.

192
00:13:17,940 --> 00:13:20,440
So we've shied away from that.

193
00:13:20,440 --> 00:13:26,040
The third element of what we do is asset-backed securities and more so on the private side.

194
00:13:26,040 --> 00:13:30,640
So this is probably less familiar to most people, but everyone might be familiar with

195
00:13:30,640 --> 00:13:33,780
residential mortgage-backed securities or RMBS.

196
00:13:33,780 --> 00:13:39,920
But within the overall umbrella of asset-backed securities, we're talking about anything that

197
00:13:39,920 --> 00:13:40,920
you can securitize.

198
00:13:40,920 --> 00:13:47,640
So be it a pool of mortgages or car loans, auto loans, credit cards or personal loans,

199
00:13:47,640 --> 00:13:53,240
these pools are set up in terms of special purpose vehicles where we back very well established

200
00:13:53,240 --> 00:14:02,440
non-bank lenders like Latitudes, First Mac, Wiser, like Mortgage House, Bluestone Mortgages.

201
00:14:02,440 --> 00:14:06,580
These sorts of groups, they originate loans that go into these special purpose vehicles

202
00:14:06,580 --> 00:14:08,240
that we help fund.

203
00:14:08,240 --> 00:14:12,120
We don't give the money to those particular companies that I just mentioned.

204
00:14:12,120 --> 00:14:16,680
We have exposure to the loan pools that they originate and we take security over these

205
00:14:16,680 --> 00:14:18,440
pools of loans.

206
00:14:18,440 --> 00:14:23,800
And so should there be anything wrong at the company level, we still have very sound security

207
00:14:23,800 --> 00:14:26,520
in the form of these pools of loans.

208
00:14:26,520 --> 00:14:32,520
So we provide that lending alongside banks who do the most risk remote, AAA and AA kind

209
00:14:32,520 --> 00:14:33,520
of lending.

210
00:14:33,520 --> 00:14:39,720
And we provide that mezzanine finance above what these companies put as first loss in

211
00:14:39,720 --> 00:14:41,720
these particular pools.

212
00:14:41,720 --> 00:14:46,880
So across these three different sleeves that I just described, we are aiming for a target

213
00:14:46,880 --> 00:14:52,560
return for our investors of cash plus 4% to 5% through the cycle.

214
00:14:52,560 --> 00:14:57,080
And we've been able to deliver that consistently since the inception of the firm because we

215
00:14:57,080 --> 00:15:03,080
firmly believe that's where the risk starts to really increase much above sort of 500

216
00:15:03,080 --> 00:15:06,200
over 600 over credit margin.

217
00:15:06,200 --> 00:15:11,460
Above that, we start to feel as though you're more correlated to the overall macro picture.

218
00:15:11,460 --> 00:15:16,520
But we are really in business to provide people a non-correlated defensive income that we

219
00:15:16,520 --> 00:15:21,800
can deliver to them in the form of cash every quarter in distributions at that sort of gross

220
00:15:21,800 --> 00:15:26,320
yield of 10.2% currently, less a flat management fee.

221
00:15:26,320 --> 00:15:31,120
Well, thank you for that very in-depth insight on how it all works.

222
00:15:31,120 --> 00:15:35,320
Can we go into just quickly, the best thing about this entire conversation is digging

223
00:15:35,320 --> 00:15:40,080
into what's the loans, which specific companies, what's the macro outlook, so many interesting

224
00:15:40,080 --> 00:15:46,080
things, but why don't we quickly cover the mechanics first, right?

225
00:15:46,080 --> 00:15:50,040
Is this, do you only have a managed fund, correct?

226
00:15:50,040 --> 00:15:52,280
How many loans are in the fund?

227
00:15:52,280 --> 00:15:53,280
As you said, it's quarterly income.

228
00:15:53,280 --> 00:15:57,440
How long does it take to get money into the fund, out of the fund?

229
00:15:57,440 --> 00:15:59,200
What are the overall mechanics?

230
00:15:59,200 --> 00:16:04,800
Yeah, so let's talk about the main flagship open-ended vehicle that we have is Revolution

231
00:16:04,800 --> 00:16:06,920
Private Debt Fund number two.

232
00:16:06,920 --> 00:16:14,900
It is approaching a size of 1.9 billion and it allows institutions to access that particular

233
00:16:14,900 --> 00:16:17,880
strategy through the Master Fund.

234
00:16:17,880 --> 00:16:22,320
The Master Fund is designed for the larger insides and about three quarters of our funds

235
00:16:22,320 --> 00:16:24,760
under management is actually institutional.

236
00:16:24,760 --> 00:16:32,420
So large clients like QIC, Brighter Super, AMP, these sorts of names.

237
00:16:32,420 --> 00:16:37,080
With that particular Master Fund, it has a one-year lockup and half-yearly redemption

238
00:16:37,080 --> 00:16:42,960
windows, but we've also got a very good vehicle in the form of a wholesale feeder vehicle

239
00:16:42,960 --> 00:16:49,320
that purchases units into the Master Fund for people like high net worths, family officers,

240
00:16:49,320 --> 00:16:53,280
qualified wholesale investors to access the strategy.

241
00:16:53,280 --> 00:16:56,620
For that particular vehicle, it is monthly applications.

242
00:16:56,620 --> 00:16:59,560
So we accept capital at the end of every month.

243
00:16:59,560 --> 00:17:05,440
And then we have quarterly redemption windows with no specified lockup period.

244
00:17:05,440 --> 00:17:10,620
But we would say the underlying investments that we invest in are quite illiquid.

245
00:17:10,620 --> 00:17:17,040
And whilst there's a 1.4-year credit duration, as in the average tenor of the loans now,

246
00:17:17,040 --> 00:17:22,240
it's about one and a half years, we really don't recommend it to be a short-term ATM

247
00:17:22,240 --> 00:17:25,800
machine for anyone, even though we offer quarterly redemption windows.

248
00:17:25,800 --> 00:17:30,360
We would recommend it because we're trying to harvest both the appropriate credit margin

249
00:17:30,360 --> 00:17:36,200
for the loans, but also a pretty handsome and observable illiquidity premium of around

250
00:17:36,200 --> 00:17:40,960
2% to 3% when you compare it to the same rating and what you can get in public markets.

251
00:17:40,960 --> 00:17:44,480
So we always say you can't turn lead into gold.

252
00:17:44,480 --> 00:17:47,180
So what do you give up for that additional return?

253
00:17:47,180 --> 00:17:51,480
The illiquid nature of it means that you get a better return, but you should have a more

254
00:17:51,480 --> 00:17:55,840
patient outlook when it comes to allocating to this type of strategy.

255
00:17:55,840 --> 00:17:56,840
Okay.

256
00:17:56,840 --> 00:17:58,880
So that's the mechanics.

257
00:17:58,880 --> 00:18:00,120
So how many loans?

258
00:18:00,120 --> 00:18:03,200
There's 47 loans in the flagship strategy.

259
00:18:03,200 --> 00:18:05,880
And across the three sleighs, what's the percentage split?

260
00:18:05,880 --> 00:18:10,280
Look, commercial property is one that I would say has been very opportunistic.

261
00:18:10,280 --> 00:18:15,720
So in our five and a half years, we've been in a historically low interest rate environment

262
00:18:15,720 --> 00:18:19,640
where the banks have actually loved the deals that we would have liked even more and done

263
00:18:19,640 --> 00:18:23,760
them at much lower spreads, lower yields than what we would entertain.

264
00:18:23,760 --> 00:18:27,760
So we've only ever done two deals in that space in that time.

265
00:18:27,760 --> 00:18:34,200
But the rest of the two other sleighs are roughly over time 50-50 between senior secured

266
00:18:34,200 --> 00:18:39,520
leverage buyout loans and private asset-backed securities in the portfolio.

267
00:18:39,520 --> 00:18:41,240
What's the largest loan?

268
00:18:41,240 --> 00:18:44,480
What is the largest loan and what's the percentage weighting of that largest loan?

269
00:18:44,480 --> 00:18:49,160
So we have a stated maximum Murdoch of seven and a half percent of the fund, but that's

270
00:18:49,160 --> 00:18:50,560
an upper limit.

271
00:18:50,560 --> 00:18:53,960
These days we're more limiting it to about 5% of the fund.

272
00:18:53,960 --> 00:18:59,800
So it's not a, I mean, 47 loans, it gives you some diversity, but it's not super granular.

273
00:18:59,800 --> 00:19:05,000
The biggest loan would be just north of a hundred million dollars out of that 1.9 billion.

274
00:19:05,000 --> 00:19:08,720
And that's, to give you an example, that's like MYOB.

275
00:19:08,720 --> 00:19:09,720
Yeah, right.

276
00:19:09,720 --> 00:19:10,720
Yeah.

277
00:19:10,720 --> 00:19:15,600
So MYOB, let me, maybe if I can give you listeners a little bit of a background on why we like

278
00:19:15,600 --> 00:19:16,600
MYOB.

279
00:19:16,600 --> 00:19:18,600
That was going to be my next question.

280
00:19:18,600 --> 00:19:19,600
Right.

281
00:19:19,600 --> 00:19:22,400
So look, I think a lot of people have the equity lens.

282
00:19:22,400 --> 00:19:25,360
And when they think of MYOB, they go, oh, it's not a terribly sexy name.

283
00:19:25,360 --> 00:19:31,000
And there's other, maybe disruptive companies coming in that sort of accounting software

284
00:19:31,000 --> 00:19:35,760
arena, like Xero and others.

285
00:19:35,760 --> 00:19:39,720
From a debt point of view though, we really look for companies like this.

286
00:19:39,720 --> 00:19:46,080
They have an unassailable 30 year market leadership history.

287
00:19:46,080 --> 00:19:51,640
The retention of their client base above six employees, so we're talking about slightly

288
00:19:51,640 --> 00:19:54,300
larger than very small companies.

289
00:19:54,300 --> 00:19:58,740
Their attention rate three times has been more than 94%.

290
00:19:58,740 --> 00:20:04,160
We honestly believe that they have transitioned from having desktop versions of their software

291
00:20:04,160 --> 00:20:08,240
to cloud, which has meant their customer base is even stickier.

292
00:20:08,240 --> 00:20:13,800
You think about the mission critical nature of what the service that they provide means

293
00:20:13,800 --> 00:20:18,200
that it's a very high risk strategy to actually pick up all of your accounting and move it

294
00:20:18,200 --> 00:20:19,260
to another company.

295
00:20:19,260 --> 00:20:24,960
If it is actually serving you well, it remains to be a very sticky kind of an investment

296
00:20:24,960 --> 00:20:29,400
that you make in providing that very essential part of doing business.

297
00:20:29,400 --> 00:20:32,920
So for us, this is all the characteristics we like.

298
00:20:32,920 --> 00:20:35,120
It is number one market share for 30 years.

299
00:20:35,120 --> 00:20:37,600
It has got higher barriers to entry.

300
00:20:37,600 --> 00:20:42,960
It's got the ability to pass through any particular increases in the interest rates that they

301
00:20:42,960 --> 00:20:45,000
get charged by people like us.

302
00:20:45,000 --> 00:20:49,160
But also if there's a labor shortage and they've got to pay more for staff, they pass

303
00:20:49,160 --> 00:20:50,600
that through in subscription rates.

304
00:20:50,600 --> 00:20:55,920
We've seen them increasing their subscription rates with very inelastic demand.

305
00:20:55,920 --> 00:21:01,200
And so this is exactly the kind of business that we particularly like because we have

306
00:21:01,200 --> 00:21:02,760
security over that whole business.

307
00:21:02,760 --> 00:21:07,760
Now it's not bricks and mortar being a software business, but you can say that the inherent

308
00:21:07,760 --> 00:21:12,960
ability for that company to generate cash flows, given its position, is very strong

309
00:21:12,960 --> 00:21:13,960
through the cycle.

310
00:21:13,960 --> 00:21:16,320
The subscription businesses are fantastic.

311
00:21:16,320 --> 00:21:17,960
You can afford to look what's coming through.

312
00:21:17,960 --> 00:21:19,480
You see where it's coming through.

313
00:21:19,480 --> 00:21:23,040
But I remember when we were looking at Xero, I could have a couple of friends and clients

314
00:21:23,040 --> 00:21:26,840
going, how the hell do you look at what Xero is going to do?

315
00:21:26,840 --> 00:21:28,920
Because people don't understand the numbers.

316
00:21:28,920 --> 00:21:33,880
What they mean by that is you get no subscriptions for 11 and a half months of the year.

317
00:21:33,880 --> 00:21:34,880
Then everyone panics.

318
00:21:34,880 --> 00:21:38,080
The last two weeks, it does their books and goes, and they log in that last two weeks.

319
00:21:38,080 --> 00:21:39,080
And they get an influx.

320
00:21:39,080 --> 00:21:41,080
And how do they calculate for it?

321
00:21:41,080 --> 00:21:42,980
It's quite interesting.

322
00:21:42,980 --> 00:21:44,280
So that's on the positive side.

323
00:21:44,280 --> 00:21:50,360
So everyone knows that with these investments, loans, et cetera, they're like lobster traps.

324
00:21:50,360 --> 00:21:52,400
Easy to get into, hard to get out of.

325
00:21:52,400 --> 00:21:53,960
That's one way to think about it?

326
00:21:53,960 --> 00:21:54,960
Yeah.

327
00:21:54,960 --> 00:21:55,960
Well, they taste delicious as well, right?

328
00:21:55,960 --> 00:21:59,280
Especially when it tastes delicious, like a couple of lobsters.

329
00:21:59,280 --> 00:22:05,760
But the reason why I phrased it that way is when you're looking at these loans, obviously

330
00:22:05,760 --> 00:22:07,440
you don't want any to go bad on you.

331
00:22:07,440 --> 00:22:13,320
So you have a particular criteria that they must reach in order to even consider it.

332
00:22:13,320 --> 00:22:14,400
What is that criteria?

333
00:22:14,400 --> 00:22:20,120
And then secondly, if a company which you lend to, macroeconomic thematics change, a

334
00:22:20,120 --> 00:22:25,120
competitor comes in and takes them out or cut each their lunch, how do you deal with

335
00:22:25,120 --> 00:22:26,120
that relationship?

336
00:22:26,120 --> 00:22:31,920
And do you support them or do you just go, right, sorry, boys, can't help anymore?

337
00:22:31,920 --> 00:22:32,920
What's your process?

338
00:22:32,920 --> 00:22:34,040
Yeah, great question.

339
00:22:34,040 --> 00:22:38,880
So look, despite doing all the analysis, there are things that sometimes happen outside of

340
00:22:38,880 --> 00:22:39,880
everyone's control.

341
00:22:39,880 --> 00:22:45,400
And therefore, the ability to work with a particular sponsor or company becomes very

342
00:22:45,400 --> 00:22:46,560
paramount.

343
00:22:46,560 --> 00:22:52,080
So having the restructuring and workout experience that I've had over a very long period really

344
00:22:52,080 --> 00:22:53,080
comes to the fore.

345
00:22:53,080 --> 00:22:59,400
But our modus operandi is not to end up in that situation at all costs avoided.

346
00:22:59,400 --> 00:23:06,320
So that lobster trap, you want it to be absolutely wonderful for all parties, including the lobster.

347
00:23:06,320 --> 00:23:11,280
So the other analogy I use is you can walk down George Street with a wheelbarrow full

348
00:23:11,280 --> 00:23:12,780
of cash and give it away.

349
00:23:12,780 --> 00:23:16,760
The hard part is getting it back in terms of people paying you back.

350
00:23:16,760 --> 00:23:17,880
So what do we do?

351
00:23:17,880 --> 00:23:23,800
So we get really under the hood on understanding how the historical businesses operated.

352
00:23:23,800 --> 00:23:25,120
What are the key drivers?

353
00:23:25,120 --> 00:23:27,320
What are the reasons why they're around?

354
00:23:27,320 --> 00:23:32,740
How their ability to generate cash and are they able to sustain the margins that they've

355
00:23:32,740 --> 00:23:38,880
historically had in periods of high cyclical times and low cyclical times?

356
00:23:38,880 --> 00:23:42,680
And what is the key drivers for us to understand the historicals?

357
00:23:42,680 --> 00:23:47,320
Then we generally from private equity get these wonderful hockey stick projections in

358
00:23:47,320 --> 00:23:53,000
terms of the future outlook because clearly they're more worried about the upside.

359
00:23:53,000 --> 00:23:57,480
Think about we take the same inputs to that, but then we look at what can go wrong because

360
00:23:57,480 --> 00:24:00,360
we have absolutely no care about the upside.

361
00:24:00,360 --> 00:24:05,000
The best thing we can do is get our interest payments as and when due and our money back

362
00:24:05,000 --> 00:24:06,440
at the end of the line.

363
00:24:06,440 --> 00:24:10,680
So we start to sensitize what happens to this company.

364
00:24:10,680 --> 00:24:12,440
Should there be a competitor come in?

365
00:24:12,440 --> 00:24:16,780
Should there be a macroeconomic downturn and recession?

366
00:24:16,780 --> 00:24:19,480
What happens if they need to pay more for input prices?

367
00:24:19,480 --> 00:24:21,180
How long is the lag?

368
00:24:21,180 --> 00:24:24,720
Or specific things like when we lent money to Ingham's.

369
00:24:24,720 --> 00:24:29,120
What happens if a whole group of chickens in one of their biggest farms need to be destroyed

370
00:24:29,120 --> 00:24:31,280
because of disease?

371
00:24:31,280 --> 00:24:35,920
What happens to the cash flow and are they able to still service our debt under those

372
00:24:35,920 --> 00:24:38,020
downside scenarios?

373
00:24:38,020 --> 00:24:41,520
And really that informs us on how resilient it is.

374
00:24:41,520 --> 00:24:46,180
So we promise our investors that we are trying to do everything in our power to have capital

375
00:24:46,180 --> 00:24:49,420
preservation being the ethos of our business.

376
00:24:49,420 --> 00:24:53,760
So for us to be true to that label, we're looking at what can go wrong.

377
00:24:53,760 --> 00:24:55,540
What happens if there's a recession?

378
00:24:55,540 --> 00:24:59,960
What happens if there's double digit unemployment rates at the same time as we have house price

379
00:24:59,960 --> 00:25:02,360
declines of 30 to 40%?

380
00:25:02,360 --> 00:25:06,840
Way worse than what APRA stress tests the banks on.

381
00:25:06,840 --> 00:25:13,400
If and only if we get to a point where we're comfortable under those ridiculously hardship

382
00:25:13,400 --> 00:25:19,640
scenarios, does this company actually start to falter or this group of loans start to

383
00:25:19,640 --> 00:25:21,120
falter?

384
00:25:21,120 --> 00:25:23,920
Do we then include it into the portfolio?

385
00:25:23,920 --> 00:25:28,660
And then once we're in a deal, we are monitoring those deals very closely.

386
00:25:28,660 --> 00:25:33,360
So we have a very strong relationship and a private side information.

387
00:25:33,360 --> 00:25:38,260
Unlike public markets where there's a reporting period, we're getting much more regular and

388
00:25:38,260 --> 00:25:41,800
timely information on how these businesses are performing.

389
00:25:41,800 --> 00:25:46,040
So if there is a period where there's deteriorating performance, we can actually address that

390
00:25:46,040 --> 00:25:50,840
with the company and sponsor and to see what we can do about working through it.

391
00:25:50,840 --> 00:25:55,960
And in the worst, worst case is enforce our security and get our money back before we

392
00:25:55,960 --> 00:25:58,840
lose our money.

393
00:25:58,840 --> 00:26:02,000
Any specific companies that you've had to deal with that?

394
00:26:02,000 --> 00:26:07,080
Well look, we've got and look, we try to be honest and upfront with all of our potential

395
00:26:07,080 --> 00:26:08,920
investors and our current investors.

396
00:26:08,920 --> 00:26:12,840
I'll give you a real life example of a deal that hasn't gone so well.

397
00:26:12,840 --> 00:26:16,160
We were involved in a company called Genesis Care.

398
00:26:16,160 --> 00:26:22,880
And in fact, I've been lending to this company when KKR first purchased it back in 2012.

399
00:26:22,880 --> 00:26:26,400
This was a wonderful success, Australian success story.

400
00:26:26,400 --> 00:26:32,880
It started with the roll up of radiation oncology businesses that started in Queensland.

401
00:26:32,880 --> 00:26:37,240
It really became the number one, it still is the number one provider of cancer radiation

402
00:26:37,240 --> 00:26:39,640
oncology in Australia.

403
00:26:39,640 --> 00:26:45,520
They successfully expanded into the UK and into Spain and have got market leading businesses

404
00:26:45,520 --> 00:26:46,520
there.

405
00:26:46,520 --> 00:26:52,720
And then I would say they embarked on what we would say is a very, very big, big acquisition,

406
00:26:52,720 --> 00:26:57,400
which really was a big change for that organization.

407
00:26:57,400 --> 00:27:02,040
Right before COVID, they decided to buy a company called 21 Century Oncology in the

408
00:27:02,040 --> 00:27:05,600
US to the tune of 1.4 billion US dollars.

409
00:27:05,600 --> 00:27:08,280
So a very large scale acquisition.

410
00:27:08,280 --> 00:27:13,920
And look, COVID didn't help the company, but also I would say KKR and the management team

411
00:27:13,920 --> 00:27:20,200
did a very poor job of actually integrating that business into the existing very successful

412
00:27:20,200 --> 00:27:21,200
business.

413
00:27:21,200 --> 00:27:24,560
And pretty soon the earnings in the US started to dwindle.

414
00:27:24,560 --> 00:27:30,040
And as a result, because it was debt funded acquisition, the leverage spiked to in excess

415
00:27:30,040 --> 00:27:32,800
of 30 times debt to EBITDA.

416
00:27:32,800 --> 00:27:35,160
So what happens in that case?

417
00:27:35,160 --> 00:27:43,360
Look, we campaigned with KKR and China Resources who were the owners.

418
00:27:43,360 --> 00:27:49,800
We actually formed a consortium of other Australian lenders to be able to campaign our best interests.

419
00:27:49,800 --> 00:27:54,200
We ended up getting involved in the debtor in possession financing under the Chapter

420
00:27:54,200 --> 00:27:56,960
11 proceedings in the US.

421
00:27:56,960 --> 00:28:02,240
And we've gotten, I would say, an outcome where we've written that asset down to what

422
00:28:02,240 --> 00:28:04,680
we believe the recovery rate is.

423
00:28:04,680 --> 00:28:10,320
And we have some ability to recover that should the company continue to trade on and be able

424
00:28:10,320 --> 00:28:15,600
to basically sell the US business and then the value returns back to the blue chip assets

425
00:28:15,600 --> 00:28:17,240
of Australia and Europe.

426
00:28:17,240 --> 00:28:23,580
But it's one where I would say the thesis of why we went into that deal still remains.

427
00:28:23,580 --> 00:28:27,760
We like the fact that they were number one in the world in cancer radiation oncology.

428
00:28:27,760 --> 00:28:32,040
The fact that this is very non-cyclical, high barriers to entry.

429
00:28:32,040 --> 00:28:33,520
We're talking about cancer, sadly.

430
00:28:33,520 --> 00:28:36,680
The incidence of cancer is only on the rises.

431
00:28:36,680 --> 00:28:39,400
The developed world ages.

432
00:28:39,400 --> 00:28:42,600
And so that's the fundamental thesis behind it.

433
00:28:42,600 --> 00:28:44,520
It's actually time critical treatment as well.

434
00:28:44,520 --> 00:28:49,560
So you need to get treated very quickly if you're sadly diagnosed with the cancer.

435
00:28:49,560 --> 00:28:55,400
But I would say the execution of that foreign acquisition, not the first company to go overseas

436
00:28:55,400 --> 00:28:58,160
and not do so well, but it won't be the last.

437
00:28:58,160 --> 00:29:01,160
So I guess that's something we've learned going forward.

438
00:29:01,160 --> 00:29:06,840
If there's a large scale acquisition of an already successful business, then we would

439
00:29:06,840 --> 00:29:12,640
really pause to see whether we are going to continue to support such a bold venture.

440
00:29:12,640 --> 00:29:16,840
It's interesting you say that because it doesn't matter what thematic you're investing in,

441
00:29:16,840 --> 00:29:18,840
sorry, what asset class, right?

442
00:29:18,840 --> 00:29:22,800
Is that you might be even be worrying some of this thematic, but at the end of the day,

443
00:29:22,800 --> 00:29:24,640
there's always a cycle within the cycle.

444
00:29:24,640 --> 00:29:29,200
It's either central bank related, inflationary, monetary policy related, or it's a cycle within

445
00:29:29,200 --> 00:29:30,800
the cycle that's specific asset class.

446
00:29:30,800 --> 00:29:36,560
It reminds me of a quote which we discussed off air by G. Michael Humpf in his book, A

447
00:29:36,560 --> 00:29:38,720
Pocalyptic Novel, right?

448
00:29:38,720 --> 00:29:43,120
Where he says, hard times create strong men, strong men create good times, good times create

449
00:29:43,120 --> 00:29:46,680
weak men and weak men create hard times, right?

450
00:29:46,680 --> 00:29:50,300
And the reason why I'm bringing that up right now is it's very, what you just described

451
00:29:50,300 --> 00:29:53,720
was very reminiscent of QBE's current problems, right?

452
00:29:53,720 --> 00:29:58,500
When all you see miners, when essentially everyone gets excited, the party's happening,

453
00:29:58,500 --> 00:30:03,440
people are popping champagne, you've got cash up here, you're writing a success of the current

454
00:30:03,440 --> 00:30:08,920
people, and then these companies proceed to look at mergers and acquisitions at evaluation,

455
00:30:08,920 --> 00:30:13,680
which they shouldn't because they don't believe that the party's ever going to stop, right?

456
00:30:13,680 --> 00:30:19,080
And then again, like, you know, these easy times become, you know, poor times type routine.

457
00:30:19,080 --> 00:30:22,880
But then if you look at the other side of this, so many people out there as well waiting

458
00:30:22,880 --> 00:30:27,760
for those hard times, you know, like we're currently seeing it right now, there's a consolidation

459
00:30:27,760 --> 00:30:31,560
play across the globe in the online gambling space, right?

460
00:30:31,560 --> 00:30:32,760
Completely.

461
00:30:32,760 --> 00:30:36,680
And what's happening is the strong will survive and whoever survives will essentially swallow

462
00:30:36,680 --> 00:30:41,360
up everyone else and then those hard men that are doing the odds at the bottom may see essentially

463
00:30:41,360 --> 00:30:44,240
come up the other side and create the good times.

464
00:30:44,240 --> 00:30:46,160
So it's just very interesting what you're saying.

465
00:30:46,160 --> 00:30:50,040
So why don't we pivot based on that?

466
00:30:50,040 --> 00:30:53,620
Just on that Murdoch, I wholeheartedly agree.

467
00:30:53,620 --> 00:30:58,920
So we've had a period where rates have been historically low for a long time.

468
00:30:58,920 --> 00:31:06,240
And then we also had unprecedented fiscal policy stimulus as well in the form of COVID.

469
00:31:06,240 --> 00:31:11,200
At those periods of time, you know, it was most important to be disciplined.

470
00:31:11,200 --> 00:31:15,720
And this is the times where, you know, it was very easy to make money, very easy to

471
00:31:15,720 --> 00:31:16,920
lend money.

472
00:31:16,920 --> 00:31:19,640
And a lot of younger people have never seen a default cycle.

473
00:31:19,640 --> 00:31:22,960
You know, there's never been one, you know, for many of them because they don't have a

474
00:31:22,960 --> 00:31:23,960
long career.

475
00:31:23,960 --> 00:31:29,720
However, there was reason to understand today because you don't have a chance to trade out

476
00:31:29,720 --> 00:31:32,680
of these private debt deals that we do.

477
00:31:32,680 --> 00:31:34,440
And none of our peers do either.

478
00:31:34,440 --> 00:31:37,880
That our report cards are all going to be collectively marked over the next 12 months

479
00:31:37,880 --> 00:31:43,560
on how you've constructed your portfolios in terms of coming into this period of macroeconomic

480
00:31:43,560 --> 00:31:48,000
stress where the hard times will come and it will be only those that are strongest will

481
00:31:48,000 --> 00:31:49,800
survive.

482
00:31:49,800 --> 00:31:53,080
And this is where experience comes to the fore.

483
00:31:53,080 --> 00:31:55,920
And the other thing is we don't offer a retail product.

484
00:31:55,920 --> 00:32:01,200
We don't think we should be investing in illiquid assets and offering daily or monthly liquidity

485
00:32:01,200 --> 00:32:03,040
to mums and dads.

486
00:32:03,040 --> 00:32:04,040
Why is that?

487
00:32:04,040 --> 00:32:09,360
Because the weaker hands when it comes to redemptions, we're seeing this in property

488
00:32:09,360 --> 00:32:10,840
already.

489
00:32:10,840 --> 00:32:12,380
Redemption gates are coming down.

490
00:32:12,380 --> 00:32:16,640
People are unable to get their money out when they were previously promised monthly liquidity.

491
00:32:16,640 --> 00:32:18,560
This is foolhardy in my view.

492
00:32:18,560 --> 00:32:19,560
So this is a...

493
00:32:19,560 --> 00:32:24,560
I was just discussing on there like an article written by David Rowe on the AFR.

494
00:32:24,560 --> 00:32:25,840
He quotes this.

495
00:32:25,840 --> 00:32:29,800
He says, the global office property crisis has finally hit Australia.

496
00:32:29,800 --> 00:32:33,320
More than eight months after the property fund managers by Blackstone shocked investors

497
00:32:33,320 --> 00:32:36,440
worldwide by limiting investor redemptions.

498
00:32:36,440 --> 00:32:43,720
Charter halls unlisted direct PFA fund, which owns 2.45 billion portfolio of office properties,

499
00:32:43,720 --> 00:32:49,000
most which are located in Australia's maybe CBDs, has also told investors that essentially

500
00:32:49,000 --> 00:32:50,840
they've limited redemptions.

501
00:32:50,840 --> 00:32:56,240
So with things like this coming in the press, but the reason I'm phrasing this way is you

502
00:32:56,240 --> 00:33:00,360
walk down the street and you see artificial intelligence and the Nasdaq running.

503
00:33:00,360 --> 00:33:04,880
But then you go to an event like I went to yesterday for two hours and heard a particular

504
00:33:04,880 --> 00:33:10,240
fund manager speak and then what they're saying, they're all saying that the interest rate

505
00:33:10,240 --> 00:33:13,920
cycle on the way up is not finished yet.

506
00:33:13,920 --> 00:33:18,800
They're saying that the reason why people's mortgages, yes, you went from 2% to paying

507
00:33:18,800 --> 00:33:21,480
6% is 200% increase from a bottom.

508
00:33:21,480 --> 00:33:25,720
These people leverage themselves to their heel, but like why aren't they defaulting?

509
00:33:25,720 --> 00:33:30,840
But I think someone showed a chart regarding that bank default rates if it's from a bank,

510
00:33:30,840 --> 00:33:35,440
a lower than it was from the private lending side because of the unregulated private lending

511
00:33:35,440 --> 00:33:36,440
markets.

512
00:33:36,440 --> 00:33:40,280
And the main reason for that was they argued that since people were just home for so long,

513
00:33:40,280 --> 00:33:42,840
they'd build up like a buffer, so to speak.

514
00:33:42,840 --> 00:33:47,920
So I'm speaking to clients now, like I spoke to a client today, a very lovely family, very

515
00:33:47,920 --> 00:33:53,840
wealthy family, and we're discussing how do we play from today going forward because it's

516
00:33:53,840 --> 00:33:56,160
in this weird state of flux.

517
00:33:56,160 --> 00:34:01,320
And I would argue that it's somewhat in this, we discussed the cycle before with hard times

518
00:34:01,320 --> 00:34:02,520
creating good men, right?

519
00:34:02,520 --> 00:34:07,480
The decisions we make now will essentially derive which way the cycle goes.

520
00:34:07,480 --> 00:34:12,040
So what's your opinion on what's happening with that?

521
00:34:12,040 --> 00:34:16,880
We see this in asset-backed securities portfolio.

522
00:34:16,880 --> 00:34:21,760
We get a good take on what the consumer's feeling throughout those pools, be they mortgages,

523
00:34:21,760 --> 00:34:24,360
auto loans, personal loans, credit cards.

524
00:34:24,360 --> 00:34:30,640
What we found is the impact of the monetary policy tightening is coming in the bigger

525
00:34:30,640 --> 00:34:35,740
lag, a longer lag this time around because of those fiscal stimulus payments and people

526
00:34:35,740 --> 00:34:38,280
building up bigger reserves.

527
00:34:38,280 --> 00:34:46,600
But fear not, as sure as night follows day, the two-speed economy is going to come whereby

528
00:34:46,600 --> 00:34:52,000
the people who are stretched will run out of those savings and they will be forced to

529
00:34:52,000 --> 00:34:53,680
liquidate assets.

530
00:34:53,680 --> 00:34:59,640
And this is the time where if you've got patient capital, as I mentioned, we don't offer liquidity.

531
00:34:59,640 --> 00:35:05,240
We want to be buying not distressed assets, but we want to be buying off distressed sellers

532
00:35:05,240 --> 00:35:11,440
of the best and brightest assets, be that in real estate, be that in leveraged buyout

533
00:35:11,440 --> 00:35:14,200
loans or be that in asset-backed securities.

534
00:35:14,200 --> 00:35:19,160
And my career, some of the best money and the best deals I made for our clients was

535
00:35:19,160 --> 00:35:24,240
in the aftermath of the global financial crisis when we had capital, when everybody was heading

536
00:35:24,240 --> 00:35:25,240
for the exit gates.

537
00:35:25,240 --> 00:35:31,000
Just like when Buffett bailed out Amex, the dealer of last resort, the best deal he ever

538
00:35:31,000 --> 00:35:32,160
did right at the bottom.

539
00:35:32,160 --> 00:35:37,600
There are some wonderful opportunities when that market is so dislocated and everything

540
00:35:37,600 --> 00:35:42,020
starts with a liquidity crunch and people need liquidity and need it pronto.

541
00:35:42,020 --> 00:35:46,620
People that offer daily liquidity, people suddenly go from greed to fear.

542
00:35:46,620 --> 00:35:51,400
They want their money back and they want it to put in the mattress when fear really takes

543
00:35:51,400 --> 00:35:52,400
hold.

544
00:35:52,400 --> 00:35:57,440
So what does it force fund managers or banks to do is to sell their best assets.

545
00:35:57,440 --> 00:36:02,400
And you want to be there to collect them at your level rather than where they're currently

546
00:36:02,400 --> 00:36:03,400
trading.

547
00:36:03,400 --> 00:36:06,840
So this is a very interesting time coming up in my opinion.

548
00:36:06,840 --> 00:36:10,880
So you don't take a macroeconomic view, you know, it's like it's an all weather style

549
00:36:10,880 --> 00:36:17,840
lend, right, but surely you must take a macroeconomic view in the essence of what project or company

550
00:36:17,840 --> 00:36:20,040
you will lend it to right now.

551
00:36:20,040 --> 00:36:23,360
And what I mean by this is say something's at the top of the cycle because clearly you

552
00:36:23,360 --> 00:36:27,600
don't want to be in that same scenario with that cancer clinic company, right?

553
00:36:27,600 --> 00:36:28,600
You know, something's running up.

554
00:36:28,600 --> 00:36:30,800
So if you had your time again, you're looking at that.

555
00:36:30,800 --> 00:36:33,640
Someone's coming to you, shouldn't you, when you be thinking yourself, right, it's top

556
00:36:33,640 --> 00:36:36,680
of the market for this particular sector.

557
00:36:36,680 --> 00:36:38,200
We definitely potentially could do the line.

558
00:36:38,200 --> 00:36:39,400
Are you sure you really want to do it?

559
00:36:39,400 --> 00:36:40,400
Do you have these conversations?

560
00:36:40,400 --> 00:36:41,400
No.

561
00:36:41,400 --> 00:36:47,040
So Murdoch, what we do is exactly what you're describing is not what we do because if it's

562
00:36:47,040 --> 00:36:50,840
at the top of the cycle, we don't want to touch it, but we don't really want to touch

563
00:36:50,840 --> 00:36:52,880
it when it's at the bottom of the cycle.

564
00:36:52,880 --> 00:36:56,200
As in we just want companies that just produce cashflow.

565
00:36:56,200 --> 00:36:57,200
Yeah, right.

566
00:36:57,200 --> 00:37:01,360
So we don't take a macro view on is the next, is a good time is going to roll for another

567
00:37:01,360 --> 00:37:03,160
two years or three years or five years.

568
00:37:03,160 --> 00:37:04,160
Just look at the cashflow.

569
00:37:04,160 --> 00:37:08,200
Just look at what can go wrong because in the end we don't get rewarded for the upside,

570
00:37:08,200 --> 00:37:09,200
right?

571
00:37:09,200 --> 00:37:12,720
So even that Genesis Care example, cancer hasn't gone away.

572
00:37:12,720 --> 00:37:16,480
This business in Australia is still very valuable.

573
00:37:16,480 --> 00:37:20,240
It's just that they had a misstep on that integration of that big acquisition.

574
00:37:20,240 --> 00:37:25,240
But again, this is mission critical, time critical cancer treatment they're providing.

575
00:37:25,240 --> 00:37:27,280
This is exactly what we're looking for.

576
00:37:27,280 --> 00:37:34,000
We also back the number two provider of cancer radiation oncology called ICON in Australia.

577
00:37:34,000 --> 00:37:38,540
And it's performed beautifully because, you know, again, sadly, people are getting cancer

578
00:37:38,540 --> 00:37:40,920
in a higher prevalence.

579
00:37:40,920 --> 00:37:45,080
Yes, it's just so interesting.

580
00:37:45,080 --> 00:37:49,560
The entire like where we are today, it's in this weird state of flux can go either direction.

581
00:37:49,560 --> 00:37:53,920
You know, people are looking at it and just going, you know, it could go north, could

582
00:37:53,920 --> 00:37:57,520
go to north in the short term, could go south in the long term.

583
00:37:57,520 --> 00:37:58,840
You know, what are people doing with the money?

584
00:37:58,840 --> 00:38:02,720
But I'm hearing more and more and more that people are quite comfortable to sit in cash

585
00:38:02,720 --> 00:38:06,560
to, you know, potentially lose the user fund like yourself or, you know, use a competitor

586
00:38:06,560 --> 00:38:09,960
where you do get a cash flow component is defensive.

587
00:38:09,960 --> 00:38:12,360
You're getting essentially more than a government bank bond.

588
00:38:12,360 --> 00:38:16,480
Sit there, relax, let essentially the markets play out however the way they play out.

589
00:38:16,480 --> 00:38:19,640
Like I just potentially don't want to play, you know, with all my money in that particular

590
00:38:19,640 --> 00:38:24,280
game and they just wait for events to unfold and then look at us as when they're cheap.

591
00:38:24,280 --> 00:38:25,280
Yep.

592
00:38:25,280 --> 00:38:26,280
I hear it everywhere.

593
00:38:26,280 --> 00:38:31,680
But the biggest thing, I suppose, and as you say, I really like the fact that you guys

594
00:38:31,680 --> 00:38:34,120
focus mainly on companies look for things with cash flow.

595
00:38:34,120 --> 00:38:37,840
So the really part I'd like to hear your opinion on is commercial property because I'm hearing

596
00:38:37,840 --> 00:38:40,180
this everywhere.

597
00:38:40,180 --> 00:38:46,080
And I don't think a lot of Australians out there really can comprehend the potential

598
00:38:46,080 --> 00:38:51,080
impact of some of these managed funds, you know, owning these commercial real estate

599
00:38:51,080 --> 00:38:54,880
as like we're sitting in Sydney right now, you know, near the Sheraton on Hyde Park,

600
00:38:54,880 --> 00:38:58,560
walking around half of these major offices are empty.

601
00:38:58,560 --> 00:38:59,560
Right?

602
00:38:59,560 --> 00:39:01,560
Like, this is unprecedented.

603
00:39:01,560 --> 00:39:02,840
Everyone's ever seen this before.

604
00:39:02,840 --> 00:39:03,840
Yeah.

605
00:39:03,840 --> 00:39:05,560
So can you speak to your thoughts on that?

606
00:39:05,560 --> 00:39:06,560
Yeah.

607
00:39:06,560 --> 00:39:11,440
So commercial property has been a source of a lot of wealth for a lot of people for decades

608
00:39:11,440 --> 00:39:12,800
and cycles.

609
00:39:12,800 --> 00:39:18,580
But I would say if you look back at history, the State Bank of Victoria almost went under

610
00:39:18,580 --> 00:39:23,280
because of its commercial property development risk they had on board.

611
00:39:23,280 --> 00:39:28,020
Over a weekend, they had to do a shotgun wedding with State Bank of Victoria being acquired

612
00:39:28,020 --> 00:39:30,100
by Cobblet Bank.

613
00:39:30,100 --> 00:39:34,680
We know that through the cycle, you can make a lot of money, but what happens when we see

614
00:39:34,680 --> 00:39:39,920
a confluence of factors is what we've witnessed over the last 12 months that all coordinate

615
00:39:39,920 --> 00:39:42,040
to affect property.

616
00:39:42,040 --> 00:39:44,720
Let's look at the factors.

617
00:39:44,720 --> 00:39:46,840
Interest rates have gone up dramatically.

618
00:39:46,840 --> 00:39:52,000
The supply costs of every raw material and everything that goes into a construction deal,

619
00:39:52,000 --> 00:39:54,920
all those prices of raw materials have gone up.

620
00:39:54,920 --> 00:40:00,400
Work costs, labor firstly scarce if you can find it, but when you do, it costs you sometimes

621
00:40:00,400 --> 00:40:02,440
multiples of what it used to.

622
00:40:02,440 --> 00:40:04,800
Also, that all affects time.

623
00:40:04,800 --> 00:40:07,440
And the biggest enemy in any development is time.

624
00:40:07,440 --> 00:40:13,000
There's no cash flow whilst you go and complete that particular property build.

625
00:40:13,000 --> 00:40:18,580
So if you've got the compounding effect of higher rates for a longer period of time,

626
00:40:18,580 --> 00:40:23,080
it will affect your development margins initially, so what the developer and what the builder

627
00:40:23,080 --> 00:40:24,080
gets.

628
00:40:24,080 --> 00:40:26,680
And generally, these are not well-capitalized businesses.

629
00:40:26,680 --> 00:40:32,280
They have multiple projects across multiple locations with all small amounts of equity.

630
00:40:32,280 --> 00:40:34,660
That gets swallowed up pretty quickly.

631
00:40:34,660 --> 00:40:40,960
If you're a lender that you lent on a notional on completion valuation of 60% loan to value,

632
00:40:40,960 --> 00:40:47,340
and you see a lot of people sprouting off on the loan to value ratio of this is 60%.

633
00:40:47,340 --> 00:40:53,440
My question to them is, what is the V in loan to value if you don't finish it?

634
00:40:53,440 --> 00:40:56,560
If it's partially complete, the builder and developer goes under.

635
00:40:56,560 --> 00:40:59,000
In some cases, it's over 100%.

636
00:40:59,000 --> 00:41:03,760
So there's a real way that you can lose money on a senior secured loan.

637
00:41:03,760 --> 00:41:06,840
Isn't that just musical chairs at the highest level?

638
00:41:06,840 --> 00:41:07,840
Absolutely.

639
00:41:07,840 --> 00:41:12,320
And why do you think we've never ever entertained doing these sorts of loans for our investors?

640
00:41:12,320 --> 00:41:16,360
It's not what we feel is always proper credit.

641
00:41:16,360 --> 00:41:19,080
It's playing a game of chicken with the cycle.

642
00:41:19,080 --> 00:41:20,080
You can make a lot of money.

643
00:41:20,080 --> 00:41:21,080
Yeah.

644
00:41:21,080 --> 00:41:25,480
When we first established Revolution Asset Management five and a half years ago, we had

645
00:41:25,480 --> 00:41:29,240
a period where there was no recession in 26 years.

646
00:41:29,240 --> 00:41:32,620
People were saying, Bob, we're not going to lock up our money for what you call a medium

647
00:41:32,620 --> 00:41:36,340
term horizon for 5% or 6% when rates were zero.

648
00:41:36,340 --> 00:41:43,360
We can lend it to these property developer guys, get 8%, 10%, or 12% plus in 12 months.

649
00:41:43,360 --> 00:41:44,360
Isn't that good?

650
00:41:44,360 --> 00:41:45,940
Because it's backed by bricks and mortar.

651
00:41:45,940 --> 00:41:49,240
A lot of those people are coming back these days and saying, you know what?

652
00:41:49,240 --> 00:41:54,160
We prefer your strategy over that because some of them have had pretty poor experience

653
00:41:54,160 --> 00:41:55,160
already.

654
00:41:55,160 --> 00:41:58,520
And I think there's more of that to come, sadly.

655
00:41:58,520 --> 00:41:59,760
Yeah.

656
00:41:59,760 --> 00:42:00,760
So that's the commercial side.

657
00:42:00,760 --> 00:42:06,880
But then you're looking at just normal moms and dads, people taking their kids to school,

658
00:42:06,880 --> 00:42:09,240
people that just want a house.

659
00:42:09,240 --> 00:42:11,960
So if you look at basic economics, what do they say?

660
00:42:11,960 --> 00:42:15,240
That essentially the main reason why an Australian will sell their home is what?

661
00:42:15,240 --> 00:42:16,960
They lose their job.

662
00:42:16,960 --> 00:42:21,880
So let's speak to something that's exactly in your wheelhouse, which is what are the

663
00:42:21,880 --> 00:42:28,360
circumstances that some of these companies that you're seeing that are ASX listed, unlisted,

664
00:42:28,360 --> 00:42:33,120
in what event of macroeconomic stress with fiscal and monetary policy, which we're currently

665
00:42:33,120 --> 00:42:36,720
experiencing, do you think may potentially impact these businesses?

666
00:42:36,720 --> 00:42:39,600
And we're already starting to see companies start to cut.

667
00:42:39,600 --> 00:42:42,600
I think Microsoft just cut 200 jobs yesterday or something in Australia.

668
00:42:42,600 --> 00:42:50,560
So what potential scenarios and how is the, I suppose, the overall health in the larger

669
00:42:50,560 --> 00:42:52,760
businesses of Australia's economy right now?

670
00:42:52,760 --> 00:42:56,520
Yeah, look, we observe that people are in fairly good position.

671
00:42:56,520 --> 00:42:59,560
I mean, we've got an unemployment rate of three and a half percent.

672
00:42:59,560 --> 00:43:01,280
So that's historical lows.

673
00:43:01,280 --> 00:43:06,160
So whilst you've got a job and you've got cash flow coming in, you've got options.

674
00:43:06,160 --> 00:43:11,160
You may not be able to afford the new repayment, but generally a bank or a lender will work

675
00:43:11,160 --> 00:43:17,880
with you to maybe extend the tenor of the loan to accommodate you making some payments.

676
00:43:17,880 --> 00:43:21,800
It's only when you really get to a desperate situation where you lose your job for a long

677
00:43:21,800 --> 00:43:27,040
period of time, you can't get another one, where you see real stress in the residential

678
00:43:27,040 --> 00:43:28,040
property market.

679
00:43:28,040 --> 00:43:33,040
Now, this time around, you might see more stress because your listeners may remember

680
00:43:33,040 --> 00:43:41,680
in COVID, there was a term financing facility, TFF, that was offered to the banks at a 0.1%

681
00:43:41,680 --> 00:43:42,680
interest rate.

682
00:43:42,680 --> 00:43:48,600
And what that led to was the banks offering very low rate honeymoon periods in fixed rate

683
00:43:48,600 --> 00:43:55,480
loans that then converted to variable loans, which are all about to go variable right about

684
00:43:55,480 --> 00:44:02,680
now and in the next six to eight months, which is quite often coined the mortgage cliff.

685
00:44:02,680 --> 00:44:08,640
But look, that's a problem mainly for the banks because they got this really cheap funding.

686
00:44:08,640 --> 00:44:12,880
But with the banks, we don't see a wholesale enforcement action of people getting tipped

687
00:44:12,880 --> 00:44:14,440
out of their house.

688
00:44:14,440 --> 00:44:19,680
The banks will be in a position where if these people maintain employment, they will be able

689
00:44:19,680 --> 00:44:25,120
to find a way through the next little period without the real pain of having large scale

690
00:44:25,120 --> 00:44:28,400
foreclosures around the residential property markets.

691
00:44:28,400 --> 00:44:33,360
Having said that, the people that have extended themselves in the last two years especially,

692
00:44:33,360 --> 00:44:37,680
we're starting to see unseasonably high sales for people that have owned their property

693
00:44:37,680 --> 00:44:40,720
less than two years, according to CoreLogic.

694
00:44:40,720 --> 00:44:45,840
So that's a little bit of an early indicator that people who probably think, oh, you know,

695
00:44:45,840 --> 00:44:47,920
this is getting way too big on me.

696
00:44:47,920 --> 00:44:48,920
I need to get out.

697
00:44:48,920 --> 00:44:54,520
I'll sell the property, pay off the bank and maybe move back into rental accommodation

698
00:44:54,520 --> 00:44:56,200
before they get foreclosed on.

699
00:44:56,200 --> 00:45:01,360
Do those CoreLogic numbers say whether or not that's closest to the city or rural or

700
00:45:01,360 --> 00:45:02,880
does it say specifically?

701
00:45:02,880 --> 00:45:07,440
I'm not exactly sure whether you can make a general observation.

702
00:45:07,440 --> 00:45:12,360
I would say these are probably more fringe areas of the metropolitan areas where you

703
00:45:12,360 --> 00:45:18,040
typically get first time buyers and that sort of cohort that have got lower amounts of equity

704
00:45:18,040 --> 00:45:24,240
in their homes and have probably stretched themselves to balance the budget to make the

705
00:45:24,240 --> 00:45:29,520
payments on their mortgage payments but then potentially get more squeezed on a cost of

706
00:45:29,520 --> 00:45:34,040
living basis as we've seen all goods and services increase in price.

707
00:45:34,040 --> 00:45:37,840
Yeah, it's definitely an interesting one out there.

708
00:45:37,840 --> 00:45:42,200
And look, again, for our listeners out there, we're just discussing the good old fashioned

709
00:45:42,200 --> 00:45:46,320
risk versus reward of what's out there and why we're looking at particular assets.

710
00:45:46,320 --> 00:45:50,160
But I suppose the reason why we're having this conversation now is, yes, there is a

711
00:45:50,160 --> 00:45:52,680
lot of private lenders out there in different asset classes.

712
00:45:52,680 --> 00:45:56,360
So we're just looking at essentially one asset class benefit to another.

713
00:45:56,360 --> 00:45:59,920
So back on the company, so there's 45 companies, right?

714
00:45:59,920 --> 00:46:00,920
47 lines.

715
00:46:00,920 --> 00:46:05,240
47 lines, which you are currently doing.

716
00:46:05,240 --> 00:46:14,040
With the current economy as it is, if someone came to you, I'll phrase it a bit differently,

717
00:46:14,040 --> 00:46:18,200
in your opinion, what are you seeing in some of the best cash flow style businesses?

718
00:46:18,200 --> 00:46:24,120
Now is it fast moving consumer goods, is it mid-tier infrastructure?

719
00:46:24,120 --> 00:46:25,560
What's your ideal loan?

720
00:46:25,560 --> 00:46:30,160
And I wouldn't mind getting back into some of the loans you've discussed like one or

721
00:46:30,160 --> 00:46:32,840
two, but a couple of the loans are very interesting.

722
00:46:32,840 --> 00:46:33,840
Absolutely.

723
00:46:33,840 --> 00:46:39,360
So early this year, we helped finance the acquisition of Patty's Foods by PAG.

724
00:46:39,360 --> 00:46:40,360
Patty's Foods?

725
00:46:40,360 --> 00:46:41,360
You mean Patty's Markets, Patty's Foods?

726
00:46:41,360 --> 00:46:42,360
No, no, Patty's P-A-T-T-I-E-S.

727
00:46:42,360 --> 00:46:43,360
Oh, Patty's, the pies.

728
00:46:43,360 --> 00:46:44,360
Patty's Pies.

729
00:46:44,360 --> 00:46:45,360
Patty's Pies.

730
00:46:45,360 --> 00:46:50,120
As Aussie is 4 and 20 pies and that is apple pies.

731
00:46:50,120 --> 00:46:51,600
I don't know, maybe that used to be the CFO.

732
00:46:51,600 --> 00:46:54,920
As soon as CFO, he used to work for the CFO about 12 years ago.

733
00:46:54,920 --> 00:46:55,920
He loved it there.

734
00:46:55,920 --> 00:46:56,920
Right.

735
00:46:56,920 --> 00:46:59,400
So what do we love about that particular business?

736
00:46:59,400 --> 00:47:05,400
In some ways, it really does represent the earnest biscuits of the frozen food aisle.

737
00:47:05,400 --> 00:47:12,120
So when people get hit in the hip pocket, they have less money to spend, they will probably

738
00:47:12,120 --> 00:47:14,440
move from fresh to frozen.

739
00:47:14,440 --> 00:47:18,680
And these ready to eat meals, they also bought Vesco as part of the acquisition, which are

740
00:47:18,680 --> 00:47:24,720
ready to eat meals, plus these frozen food type of products that have been around for

741
00:47:24,720 --> 00:47:26,000
a long time.

742
00:47:26,000 --> 00:47:27,640
We like the resilience of it.

743
00:47:27,640 --> 00:47:32,480
And you think about through the cycle, we saw Patty's trading in periods where things

744
00:47:32,480 --> 00:47:36,640
are a bit tougher, their cash flows actually sustain.

745
00:47:36,640 --> 00:47:41,720
They have large scale Australian manufacturing, which they're rationalizing to a couple of

746
00:47:41,720 --> 00:47:43,400
large centers.

747
00:47:43,400 --> 00:47:48,240
Taking out cost synergies, but then also being able to supply coals and woolies.

748
00:47:48,240 --> 00:47:53,440
Like Arnott's, you've got very good market position to be able to push through input

749
00:47:53,440 --> 00:47:54,880
price shocks.

750
00:47:54,880 --> 00:48:02,160
As every business has been affected, their ability to move up prices in relation to all

751
00:48:02,160 --> 00:48:09,440
of their input prices, be it raw materials, freight, interest costs, labor costs, energy

752
00:48:09,440 --> 00:48:11,160
costs, you name it.

753
00:48:11,160 --> 00:48:15,640
They just move that right through to the consumer and increase their prices, thereby sustaining

754
00:48:15,640 --> 00:48:17,400
their gross margin.

755
00:48:17,400 --> 00:48:20,680
In that way, this is the kind of company we really like.

756
00:48:20,680 --> 00:48:28,720
I can guarantee you if you're a coals or woolies and you've got a supplier of one or two products

757
00:48:28,720 --> 00:48:33,520
and your prices go up, you're going to have to swallow some of that pain with the coals

758
00:48:33,520 --> 00:48:35,280
and woolies breathing down your neck.

759
00:48:35,280 --> 00:48:37,040
Otherwise they can do without your product.

760
00:48:37,040 --> 00:48:40,800
They just go, well, you know what, we'll just go with someone else.

761
00:48:40,800 --> 00:48:46,240
That illustrates the negotiating power of these large companies when you occupy a dominant

762
00:48:46,240 --> 00:48:52,240
market share is very, very powerful and what we look for whenever we lend money to these

763
00:48:52,240 --> 00:48:53,960
sorts of companies.

764
00:48:53,960 --> 00:48:54,960
Yeah.

765
00:48:54,960 --> 00:49:01,360
What's the minimum size loan parcel you would look at?

766
00:49:01,360 --> 00:49:07,240
These days, we have a $1.9 billion fund.

767
00:49:07,240 --> 00:49:12,920
We're likely not to look at deals that are below $50 million in terms of our allocation

768
00:49:12,920 --> 00:49:15,320
and then on the size of a particular company.

769
00:49:15,320 --> 00:49:17,600
We don't do smaller companies.

770
00:49:17,600 --> 00:49:21,600
That generally means in Australia, we don't really look at opportunities that are below

771
00:49:21,600 --> 00:49:28,600
a $30 million EBITDA scale and that or above.

772
00:49:28,600 --> 00:49:32,240
That gives you a sense that they've got to be decent sized businesses with good governance

773
00:49:32,240 --> 00:49:33,240
and good controls.

774
00:49:33,240 --> 00:49:35,000
This is the fun part.

775
00:49:35,000 --> 00:49:40,920
When you're looking through those financials, ideally what type of profit margins are you

776
00:49:40,920 --> 00:49:41,920
looking at?

777
00:49:41,920 --> 00:49:44,480
Well, this is interesting because we were looking at one the other day where essentially

778
00:49:44,480 --> 00:49:48,920
one particular industry said to make it work, it needs to be 14.5%.

779
00:49:48,920 --> 00:49:53,880
Then you go speak to other colleagues or if in our business, I want to go to those numbers,

780
00:49:53,880 --> 00:49:57,440
but say someone else's business, they won't touch a business unless it's like 30% as a

781
00:49:57,440 --> 00:49:58,440
bare minimum.

782
00:49:58,440 --> 00:49:59,440
Yeah.

783
00:49:59,440 --> 00:50:04,920
But you get some other businesses where 6% is huge because it's just so tight.

784
00:50:04,920 --> 00:50:08,720
So what type of profit margins, as you said, is cashflow orientated?

785
00:50:08,720 --> 00:50:13,280
So when you're looking in this business to lend, is there enough room?

786
00:50:13,280 --> 00:50:18,960
I think it's very difficult to generalize because as you correctly point out, industries

787
00:50:18,960 --> 00:50:23,400
and businesses within those industries have very different profit margins depending on

788
00:50:23,400 --> 00:50:28,080
their positions and what is a more mature market with a lot of players, generally lower

789
00:50:28,080 --> 00:50:32,040
profit margins, but is it sustainable is what we look for.

790
00:50:32,040 --> 00:50:37,440
So whatever that particular gross margin is and whatever cash flows it is, how sustainable

791
00:50:37,440 --> 00:50:40,600
is that through the cycle is what we're looking for.

792
00:50:40,600 --> 00:50:42,000
What sort of capex requirements?

793
00:50:42,000 --> 00:50:44,240
Is it maintenance capex?

794
00:50:44,240 --> 00:50:48,240
Is it absolutely mandatory capex or voluntary capex?

795
00:50:48,240 --> 00:50:53,000
What are the things I need to think about in terms of if labor costs go up or the input

796
00:50:53,000 --> 00:50:55,360
price go up, what happens to their gross margin?

797
00:50:55,360 --> 00:50:59,220
What happens to the profitability in that sort of scenario?

798
00:50:59,220 --> 00:51:01,880
What has happened in the past when these things have happened?

799
00:51:01,880 --> 00:51:03,260
Have they been able to sustain?

800
00:51:03,260 --> 00:51:05,080
What is the trend?

801
00:51:05,080 --> 00:51:07,080
What is their total addressable market?

802
00:51:07,080 --> 00:51:09,280
What is their market share in that?

803
00:51:09,280 --> 00:51:12,080
What is their net promoter scores?

804
00:51:12,080 --> 00:51:14,200
What do the customers think of them?

805
00:51:14,200 --> 00:51:16,840
Is this the right leverage for this type of business?

806
00:51:16,840 --> 00:51:18,800
Is that sustainable?

807
00:51:18,800 --> 00:51:20,600
These are things that come with experience.

808
00:51:20,600 --> 00:51:26,840
And so I can tell you a cyclical business, even though we don't look at them, they can

809
00:51:26,840 --> 00:51:31,840
obviously not sustain a high level of leverage compared to private hospitals with huge barriers

810
00:51:31,840 --> 00:51:34,480
like Brookfield owns HealthScope.

811
00:51:34,480 --> 00:51:39,240
They can maintain a higher leverage of north of five times debt to EBITDA.

812
00:51:39,240 --> 00:51:41,040
That's considered to be high leverage.

813
00:51:41,040 --> 00:51:47,600
But because of your market position being number two behind Ramsey in private health,

814
00:51:47,600 --> 00:51:51,080
you can sustain that sort of leverage with a very strong sponsor in Brookfield with a

815
00:51:51,080 --> 00:51:56,440
very sizable equity check that sits as a shock absorber for any loss that we may incur in

816
00:51:56,440 --> 00:51:57,440
the future.

817
00:51:57,440 --> 00:52:02,600
So interesting, we can sit here all day and go in through these things.

818
00:52:02,600 --> 00:52:08,640
I might sort of leave you with a couple of thoughts about what keeps you up at night

819
00:52:08,640 --> 00:52:10,640
and essentially what do you get up in the morning?

820
00:52:10,640 --> 00:52:11,640
Yeah, cool.

821
00:52:11,640 --> 00:52:12,640
So what keeps me up at night?

822
00:52:12,640 --> 00:52:22,000
I think look, the kind of macroeconomic backdrop that we sort of run in our scenarios, if that

823
00:52:22,000 --> 00:52:27,040
were to come true, then we would we're in a world of pain the whole economy, right?

824
00:52:27,040 --> 00:52:31,560
We're talking about huge unemployment, we're talking about big declines in property prices,

825
00:52:31,560 --> 00:52:36,900
we're talking about the big four Australian banks, potentially, they're levered institutions

826
00:52:36,900 --> 00:52:38,680
by their very nature.

827
00:52:38,680 --> 00:52:41,240
So these are the kind of things that I worry about.

828
00:52:41,240 --> 00:52:47,640
But I think, look, the RBA is able to navigate their way through this well without letting

829
00:52:47,640 --> 00:52:49,440
inflation get out of control.

830
00:52:49,440 --> 00:52:55,320
We hope that it moderates so we don't get a very deep and heavy recession.

831
00:52:55,320 --> 00:53:00,680
But that's sort of the sort of left to our risk I worry about sometimes.

832
00:53:00,680 --> 00:53:05,960
On a day to day basis, we're very comfortable with the portfolio as it currently stands.

833
00:53:05,960 --> 00:53:09,800
And we're very proud of the deals we've done, even more proud of the deals we've said no

834
00:53:09,800 --> 00:53:12,920
to that have been financed by others.

835
00:53:12,920 --> 00:53:17,520
And I guess what gets me up in the morning is we really care about looking after our

836
00:53:17,520 --> 00:53:21,160
client money, we take that responsibility very seriously.

837
00:53:21,160 --> 00:53:24,640
Being able to deliver what we promise is what we stand for.

838
00:53:24,640 --> 00:53:26,920
And we've got very strong governance in what we do.

839
00:53:26,920 --> 00:53:32,200
So some of the things that set us apart from some of our peers, we in all of these deals,

840
00:53:32,200 --> 00:53:34,160
a lot of them we get upfront fees.

841
00:53:34,160 --> 00:53:38,680
So we not only get the appropriate credit margin for a loan, we quite often get upfront

842
00:53:38,680 --> 00:53:40,080
fees.

843
00:53:40,080 --> 00:53:44,160
Some of our peers take a more cavalier approach on those and take those fees to the management

844
00:53:44,160 --> 00:53:45,160
company.

845
00:53:45,160 --> 00:53:49,960
We have a philosophy of passing all those fees to the fund in their entirety.

846
00:53:49,960 --> 00:53:57,800
The second thing we point to is we have a philosophy that says we don't charge performance

847
00:53:57,800 --> 00:53:58,800
fees.

848
00:53:58,800 --> 00:53:59,800
Why is that?

849
00:53:59,800 --> 00:54:01,360
That comes foreign to many people.

850
00:54:01,360 --> 00:54:04,040
Think about we the best we can do is get our money back, right?

851
00:54:04,040 --> 00:54:06,240
We're a capital stable product.

852
00:54:06,240 --> 00:54:10,640
If we have an incentive to charge performance fees, we will take on more risk, it's human

853
00:54:10,640 --> 00:54:13,800
nature because we get the upside out of that.

854
00:54:13,800 --> 00:54:16,860
So we don't want to have that misalignment of interest.

855
00:54:16,860 --> 00:54:23,040
And then thirdly, we have a very good governance with every single loan being reviewed every

856
00:54:23,040 --> 00:54:28,760
month by a third party valuation agent called Lidenhall who report back to our responsible

857
00:54:28,760 --> 00:54:29,760
entity.

858
00:54:29,760 --> 00:54:34,180
So if you think about going into private debt today, yeah, you've got wonderful attributes.

859
00:54:34,180 --> 00:54:37,840
You've got floating rate, security, as I mentioned, diversity.

860
00:54:37,840 --> 00:54:40,400
But how do you know you're not walking into a ticking time bomb where there's a whole

861
00:54:40,400 --> 00:54:42,640
bunch of defaults waiting to happen?

862
00:54:42,640 --> 00:54:46,920
We have the ability to tell our clients and our prospective clients these loans are being

863
00:54:46,920 --> 00:54:51,920
reviewed every month according to our original base case for all of these loans.

864
00:54:51,920 --> 00:54:57,320
And only if and only if they're performing will we value these assets of par.

865
00:54:57,320 --> 00:55:03,040
And out of the 47 loans, with the exception of Genesis, 46 of them are at par today and

866
00:55:03,040 --> 00:55:06,520
are performing at our original base case of where we went into the loans.

867
00:55:06,520 --> 00:55:12,400
So we really look forward to having us deliver on our promise to our clients through the

868
00:55:12,400 --> 00:55:20,320
cycle and really navigate these sort of uncertain times that we expect coming in the next 12

869
00:55:20,320 --> 00:55:21,320
months.

870
00:55:21,320 --> 00:55:25,480
But also being there with patient capital, we're experiencing some of the larger inflows

871
00:55:25,480 --> 00:55:29,920
we've ever had in the firm's history, because this yield is now looking very attractive

872
00:55:29,920 --> 00:55:30,920
to many.

873
00:55:30,920 --> 00:55:33,720
When you think about what do you think the equity market is going to return over the

874
00:55:33,720 --> 00:55:39,600
next 12 months, we can deliver you a net return delivered quarterly in income that's going

875
00:55:39,600 --> 00:55:42,120
to be well into the mid nines.

876
00:55:42,120 --> 00:55:46,360
And that for a lot of people is pretty compelling when you look at the long term return for

877
00:55:46,360 --> 00:55:49,120
many asset classes.

878
00:55:49,120 --> 00:55:52,840
Stability is very, very compelling, especially in these times of volatility.

879
00:55:52,840 --> 00:55:53,840
Indeed.

880
00:55:53,840 --> 00:56:01,120
Look, if listeners want to learn more about Revolution Asset Management yourself, how

881
00:56:01,120 --> 00:56:02,560
do they get a hold of you?

882
00:56:02,560 --> 00:56:05,560
Is there a team or how does that work?

883
00:56:05,560 --> 00:56:11,520
So we are very fortunate to have Channel Capital as our investment servicing partner.

884
00:56:11,520 --> 00:56:17,080
So they look after all of the institutional grade, back and middle office, risk and compliance,

885
00:56:17,080 --> 00:56:23,040
finance, IT, distribution and marketing for on behalf of Revolution Asset Management and

886
00:56:23,040 --> 00:56:25,680
other good fund managers out there.

887
00:56:25,680 --> 00:56:33,720
So if anybody wants more information, you can go to revolutionam.com.au or Channel Capital.

888
00:56:33,720 --> 00:56:36,040
They've got their own website.

889
00:56:36,040 --> 00:56:40,800
But there's a team of great distribution people that they can get in touch.

890
00:56:40,800 --> 00:56:44,840
We can provide you with all the information you like.

891
00:56:44,840 --> 00:56:50,960
And happy to, on an individual basis, if people are looking for maybe a bit more of an insight,

892
00:56:50,960 --> 00:56:57,640
happy to make myself or some of the team available for chats to people for their consideration.

893
00:56:57,640 --> 00:57:00,200
Well, Bob, it has been a pleasure having you on.

894
00:57:00,200 --> 00:57:04,400
I really, really enjoyed your thoughts and your insights and looking forward to having

895
00:57:04,400 --> 00:57:06,920
you back in maybe 12 months to see how everything's going.

896
00:57:06,920 --> 00:57:07,920
Great Murdoch.

897
00:57:07,920 --> 00:57:10,960
And thanks to yourself and York for making this possible.

898
00:57:10,960 --> 00:57:11,960
Appreciate the opportunity.

899
00:57:11,960 --> 00:57:12,960
Fantastic.

900
00:57:12,960 --> 00:57:13,960
Have a great day.

901
00:57:13,960 --> 00:57:14,960
Yep, you too.

902
00:57:14,960 --> 00:57:15,960
Thanks.

903
00:57:15,960 --> 00:57:31,760
Any views expressed in this recording do not represent the view of any other third party

904
00:57:31,760 --> 00:57:34,440
and other sole personal opinions of the speaker.

905
00:57:34,440 --> 00:57:38,440
Any reference to financial product does not constitute advice or recommendation and before

906
00:57:38,440 --> 00:57:42,400
any action you should seek proper advice from your financial professional.

907
00:57:42,400 --> 00:57:49,240
Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial

908
00:57:49,240 --> 00:57:50,240
advice.

909
00:57:50,240 --> 00:58:05,680
To get in touch with York, head to our website www.yorkwealth.com.au.