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Welcome back to the Rate of Change with York Wealth Management.

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As advisors to some of the wealthiest families in the country, the Rate of Change is a podcast

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designed to help you in the pursuit of building long-term wealth through the insights of some

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of the brightest minds in asset management.

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I'm your host Murdoch Gatty and in today's broadcast we're speaking with Luke Cummings,

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the co-founder, CIO and managing director of Harvest Lane Asset Management.

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If you enjoy reading about the latest mergers and acquisitions and takeovers in the AFR

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and always wondered what is the best way to make money out of these stories, then I think

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you're really going to enjoy this conversation with Luke.

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The first time is Harvest Lane is an absolute return fund with a mergers and acquisitions

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arbitrage trading strategy.

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The fund seeks to profit from M&A activity due to pricing inefficiencies whilst in the

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process of these takeovers and mergers.

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Luke discusses current activity, what a good opportunity for them looks like, how they

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manage risk if a play goes against them and we explore some recent activity in the market

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such as Origin Energy, Liontown and we dig into some sectors including the tech space.

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Harvest Lane's approach has returned 10.61% for the past 12 months with an 8.45% annualized

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return since inception.

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For me, I really enjoyed hearing Luke unpack the nuances of this strategy and there are

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so many similarities to playing poker.

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In particular, hearing the play by play for the rise and fall for the Liontown deal.

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This deal had many major players in the game such as Gene Reinhart, Chris Ellison from

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Miner Resources and Viom for the company.

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So join us as we hear how Luke and his team managed to navigate this circus to a profit

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whilst many others failed.

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Before we get into this podcast, I'd also like to encourage you to listen to the disclaimer

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at the end of this broadcast and to keep your feedback coming.

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You can reach me at mgatty at ywm.com.au.

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So with that being said, I hope you enjoyed this conversation as much as I did.

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So sit back, relax and enjoy it.

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Luke Cummings, welcome to the Rate of Change with York Wealth Management.

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Thanks, Madhav.

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Good to be here.

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Good to have you here, Luke.

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Why don't we start things off and can you give everyone a bit of an insight into your

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formative years and how you managed up in the beautiful world of financial markets?

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Yeah, sure.

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Probably not the world trodden path for most.

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I grew up in a smallish country town in New South Wales.

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I don't think anyone in my family had ever owned a share as far as I'm aware.

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I didn't know anyone in the stock market, didn't know anything about the stock market.

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So it certainly wasn't something that was on my radar.

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I was fairly low socioeconomic to mid socioeconomic background, I guess.

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And just before I was meant to start university literally the day before as a journalism undergrad,

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I had a very last minute change of heart.

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Ended up working in the first instance of art and asset management.

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It's probably a firm that's fairly well known to your listeners when they were quite small

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themselves.

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I think maybe I was employee number 13 or 14.

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And I just thought it was the most brilliant thing I'd ever seen, this sort of concept

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that I guess if you don't know better, you assume that the way you make money is you

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work for it and you get an hourly rate and you rely on a boss who's going to give you

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a pay rise and that's how life goes.

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And I think to have your eyes open to the fact that there's this cool thing called the

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stock market and through your own endeavors, I guess you can use other people's endeavors

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to make frankly amounts of money that I would never have imagined or envisaged when I was

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growing up.

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So that was sort of ended up in markets, I guess.

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I suppose we'll get into how Barbers Lane came to be, but that was my background.

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I don't think I'd even heard of the internet until I was probably 17 years of age, as in

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I don't think we had, maybe we had a computer at home.

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It certainly didn't have internet access.

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I played lots of sports when I was a kid and just had a, I guess, a kind of 1980s, 1990s

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Australian childhood.

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Yeah.

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Wow.

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Could you imagine all the kids listening to this now are just going, sorry, what?

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You didn't have internet until you were 17?

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I'm not sure I had a mobile phone until I was 20.

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Such a foreign concept in this modern world.

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Absolutely.

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So journalism, the reason I find that so interesting is being on trading floors and some of the

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best managers I know of, Marnie, have the most interesting pathways into management.

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What made you look at journalism?

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Yeah.

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Look, I think, as I said, I played a lot of sports as a kid and I think, absent being

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an athlete, I thought that being a sports journalist would actually be a pretty cool

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way to stay involved in that world.

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And zero concept of the fact, of course, that everyone wants to be a sports journalist,

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right?

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Not many people want to be a political journalist or a financial journalist.

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They want to be a sports journalist.

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So I guess I had reasonably good marks in English at school.

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My teacher told me I was a good writer and that seemed like a logical thing at the time

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to do.

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And I guess it's, it spins me out a little bit to think that my life may have been completely

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different.

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I've gone ahead and done that.

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I think with the benefit of hindsight, it probably would have been better off focusing

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on a law degree, would have been more useful for what I'm doing now than a journalism degree.

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But it's funny how life works out, I guess.

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Well, journalism would teach you how to research, essentially, which is predominantly 90% of

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what you do, right?

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Yeah, for sure.

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I mean, the love of, I guess, reading, we'll talk about it a bit more.

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But you know, there's a lot of reading, there's a lot of researching, there's a lot of digging

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for things and I guess nuggets that other people have overlooked.

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So if you don't enjoy reading, you're going to find this difficult, this job pretty difficult,

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I guess.

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Very true.

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So Harvest Lane, Harvest Lane is your baby.

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How did that come to be?

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What's happening now?

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What's the philosophy?

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Yeah, so looking again, for someone who's quite the planner and likes to be organized,

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I sort of fell into being a fund manager too, I suppose.

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So I worked at Platinum Master Management, great experience, a bunch of really smart

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guys there who I had good exposure to in the early days, I guess, because the team was

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so small.

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I took a detour and worked for a subsidiary of ANZ for a period of time, was basically

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became a stockbroker, working for someone else, was involved in as a partner in my own

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firm with a couple of other co-founders, we sold that business.

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That would have been circa 2009, 2010, so markets were still really bouncing around,

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I guess, a lot at that time.

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So the idea that you sort of had this pool of capital from the sale of our business,

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a non-compete cause, so couldn't necessarily go straight back into product if that's what

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I wanted to do.

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And it probably had always had an aversion, I guess, to kind of beta risk in markets,

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right?

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But this idea that most people make money when stock markets go up and most people lose

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money when stock markets go down, it sort of feels to me like it's not quite enough

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control, right?

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Even the best constructed portfolio of predominantly long-only positions, at least in the traditional

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sense, you wake up tomorrow and US market's down 15% or 20% for some reason, that portfolio

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is likely down by a similar number.

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I think if you're 25 or 30 years of age and you have a job and your income's not dependent

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on the stock market and you're not retiring until you're 65 years old or thereabouts,

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you don't kind of have that exposure to the sequencing risk, I guess, right?

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But when you have a pool of capital but you don't have a job but don't have income, which

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was sort of the position that I was in post the sale of that business, the idea that a

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whole lot of work to construct a long-only portfolio but yet still at the mercy of the

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US market, I guess, out of the back end of the GSC wasn't particularly appealing, at

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least from my perspective.

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So I think we sort of started to think about, and I say we, I had a couple of co-founders

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initially, we sort of started to think about, okay, well, how do we sort of protect and

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ideally grow this pool of money in a reasonably safe way?

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Something we'd also, I guess, done as part of our stock-broking life was just look for,

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I guess, I'm going to call it a loophole, but really inefficiencies, right?

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Things that other people are overlooking that sort of sitting in plain sight but for various

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different reasons, people just don't pay attention to.

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So I think in particular, if I sort of go way, way back, with small amounts of money,

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buying a diversified portfolio of stocks when you're 23 or 24 years of age and really hoping

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to become wealthy as a result of that just takes time, right?

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It's very hard to buy BHP and Westpac and Woolworths and whatever else people buy and

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expect to really grow your wealth at an outsized rate.

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But what sort of struck me or struck us was there were all these cool things of which

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merger arbitrage was one of them where the market would just misprice them for various

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different reasons.

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So we just got to the point where we're just looking for market mispricings and we're trying

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to identify things where future share price performance would be dictated by events,

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specific to that company and not the market more broadly.

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And I guess we'll get into a lot of the merger arbitrage type stuff that we do really fits

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that bill because all of a sudden you have these stocks where their performance is specific

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to whatever transaction or event they're subject to.

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They should have very little correlation with other stocks in the portfolio and they should

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have very little correlation, chosen well with the market more broadly.

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A little bit of a tangent, this story is floating around on the internet in various places,

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but I guess my other aversion to losing money and to having I guess market linked performance

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as opposed to stock specific performance.

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One of the loopholes is maybe a story for another day that we thought we'd found in

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the market or an interesting niche.

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We became pretty confident early on, I'm talking when I'm maybe 22, 23 here, that we'd figure

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out a way to pretty consistently make money without losing it.

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Nobody would not recommend this to anyone, but got to the point where we started borrowing

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money on credit cards like with cash advances in our early 20s to fund this trading strategy,

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which sounds absolutely crazy with the benefit of hindsight.

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I completely understand.

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But the thing was, it was a very short kind of hold period, I guess.

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You had kind of an inbuilt safety buffer of sorts in the strategy and the key was just

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not to lose money.

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If you're borrowing money from anyone, whether it's a credit card, a margin loan or anything

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else out of your mortgage, disaster happens when you're leveraging either positions that

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you lose money on.

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I think that really, I guess, focused my mind on making sure that we protected capital and

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protected downside because I think a lot of people go wrong, not by failing to make money

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in good times, but by losing too much or suffering drawdowns that are too large when markets

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are not performing well.

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So, yeah, it's a bit of a backstory that, as I said, I absolutely emphasize that no

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one in their right mind should ever consider doing.

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I want to know what that strategy was.

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Wait, look, I mean, the really short version was, which we still do a little bit today,

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but far, much less than we sort of did once upon a time because we're sort of bigger now

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and it's harder to exploit.

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But this concept of kind of these deeply discounted cap raisings, right?

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Whether that be a share purchase plan or a rights issue or whatever the case may be,

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keep in mind I'm talking about 20 odd years ago here now.

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So like most inefficiencies in markets, they tend to get traded away over time.

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But I think if you kind of go back to Finance 101 or 201 or whatever we all studied at university,

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the idea was that markets are supposed to be pretty efficient, right?

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And we all know about kind of theoretical X rights price.

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If there's a rights issue that a company is conducting.

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And I'd say a lot of the time now when a company goes X rights, very frequently it will fail

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to hold its theoretical X rights price.

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So the idea that you would own the stock beforehand can take up your rights and make money.

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It doesn't actually usually work, right?

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If anything, the opposite.

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Once upon a time, though, that certainly wasn't the case.

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And I'd say something like a share purchase plan as an example, which is not typically

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pro rata.

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It probably looks more pro rata these days because companies tend to conduct share purchase

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plans more like their rights issues.

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But once upon a time, irrespective of holding size, you could buy, I guess, initially $5,000

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worth of stock and it became $10,000 and it became $30,000 worth of stock.

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Because you don't have institutions actively participating in share purchase plans because

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it's too small for them, that part of the market was just far too inefficient.

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So instead of trading back to the share purchase plan price or the theoretical adjusted price

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post the share purchase plan, quite often these things wouldn't move at all.

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So if you had the ability to buy discounted stock through a share purchase plan, through

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selective rights issues, you're basically making free money is what it came down to.

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So a little bit of market risk between when you pay your application money and consult

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the stock.

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Typically, that was a period of less than a week, which is obviously a fairly stressful

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week.

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But you had a nice in-built buffer discount on the downside.

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So you were probably 10% or 20% ahead of the curve before you even got started.

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So in a nutshell, that's the very short version of what we're exploiting, which went on for

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a long time actually, which was really cool.

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Unfortunately, it doesn't work anymore, which is a shame.

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But it was a pretty fun time.

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And look, I think when you talk about how did you end up at Harvest Lane and the strategy

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that we're trading, I think to be an active fund manager, you can't believe markets are

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efficient.

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But I think for me, that was a real eye opener around the fact that, okay, well, you think

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that something really cool like that would be exploited or would be traded away and it

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wasn't, which I think probably just made us start looking for other things that we felt

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were like that, I suppose.

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We'll get onto some good stories about that in a moment, I guess.

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So moral of the story is you're always looking for sticking money in, not losing it, finding

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essentially miscalculation or a discount where essentially there is a profit margin in which

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you could calculate, decrease the risk and then have a short-term exit, which I suppose

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is the cornerstone of what arbitrage is.

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Yeah.

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For sure, like in that instance, absolutely.

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That's exactly what we're doing.

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And I think about what we're doing now as a variation of that.

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If you buy situations that are mispriced frequently enough, then whether 20 years ago it was a

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discounted share purchase plan or whether today it's a takeover or merger or whatever

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it is, if you're buying stuff that's mispriced, the market usually at some point figures out

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how to price it correctly and then it's just bankroll management.

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So if you've got an edge, if you can keep exploiting the edge over and over again, the

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profits tend to take care of themselves and you just need to make sure that you're adequately

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position sized in each instance so that when things do go wrong, which they inevitably

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do, it's kind of a paper cut rather than something more fatal.

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So for everyone out there that's not familiar with merger and acquisition arbitrage.

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Do you want to give a bit of an overview of what that exactly means and a couple of examples?

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Yeah, for sure.

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So I guess one that's catching the public's imagination at the moment as we record this,

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I should say we don't have a position in it, but Origin Energy, so Origin Energy would

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be a name I guess familiar to most, one of Australia's biggest electricity retailers,

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is currently the subject of a bid between where Brookfield and EIG are jointly bidding

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by a scheme of arrangement for Origin.

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I would say merger kind of flies under the radar most of the time.

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Most people probably don't know about it.

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No one thinks about it.

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It doesn't get much newspaper coverage and this one's really captured people's attention.

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I think Australian super, obviously a very big custodian of the wealth, superannuation

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wealth of a lot of Australian mums and dads has been pretty outspoken about the price

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being too low in this instance and have been putting their money where their mouth is acquiring

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shares.

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The vote's later this week.

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It's going to be really close.

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I'll stick my neck out and say I think it's going to get voted down in its current form.

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Let's see what happens.

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But it's probably a good segue.

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So keep the math simple, I guess.

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Stock trading at 60 cents, let's say for argument's sake, receives a takeover bid from one of

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their competitors at a dollar a share, let's say.

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The way the bid would be announced would look something like company XYZ is buying company

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ABC for a dollar a share.

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That's a 60% premium to its recent trading price.

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We expect the transaction to complete in three months' time.

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It's subject to receiving 50.1% shareholder acceptances, what they would call no materialized

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dose changes, which is usually an unusual challenge in the level of earnings or net

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technical assets.

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So with three months to go, I'd expect when that stock resumes trading, it probably trades

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at 96, 97 cents, let's say.

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So from our perspective, there's really sort of three things that happen there.

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We buy the stock at 96 hoping and expecting to get a dollar, and that's fine.

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That doesn't sound very interesting.

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But if you do that often enough, paying 96 and receiving a dollar in a pretty low risk

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scenario works just fine.

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Ideally, what sometimes happens is that one dollar bid gets improved to $1.10 or $1.20

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or $1.50.

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I think I was telling you when we were speaking recently that the craziest one I've seen was

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a bid that started at a dollar and finished at $8.50.

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And people just say, how the hell is that even possible?

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It's like an auction for a house, right?

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You turn up on the day, you don't know who's going to come.

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And first bid very rarely is the last or only bid.

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And it's just a matter of, well, who else wants to own it?

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And how much can they afford?

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00:19:50,680 --> 00:19:52,840
And how keen are they?

293
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And that's really in the situation what that is.

294
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So that's obviously really good for the strategy.

295
00:19:58,400 --> 00:20:03,280
And what we're trying to avoid is buying something at 96 cents or 97 cents, expecting

296
00:20:03,280 --> 00:20:08,040
to get a dollar and then something goes wrong and the stock trades back to 60 cents where

297
00:20:08,040 --> 00:20:10,760
it was before or 50 cents or whatever the case may be.

298
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So the key obviously there is you want to keep paying 96 and 97 cents and getting a

299
00:20:18,720 --> 00:20:19,720
dollar.

300
00:20:19,720 --> 00:20:21,480
Occasionally, you want to get $1.10 and $1.20.

301
00:20:21,480 --> 00:20:25,640
And as infrequently as possible, you want to avoid having to sell because the transaction

302
00:20:25,640 --> 00:20:28,400
breaks and you're getting 50 or 60 cents.

303
00:20:28,400 --> 00:20:34,000
So as you'd imagine, a lot of our process is designed around identifying what we think

304
00:20:34,000 --> 00:20:38,160
the risk is of the transaction not completing in the first instance and getting comfortable

305
00:20:38,160 --> 00:20:39,160
around that.

306
00:20:39,160 --> 00:20:45,480
Assuming that's the case, it'll go into the portfolio in some way, shape or form.

307
00:20:45,480 --> 00:20:49,960
Trying to then, I guess, secondly, identify who else might be interested if not just the

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current bidder and also at least a rough idea of what we think valuation might be that's

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00:20:55,000 --> 00:20:56,520
reasonable in the circumstances.

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00:20:56,520 --> 00:21:02,480
And I guess the third facet of that more recently as we get a bit bigger is sometimes injecting

311
00:21:02,480 --> 00:21:04,600
ourselves into the process in a more active way.

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00:21:04,600 --> 00:21:09,400
So you can run this strategy somewhat passively as in you still have to be active in terms

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00:21:09,400 --> 00:21:12,280
of doing the work to decide what goes in your portfolio.

314
00:21:12,280 --> 00:21:18,080
You have to be really organized around monitoring key dates and vote levels and when conditions,

315
00:21:18,080 --> 00:21:22,120
if they are satisfied or not satisfied.

316
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And I think the more active component of that is we've probably participated in 60 deals

317
00:21:27,440 --> 00:21:31,400
a year for the last 10 years or so, maybe more than that.

318
00:21:31,400 --> 00:21:36,320
So you get a pretty good idea of what works, what doesn't work, when buyers can be pushed

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00:21:36,320 --> 00:21:41,200
a little bit harder, maybe when a target company wants to engage but hasn't quite figured out

320
00:21:41,200 --> 00:21:42,200
how to do that.

321
00:21:42,200 --> 00:21:46,800
We find occasionally that inserting ourselves into that process behind the scenes can be

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00:21:46,800 --> 00:21:47,800
useful.

323
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So in a nutshell, what we're doing, I think where's the edge there?

324
00:21:53,080 --> 00:21:59,240
The 96 or 97 cents that you're paying, part of that's just a time value of money component,

325
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so interest rates and the discounted future cash flow back to today's dollars is part

326
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of that.

327
00:22:04,440 --> 00:22:07,800
Part of that is the risk that the transaction doesn't complete.

328
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So buyers and sellers have to, I guess, make a judgment on what the likelihood is of that

329
00:22:12,440 --> 00:22:13,880
happening or not happening.

330
00:22:13,880 --> 00:22:18,360
But there's some other sort of, I guess, natural reasons for people to sell.

331
00:22:18,360 --> 00:22:25,920
So other small and mid-cap, long-only fund managers, I mentioned that beta, the market

332
00:22:25,920 --> 00:22:29,360
correlation comes out a lot of these transactions once they're announced because the future

333
00:22:29,360 --> 00:22:33,560
return path is dictated by the transaction itself and not the market more broadly.

334
00:22:33,560 --> 00:22:37,960
So market goes up 10%, probably doesn't affect it very much.

335
00:22:37,960 --> 00:22:42,200
Market goes down 10%, shouldn't affect it very much and certainly doesn't impact upon

336
00:22:42,200 --> 00:22:48,600
the likelihood of the transaction closing, assuming we've done our homework.

337
00:22:48,600 --> 00:22:50,320
That's good for us because that's what we're managing to.

338
00:22:50,320 --> 00:22:54,240
But for a manager who needs a certain amount of beta in their portfolio and is sort of

339
00:22:54,240 --> 00:23:00,480
tracking a benchmark, having the beta fall out of that stock is actually a negative from

340
00:23:00,480 --> 00:23:02,760
their perspective because it increases their tracking error.

341
00:23:02,760 --> 00:23:04,360
So that's a factor.

342
00:23:04,360 --> 00:23:08,440
And I think the other factor is lots of these names, especially when they're sort of small

343
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and mid-cap.

344
00:23:09,440 --> 00:23:13,760
Lots of retail shareholders who when a stock's up 60% or 70% a day because they've got a

345
00:23:13,760 --> 00:23:16,440
takeover beta are really happy to sell it.

346
00:23:16,440 --> 00:23:22,560
I think in other deeper markets like in the US and Europe and other parts of Asia, your

347
00:23:22,560 --> 00:23:27,120
event funds, M&A funds, whatever you want to call our stall of strategies is quite common.

348
00:23:27,120 --> 00:23:32,520
But in Australia, to the best of my knowledge, we're the only one who are doing it in a systematic

349
00:23:32,520 --> 00:23:35,160
fashion where that's our sole focus.

350
00:23:35,160 --> 00:23:41,720
So I'm sure there are other kind of multi-strat funds and maybe long-only funds that do bits

351
00:23:41,720 --> 00:23:46,080
and pieces of it maybe because they're familiar with the stocks that are subject to the bid

352
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or because they have more cash at any particular point in time than they would have otherwise.

353
00:23:50,560 --> 00:23:56,080
But yeah, when you start looking around for people doing it actively in Australia, we're

354
00:23:56,080 --> 00:23:57,080
it.

355
00:23:57,080 --> 00:24:04,880
So we usually have pretty good choice of stock being offered to us when these deals are announced.

356
00:24:04,880 --> 00:24:06,960
It's quite interesting.

357
00:24:06,960 --> 00:24:16,040
You talk about risk mitigation for we just seen a Lions Town play out.

358
00:24:16,040 --> 00:24:18,320
The spectacle that was a Lions Town.

359
00:24:18,320 --> 00:24:23,200
Do you want to use that as an example to walk through the good, the bad, the ugly and you

360
00:24:23,200 --> 00:24:29,560
know how I'm not too sure if you were in that and then how you deal with something of that

361
00:24:29,560 --> 00:24:32,040
magnitude or the events that unfold?

362
00:24:32,040 --> 00:24:38,280
Yeah, I mean, that's a probably unusually complex situation as well in some ways.

363
00:24:38,280 --> 00:24:43,160
I think a lot of this stuff is really vanilla and boring, I would say.

364
00:24:43,160 --> 00:24:44,160
Not boring to us.

365
00:24:44,160 --> 00:24:45,160
I love it.

366
00:24:45,160 --> 00:24:50,040
And I think the whole thing is just like sport in some ways.

367
00:24:50,040 --> 00:24:53,400
But a lot of it is a transaction gets announced.

368
00:24:53,400 --> 00:24:57,080
You have to do a lot of research to make sure that you kind of have a handle on whatever

369
00:24:57,080 --> 00:24:59,400
risks or conditions are inherent in the deal.

370
00:24:59,400 --> 00:25:01,820
And honestly, not much happens.

371
00:25:01,820 --> 00:25:05,160
You buy something at a discount and more often than not, they complete in their current form

372
00:25:05,160 --> 00:25:06,160
and that's it.

373
00:25:06,160 --> 00:25:11,360
It gets exciting if there's a counterbid or multiple counterbids and it's obviously not

374
00:25:11,360 --> 00:25:13,280
very exciting if the transaction falls over.

375
00:25:13,280 --> 00:25:20,720
But the Lions Town was really interesting because it had traded at a discount to the

376
00:25:20,720 --> 00:25:24,440
bid at the time, at least in the first instance.

377
00:25:24,440 --> 00:25:29,600
So and we did have a little bit of it at that point.

378
00:25:29,600 --> 00:25:30,600
Not a lot.

379
00:25:30,600 --> 00:25:31,600
It wasn't a big position size for us at that time.

380
00:25:31,600 --> 00:25:35,440
There were still a few risks in the deal that we weren't particularly comfortable with or

381
00:25:35,440 --> 00:25:37,920
yet comfortable with, which sometimes happens, right?

382
00:25:37,920 --> 00:25:43,280
Sometimes you just need time to get your head around the variables to work out what your

383
00:25:43,280 --> 00:25:44,440
ultimate position size should be.

384
00:25:44,440 --> 00:25:50,880
But we did have some and then when it traded to the bid price at $3, in the first instance,

385
00:25:50,880 --> 00:25:51,880
we weren't a seller.

386
00:25:51,880 --> 00:25:56,160
But I think as it became clear, it became pretty clear it was Gina who was buying that

387
00:25:56,160 --> 00:25:58,320
stock at least initially.

388
00:25:58,320 --> 00:26:01,480
And I guess this is where experience is helpful.

389
00:26:01,480 --> 00:26:04,280
And I must say that you don't know this in advance.

390
00:26:04,280 --> 00:26:07,880
So it's not like we knew for sure that that was going to be the case.

391
00:26:07,880 --> 00:26:13,900
But we've seen other situations where Gina and also Chris Ellison from Mineral Resources,

392
00:26:13,900 --> 00:26:16,280
when they buy stock, they're not buying stock to bid themselves.

393
00:26:16,280 --> 00:26:20,200
They're buying stock to block potentially.

394
00:26:20,200 --> 00:26:23,520
And it's not unusual for them both to turn up in the same situation.

395
00:26:23,520 --> 00:26:30,360
So I think the thing with Lions Town was we couldn't see the path through for the bid

396
00:26:30,360 --> 00:26:32,640
succeeding in its current form, certainly.

397
00:26:32,640 --> 00:26:36,120
I mean, effectively that buying had paid to that.

398
00:26:36,120 --> 00:26:40,160
And then the question was, well, are they going to bid themselves or not?

399
00:26:40,160 --> 00:26:43,480
And look, I played a lot of poker when I was younger.

400
00:26:43,480 --> 00:26:45,600
I haven't played a lot recently.

401
00:26:45,600 --> 00:26:50,820
But the thing that's fascinating to me about poker is there's the cards.

402
00:26:50,820 --> 00:26:56,600
So it's pretty easy to get a handle on pre-flop, what your odds are based on the hand that

403
00:26:56,600 --> 00:27:00,320
you have, what your odds are at any point in time based on the hand that you have.

404
00:27:00,320 --> 00:27:02,040
And the cards you see in the middle.

405
00:27:02,040 --> 00:27:05,360
But of course, the game gets interesting when there's more cards in the middle.

406
00:27:05,360 --> 00:27:07,600
And now all of a sudden, there's a bunch of unknowns.

407
00:27:07,600 --> 00:27:12,400
And you have to try and work out what your actual odds are based on what your cards are.

408
00:27:12,400 --> 00:27:16,640
But also what others may have and what others may represent that they have.

409
00:27:16,640 --> 00:27:23,600
And a lot of the dark arts of murder are, I guess, is people tell you what they want

410
00:27:23,600 --> 00:27:25,280
you to hear or they tell you nothing at all.

411
00:27:25,280 --> 00:27:28,220
And it's trying to work out in that situation, at least.

412
00:27:28,220 --> 00:27:34,200
And it's not normal to have to go to this extent of doing analysis on people as opposed

413
00:27:34,200 --> 00:27:35,560
to the transaction itself.

414
00:27:35,560 --> 00:27:39,680
But I think some other transactions we've been in previously told us that Gina probably

415
00:27:39,680 --> 00:27:42,680
wasn't going to bid at least straight away.

416
00:27:42,680 --> 00:27:47,640
And look, as it turned out, obviously, for anyone that was in that trade, they did a

417
00:27:47,640 --> 00:27:52,520
pretty hefty cap raising at a pretty big discount not too soon thereafter, which meant that

418
00:27:52,520 --> 00:27:58,080
any ARB funds that were in that trade, expecting that there was going to be a counterbid.

419
00:27:58,080 --> 00:28:04,080
You know, from Gina or anyone else, obviously lost a lot of money through that process.

420
00:28:04,080 --> 00:28:09,560
So what sort of happened there was, I mean, the downside in that transaction is what we're

421
00:28:09,560 --> 00:28:10,560
trying to avoid.

422
00:28:10,560 --> 00:28:17,680
Absolutely, the difficulty in Linetown, I think, even for us, was part of the attraction

423
00:28:17,680 --> 00:28:19,600
of these strategies, the counterbid, right?

424
00:28:19,600 --> 00:28:25,240
So when there's a bid at $3 and you see someone buying a lot of the stock, once upon a time,

425
00:28:25,240 --> 00:28:29,880
my first reaction would have been, oh, this is great, there's another bid coming, right?

426
00:28:29,880 --> 00:28:34,080
And if you think about those transactions I mentioned where the first bid's at $1 and

427
00:28:34,080 --> 00:28:39,240
it ends north of $8 or the first bid's at $3.75 and it ends at $11, at some point, someone's

428
00:28:39,240 --> 00:28:43,440
had to aggressively get involved and buy stock and come over the top from a bid perspective.

429
00:28:43,440 --> 00:28:49,920
So I think the confusion, with less experience in Linetown, I could easily have thought that

430
00:28:49,920 --> 00:28:54,960
all of that buying was going to lead to a counterbid when in fact, not only did it not

431
00:28:54,960 --> 00:29:00,080
produce, not lead to a counterbid, but it actually led to the deal breaking and a pretty

432
00:29:00,080 --> 00:29:01,680
big cap raising at a discount.

433
00:29:01,680 --> 00:29:07,200
So yeah, it was a bit of a curly one to throw at me, to be honest.

434
00:29:07,200 --> 00:29:09,680
Not common, I would say.

435
00:29:09,680 --> 00:29:12,200
But yeah, that's the benefit of experience, right?

436
00:29:12,200 --> 00:29:18,000
Sometimes I talk to financial advisors and research firms and they're like, oh, there

437
00:29:18,000 --> 00:29:22,840
are vehicles offshore where this is sort of passive and it's done via an ETF.

438
00:29:22,840 --> 00:29:25,800
And my first question is, oh, how's that ETF going?

439
00:29:25,800 --> 00:29:28,320
And they're like, terrible.

440
00:29:28,320 --> 00:29:29,320
It makes sense, right?

441
00:29:29,320 --> 00:29:33,280
If you just bought all of these deals when they're announced, then just don't actively

442
00:29:33,280 --> 00:29:34,280
manage them.

443
00:29:34,280 --> 00:29:36,280
Don't adjust your position sizing.

444
00:29:36,280 --> 00:29:40,360
Don't make phone calls to check assumptions and kind of do the industry background and

445
00:29:40,360 --> 00:29:42,080
just let things run their course.

446
00:29:42,080 --> 00:29:47,360
I absolutely guarantee you lose money in this strategy because the key is to avoid the losses

447
00:29:47,360 --> 00:29:48,360
and the blowups.

448
00:29:48,360 --> 00:29:50,720
And it's just bankroll management, right?

449
00:29:50,720 --> 00:29:52,200
It's the same as poker, I guess, right?

450
00:29:52,200 --> 00:29:54,320
There are some hands you'll never play because the cards are rubbish.

451
00:29:54,320 --> 00:29:57,400
There are some hands that for the right value, you'll play.

452
00:29:57,400 --> 00:29:59,000
It doesn't guarantee that you'll win.

453
00:29:59,000 --> 00:30:04,960
But if you position size in terms of what you have in the pot at that point in time,

454
00:30:04,960 --> 00:30:05,960
then it's fine.

455
00:30:05,960 --> 00:30:09,280
And there are other things where the odds are massively in your favor and that's when

456
00:30:09,280 --> 00:30:14,000
you want to have a lot of money in the pot, albeit like poker in markets, weird things

457
00:30:14,000 --> 00:30:17,200
happen and sometimes you can think you're on a sure thing and you're not.

458
00:30:17,200 --> 00:30:22,080
So we're just ultra focused on just making sure that everything is position sized accordingly.

459
00:30:22,080 --> 00:30:27,720
No matter how confident we are so that if something unexpected does happen, yeah, it

460
00:30:27,720 --> 00:30:33,880
hurts a little bit and lose a couple of percent of the portfolio in a deal potentially, but

461
00:30:33,880 --> 00:30:34,880
it's fine.

462
00:30:34,880 --> 00:30:35,880
That happens a couple of times a year.

463
00:30:35,880 --> 00:30:39,240
It has done every year for 10 years and you live to fight another day.

464
00:30:39,240 --> 00:30:44,000
What you don't want to do is be so invested in something that goes wrong that it wipes

465
00:30:44,000 --> 00:30:47,400
out your capital and then you've got nowhere to go from there.

466
00:30:47,400 --> 00:30:53,040
So someone called me a bush lawyer the other day, I think to your point about being a journalist,

467
00:30:53,040 --> 00:30:57,360
I think you really need to understand the laws that govern these takeovers and schemes

468
00:30:57,360 --> 00:31:02,280
in Australia, what the rights of bidders and targets are, what the rights of shareholders

469
00:31:02,280 --> 00:31:03,440
are.

470
00:31:03,440 --> 00:31:04,720
And I think a lot of it is just experience.

471
00:31:04,720 --> 00:31:12,000
There's a lot of commonality between all of these transactions and we don't at the moment

472
00:31:12,000 --> 00:31:15,440
at least have an awful lot of competition in a lot of these deals and the smaller and

473
00:31:15,440 --> 00:31:18,840
mid cap deals, the big offshore funds are too big to play in that space.

474
00:31:18,840 --> 00:31:21,040
There's no one really exploiting in Australia.

475
00:31:21,040 --> 00:31:25,680
Probably lots of private investors actually who used to work as fund managers or prop traders

476
00:31:25,680 --> 00:31:26,680
and investment banks.

477
00:31:26,680 --> 00:31:30,960
I know a few who work from home and sort of trade this with their own private capital,

478
00:31:30,960 --> 00:31:32,960
but it's an interesting space.

479
00:31:32,960 --> 00:31:36,200
It's a very, very interesting space.

480
00:31:36,200 --> 00:31:40,640
For people that don't have a chart in front of them, what were the actual prices that

481
00:31:40,640 --> 00:31:45,640
you were flying to, like where do you start, you said $3, where do they end up and where

482
00:31:45,640 --> 00:31:46,640
do they finish?

483
00:31:46,640 --> 00:31:53,000
Yeah, so I mean the interesting thing about Liontown in particular was that there was

484
00:31:53,000 --> 00:31:58,680
a lot of talk about this bid before it actually became a bid.

485
00:31:58,680 --> 00:32:02,920
And in fact, Liontown had sort of disclosed over that journey that they'd had a couple

486
00:32:02,920 --> 00:32:06,620
of approaches over time.

487
00:32:06,620 --> 00:32:11,560
And I guess it just kind of eventually got to the point where the approach was sort of

488
00:32:11,560 --> 00:32:16,160
so good that they were happy to try and firm something up with the bidder.

489
00:32:16,160 --> 00:32:20,720
But I mean the stock, I mean lithium's obviously been pretty volatile.

490
00:32:20,720 --> 00:32:23,800
Well, I was going to say for the better part of the last year, but really for the better

491
00:32:23,800 --> 00:32:25,080
part of the last few years.

492
00:32:25,080 --> 00:32:33,720
But Liontown was trading, let's say between like a dollar and sort of a dollar and two

493
00:32:33,720 --> 00:32:35,720
in the lead up to the bid, I guess.

494
00:32:35,720 --> 00:32:40,960
I think a lot of that sort of trading above $1.60 through to $2 was on that bid speculation.

495
00:32:40,960 --> 00:32:45,560
But immediately before they announced that bid, the stock was trading at about $1.50

496
00:32:45,560 --> 00:32:48,080
and the bid was pitched at $3.

497
00:32:48,080 --> 00:32:53,640
So after it was announced, the stock sort of traded between $2.60 and $2.80 for a period

498
00:32:53,640 --> 00:32:54,640
of time.

499
00:32:54,640 --> 00:33:00,680
And that's sort of when we had started building our position and then traded almost straight

500
00:33:00,680 --> 00:33:05,000
to three, which was around the time that we were a seller.

501
00:33:05,000 --> 00:33:09,280
We traded through three, I think it got to like three or four, three or five, maybe a

502
00:33:09,280 --> 00:33:10,440
bit higher.

503
00:33:10,440 --> 00:33:15,120
And then sort of bounced around between $2.80 and $3 for a couple of weeks whilst people

504
00:33:15,120 --> 00:33:20,800
weren't really sure what Gina's intentions were and whether that was going to lead to

505
00:33:20,800 --> 00:33:23,720
another bid or not.

506
00:33:23,720 --> 00:33:26,520
Stock's back to $1.50 now, $1.47 as we speak.

507
00:33:26,520 --> 00:33:34,560
So having not succeeded with the $3 bid, the company raised a bunch of money at $1.80 soon

508
00:33:34,560 --> 00:33:36,920
after it became clear that the bid wasn't going ahead.

509
00:33:36,920 --> 00:33:43,600
And even anyone who bought stock in that placement at $1.80, we're talking before about rights

510
00:33:43,600 --> 00:33:46,760
issues and placements and theoretical X rights prices.

511
00:33:46,760 --> 00:33:52,560
I mean, the stocks, if you paid $1.80, you're down 20% on your money from that placement

512
00:33:52,560 --> 00:33:53,760
of just a few weeks ago.

513
00:33:53,760 --> 00:34:00,180
So if you look at that chart, you sort of traded that the whole way through, you've

514
00:34:00,180 --> 00:34:04,840
probably bought stock at between $2.60 and $2.80 expecting to get $3 and if you've held

515
00:34:04,840 --> 00:34:10,520
it the whole way through, well, now you're back to $1.50.

516
00:34:10,520 --> 00:34:13,560
You don't need a calculator to work out that that's not ideal.

517
00:34:13,560 --> 00:34:16,560
So in many ways...

518
00:34:16,560 --> 00:34:21,520
How much money is in the strategy?

519
00:34:21,520 --> 00:34:22,980
You say position sizing.

520
00:34:22,980 --> 00:34:25,480
So what's your minimum start with?

521
00:34:25,480 --> 00:34:28,520
What's the maximum you've gone at a particular place?

522
00:34:28,520 --> 00:34:29,520
For sure.

523
00:34:29,520 --> 00:34:32,720
I think Linetown is a great example of what we're trying to avoid.

524
00:34:32,720 --> 00:34:37,240
And I think seeing that and living that is what scares people about merger art.

525
00:34:37,240 --> 00:34:39,960
It's like, okay, well, you can do lots and lots of good work and then you get one of

526
00:34:39,960 --> 00:34:43,640
those and the perception is it wipes out all your gains.

527
00:34:43,640 --> 00:34:47,600
I think if origin fails, like we're discussing before in the next couple of days, that's

528
00:34:47,600 --> 00:34:50,600
also probably a negative.

529
00:34:50,600 --> 00:35:00,080
But yeah, look, so we run currently $150-ish million in the strategy.

530
00:35:00,080 --> 00:35:04,840
So I'd say that's quite small by most fund manager standards for sure.

531
00:35:04,840 --> 00:35:09,680
But it gives you the ability to, I guess, look in places that others wouldn't necessarily

532
00:35:09,680 --> 00:35:10,680
look.

533
00:35:10,680 --> 00:35:12,720
So we think about everything in terms of max loss.

534
00:35:12,720 --> 00:35:19,260
So we have a really comprehensive checklist of items that we go through to determine how

535
00:35:19,260 --> 00:35:24,160
risky or safely perceived an announced deal to be.

536
00:35:24,160 --> 00:35:28,120
Just to give you a flavor of those types of things, conditionality.

537
00:35:28,120 --> 00:35:33,260
So the more conditions there are, or the more outs that a bidder has, the more likely they

538
00:35:33,260 --> 00:35:36,840
are to walk away if and when times get tough.

539
00:35:36,840 --> 00:35:43,680
So in normal kind of markets and rising markets, M&A deals that are announced tend to complete.

540
00:35:43,680 --> 00:35:49,640
When deals tend to break more often than not, sorry, not more often than not, but more so

541
00:35:49,640 --> 00:35:51,240
than in normal times is in times of market stress.

542
00:35:51,240 --> 00:35:56,120
So GFC, COVID, all those types of things, that's when buyers want to get out of deals

543
00:35:56,120 --> 00:36:00,440
because they've probably got other parts of their portfolio where they're running around

544
00:36:00,440 --> 00:36:01,440
with their hair on fire.

545
00:36:01,440 --> 00:36:02,760
They don't need to add more problems.

546
00:36:02,760 --> 00:36:08,200
So our whole process is aimed at making sure that irrespective of kind of market conditions,

547
00:36:08,200 --> 00:36:11,440
we want to know that the deal is binding and enforceable.

548
00:36:11,440 --> 00:36:15,040
So something that's really easy for a buyer to use to get out of a deal is if a deal is

549
00:36:15,040 --> 00:36:20,680
subject to due diligence, that's really in the buyer's control, not in the target's control.

550
00:36:20,680 --> 00:36:27,800
If it's subject to the buyer's investment committee approval or subject to financing,

551
00:36:27,800 --> 00:36:30,920
they're all things that the target and the target company shareholders have no control

552
00:36:30,920 --> 00:36:32,480
and very little visibility over.

553
00:36:32,480 --> 00:36:33,480
And it's super easy.

554
00:36:33,480 --> 00:36:39,760
If I decide I want to get out of a deal because market conditions have changed or whatever,

555
00:36:39,760 --> 00:36:44,440
I just say, well, look, guys, I wanted to do the deal, but we couldn't get financing approval

556
00:36:44,440 --> 00:36:49,480
or we couldn't get investment committee approval or we found something due diligence we didn't

557
00:36:49,480 --> 00:36:50,480
like.

558
00:36:50,480 --> 00:36:56,280
Right now, there was a bit of an Elon Musk Twitter circus a couple of years ago where

559
00:36:56,280 --> 00:37:00,800
he'd bid for Twitter and then was kind of doing everything he could to get out of it.

560
00:37:00,800 --> 00:37:06,500
The difficulty for him was in the US, when you launch a transaction, a bid, you need

561
00:37:06,500 --> 00:37:10,160
to lodge a whole bunch of docs with the SEC around your approvals.

562
00:37:10,160 --> 00:37:15,120
So it was already very clear that he had financing approval on an unconditional basis.

563
00:37:15,120 --> 00:37:18,000
So when he was trying to tell people, hey, I can't afford to do this anymore, my funders

564
00:37:18,000 --> 00:37:21,400
won't fund it, they're like, well, we've actually seen the documents that say that

565
00:37:21,400 --> 00:37:22,400
you can.

566
00:37:22,400 --> 00:37:26,280
So we might come back to that later.

567
00:37:26,280 --> 00:37:30,760
So things inside the bidder's control, we don't want ideally.

568
00:37:30,760 --> 00:37:35,920
What we also don't really want for the most part is ACCC approval or foreign investment

569
00:37:35,920 --> 00:37:44,040
review board approval to politically influenced bodies, whether they say they are or not.

570
00:37:44,040 --> 00:37:50,800
The way that they think about approving transactions are not sort of ebbs and flows with both the

571
00:37:50,800 --> 00:37:55,240
political party of the day, but also, I guess, public sentiment, who the public at various

572
00:37:55,240 --> 00:38:01,840
times care more about foreign buyers buying some of our assets than they do at others.

573
00:38:01,840 --> 00:38:10,000
I think the new head of the ACCC seems more intent on, I guess, having more stick than

574
00:38:10,000 --> 00:38:13,000
carrot, I suppose you would say, when it comes to some of these deals.

575
00:38:13,000 --> 00:38:17,880
So they're not deal breakers for us, but it's certainly something you need to consider.

576
00:38:17,880 --> 00:38:24,360
In a small 50 or 100 or 300 mil market cap company, ACCC or Ferber are unlikely to be

577
00:38:24,360 --> 00:38:26,160
issues for the most part.

578
00:38:26,160 --> 00:38:31,800
But something big like Origin or ANZ and Suncorp have a deal at the moment that comes out

579
00:38:31,800 --> 00:38:33,400
currently doesn't have ACCC approval.

580
00:38:33,400 --> 00:38:37,760
They're the things that are at risk.

581
00:38:37,760 --> 00:38:39,800
So material adverse change causes.

582
00:38:39,800 --> 00:38:43,320
So a bidder will say, okay, we're going to go ahead, but if your earnings fall by 10%

583
00:38:43,320 --> 00:38:48,400
between now and the end of the bid period or your net tangible assets decrease by 5%

584
00:38:48,400 --> 00:38:54,580
or X and Y and Z, we have the ability to walk from the deal.

585
00:38:54,580 --> 00:38:58,960
So we need to get really comfortable around the company's numbers, level of earnings,

586
00:38:58,960 --> 00:39:03,280
PTA, whatever those other conditions may be, and just, I guess, take a view on how likely

587
00:39:03,280 --> 00:39:09,160
we think it is that something will trigger there that allows the bidder to walk.

588
00:39:09,160 --> 00:39:12,920
And then other things like, okay, who are the major shareholders?

589
00:39:12,920 --> 00:39:14,280
What percentages they own?

590
00:39:14,280 --> 00:39:15,280
What's their average price?

591
00:39:15,280 --> 00:39:18,320
If we can work that out, are they likely to be in favor of this bid?

592
00:39:18,320 --> 00:39:20,640
Are they likely to be against it?

593
00:39:20,640 --> 00:39:23,860
Who else is on the register that might bid?

594
00:39:23,860 --> 00:39:27,600
What other transactions have happened in the sector, either in Australia or elsewhere?

595
00:39:27,600 --> 00:39:28,880
What's the earnings multiple?

596
00:39:28,880 --> 00:39:32,520
What does the business look like in a comparative sense?

597
00:39:32,520 --> 00:39:36,040
Does the company have any excess franking credits on its balance sheet that maybe should

598
00:39:36,040 --> 00:39:38,320
be getting tipped out as part of this process?

599
00:39:38,320 --> 00:39:43,600
So that's sort of a flavor of what we're looking for.

600
00:39:43,600 --> 00:39:45,520
Shareholder composition is interesting.

601
00:39:45,520 --> 00:39:47,840
As I said, I was a super big shareholder in Origin at the moment.

602
00:39:47,840 --> 00:39:51,600
I've been buying more with the intent to block this deal.

603
00:39:51,600 --> 00:39:55,360
Sometimes having a blocking type shareholder on the register can be really helpful because

604
00:39:55,360 --> 00:40:00,600
it may lead to a higher bid or improved bid terms to get that shareholder over the line.

605
00:40:00,600 --> 00:40:04,320
But of course, some shareholders maybe won't sell at any price.

606
00:40:04,320 --> 00:40:06,520
And that's kind of what we're trying to avoid because we don't want someone who's going

607
00:40:06,520 --> 00:40:09,640
to interrupt the current transaction and stop it from completing.

608
00:40:09,640 --> 00:40:13,800
So that's sort of a flavor of what we're looking for.

609
00:40:13,800 --> 00:40:15,440
And then it just becomes position sizing.

610
00:40:15,440 --> 00:40:21,640
So something we're super confident in is what we would consider to be a full position size.

611
00:40:21,640 --> 00:40:27,760
We've run a few different mandates, but in our public fund, we're kind of risking 2.75%

612
00:40:27,760 --> 00:40:30,960
of NTA max on a deal we really, really like.

613
00:40:30,960 --> 00:40:35,560
So if that transaction breaks for some reason, even though we're really confident that it

614
00:40:35,560 --> 00:40:43,360
was going to go ahead, it should cost us 2.75% of NTA give or take.

615
00:40:43,360 --> 00:40:46,360
As I said, we sort of had a couple of those a year.

616
00:40:46,360 --> 00:40:52,880
In the earlier years, we probably were more likely to lose kind of circa 2% or more if

617
00:40:52,880 --> 00:40:54,120
something like that went wrong.

618
00:40:54,120 --> 00:41:00,720
I think we're better now at working out which transactions are likely to fail and either

619
00:41:00,720 --> 00:41:04,760
avoiding them altogether or having much smaller size.

620
00:41:04,760 --> 00:41:08,760
And then position sizing just becomes, that's a full risk position.

621
00:41:08,760 --> 00:41:11,680
So something where it ticks a lot of our boxes, but maybe not all of them.

622
00:41:11,680 --> 00:41:14,600
Maybe we need more information or maybe we're waiting to see how something plays out.

623
00:41:14,600 --> 00:41:18,440
It'd be a three quarter risk unit, half risk unit, and usually a quarter risk unit.

624
00:41:18,440 --> 00:41:24,040
And a quarter risk unit is something that's a bit more speculative, but where we think

625
00:41:24,040 --> 00:41:26,360
the upside justifies having a position.

626
00:41:26,360 --> 00:41:34,080
And if you lose a little bit of money on that basis, so be it, because the risk reward stacks

627
00:41:34,080 --> 00:41:35,080
up.

628
00:41:35,080 --> 00:41:37,200
And all of those numbers sort of change.

629
00:41:37,200 --> 00:41:40,240
So we'll take an initial view on what something looks like at the start.

630
00:41:40,240 --> 00:41:44,840
It might be a 50% risk unit, half a risk unit at the start, and it becomes a full risk unit

631
00:41:44,840 --> 00:41:45,840
over time.

632
00:41:45,840 --> 00:41:50,560
Or it might be a full risk unit on day one, and then something happens as the transaction

633
00:41:50,560 --> 00:41:52,440
proceeds that changes our view on that.

634
00:41:52,440 --> 00:41:57,160
And maybe it goes back to being half risk position or no position at all.

635
00:41:57,160 --> 00:42:03,960
So Linetown, going back to that, was probably a quarter risk position for us.

636
00:42:03,960 --> 00:42:08,480
At the outset, it traded to the bid price and we exited in its entirety.

637
00:42:08,480 --> 00:42:13,480
So most transactions were holding through to completion, I would say, generally.

638
00:42:13,480 --> 00:42:18,180
But it's a really dynamic process where you just have to be monitoring for price movements

639
00:42:18,180 --> 00:42:22,320
and new news and developments every single day.

640
00:42:22,320 --> 00:42:24,480
So how does that translate into the performance?

641
00:42:24,480 --> 00:42:27,680
So what's the performance been on the fund historically?

642
00:42:27,680 --> 00:42:29,880
What's the beta past 12 months?

643
00:42:29,880 --> 00:42:34,480
Yeah, so look, historically, so we've been going for a little bit over 10 years.

644
00:42:34,480 --> 00:42:40,840
We've done about 8.5% net of all fees over that period of time, which is sort of right

645
00:42:40,840 --> 00:42:42,960
in the sweet spot of where we'd like to be.

646
00:42:42,960 --> 00:42:47,640
So reasonably pleased with that as a number.

647
00:42:47,640 --> 00:42:52,080
In particular, because we've done that with kind of single digit volatility.

648
00:42:52,080 --> 00:42:55,680
So over that period of time, we're not trying to keep up with the market per se.

649
00:42:55,680 --> 00:42:57,280
We're an absolute return fund.

650
00:42:57,280 --> 00:43:02,420
So that sort of 8% to 10% per annum number is sort of in the sweet spot of where we want

651
00:43:02,420 --> 00:43:05,440
to be net of fees.

652
00:43:05,440 --> 00:43:09,680
But the ASX has done roughly that number over that same period of time.

653
00:43:09,680 --> 00:43:15,520
But with vol of, I'm going to say like 12 and a half or 13 versus for us, sort of vol

654
00:43:15,520 --> 00:43:20,360
of nine-ish over that period of time.

655
00:43:20,360 --> 00:43:24,960
Last three years, we'd be about 16% net of fees for three years with much, much lower

656
00:43:24,960 --> 00:43:32,080
vol, sort of vol of more like 6% over that period of time.

657
00:43:32,080 --> 00:43:37,760
So we're up, I think, 11 and a bit net of fees as of end of October.

658
00:43:37,760 --> 00:43:43,120
So I guess we're having an average year of sorts in terms of slightly above average in

659
00:43:43,120 --> 00:43:45,360
terms of where we'd like to see returns.

660
00:43:45,360 --> 00:43:49,760
I think our 16% per annum stacks up pretty well over the last three years against the

661
00:43:49,760 --> 00:43:51,320
market and a lot of other strategies.

662
00:43:51,320 --> 00:43:58,780
So I think there's sort of this perception that when interest rates go up, that M&A kind

663
00:43:58,780 --> 00:44:02,040
of dies and is sort of severely diminished.

664
00:44:02,040 --> 00:44:08,200
I think that's absolutely fair in bigger transactions and anything that's kind of PE sponsored where

665
00:44:08,200 --> 00:44:13,700
funding, external debt funding is a big portion of kind of the acquisition proceeds.

666
00:44:13,700 --> 00:44:18,840
But the smaller mid-cap section of the market, you tend to have buyers paying for things

667
00:44:18,840 --> 00:44:24,840
in cash or from existing kind of debt facilities or lines of credit that they have, script

668
00:44:24,840 --> 00:44:28,320
bids, one company buying another for script.

669
00:44:28,320 --> 00:44:34,040
So we've been pretty pleasantly surprised in the past few years about the opportunity

670
00:44:34,040 --> 00:44:35,040
set.

671
00:44:35,040 --> 00:44:38,040
And look, we're not solely merger-arb either, right?

672
00:44:38,040 --> 00:44:43,200
So we do do like a company liquidation, for example.

673
00:44:43,200 --> 00:44:47,920
So we did one recently in Sunland Group.

674
00:44:47,920 --> 00:44:50,720
Sunland for anyone who doesn't know, it was a Gold Coast property developer.

675
00:44:50,720 --> 00:44:56,680
I think that would scare most people off from the outset.

676
00:44:56,680 --> 00:45:01,160
But founding family owned roughly 60% of the shares on issue.

677
00:45:01,160 --> 00:45:05,400
They make an announcement sort of three years ago that they're going to basically start

678
00:45:05,400 --> 00:45:10,520
liquidating the entire portfolio because it had never traded near NTA.

679
00:45:10,520 --> 00:45:16,560
I think the stated NTA at that time was sort of roughly $2.20 and the stock was trading

680
00:45:16,560 --> 00:45:20,280
at maybe $1.40 or $1.50.

681
00:45:20,280 --> 00:45:26,160
So we did a little bit of work and just credit to Ben and my team, who really sort of drove

682
00:45:26,160 --> 00:45:30,520
this one, but had a quick look at the balance sheet, realized that a lot of the inventory

683
00:45:30,520 --> 00:45:34,560
that was being carried was actually being carried at cost, in some instances from years

684
00:45:34,560 --> 00:45:36,080
and years and years ago.

685
00:45:36,080 --> 00:45:43,320
Sure, lots of property companies like to revalue their assets, kind of annually at least, and

686
00:45:43,320 --> 00:45:47,280
will typically increase NTA and sometimes earnings on that basis.

687
00:45:47,280 --> 00:45:49,280
These guys just hadn't done that.

688
00:45:49,280 --> 00:45:55,320
And as we sort of realized that, it was like, OK, well, $2.20 is probably too low in terms

689
00:45:55,320 --> 00:45:56,600
of what the real NTA is.

690
00:45:56,600 --> 00:46:00,240
We can buy this stock at like $1.50.

691
00:46:00,240 --> 00:46:04,960
The founders and a lot of the staff, key staff, have a real vested interest here in getting

692
00:46:04,960 --> 00:46:06,460
an outcome.

693
00:46:06,460 --> 00:46:11,720
And just as they sort of sold off apartments and inventory and whatever, it just turned

694
00:46:11,720 --> 00:46:15,520
into more and more of a cash box and the market just wasn't really reflecting the progress

695
00:46:15,520 --> 00:46:16,520
they were making.

696
00:46:16,520 --> 00:46:22,160
So we got what was probably the last $0.90 capital distribution just a couple of weeks

697
00:46:22,160 --> 00:46:27,520
ago, I think in total, including dividends and franking credits.

698
00:46:27,520 --> 00:46:32,280
We've had about $4.50, I think $4.60 returned to us through that process.

699
00:46:32,280 --> 00:46:36,720
There might be a little bit more juice to squeeze out of it as they wind down the last

700
00:46:36,720 --> 00:46:39,280
of it in an unlisted capacity.

701
00:46:39,280 --> 00:46:45,120
But that was in plain sight for everyone to see the day it was announced, a month after

702
00:46:45,120 --> 00:46:46,840
it was announced, a year after it was announced.

703
00:46:46,840 --> 00:46:50,840
We wrote about it in our newsletters.

704
00:46:50,840 --> 00:46:57,960
It wasn't a secret and yet, as far as I could tell, we were probably the only institutional

705
00:46:57,960 --> 00:47:04,200
professional fund of note that was buying this stock at any stage through that process.

706
00:47:04,200 --> 00:47:09,520
So I mentioned some of the stuff we were doing early days, 20 years ago, those efficiencies

707
00:47:09,520 --> 00:47:10,520
have been removed.

708
00:47:10,520 --> 00:47:15,280
But that was literally just not being scared off by Gold Coast property developer, getting

709
00:47:15,280 --> 00:47:19,560
a handle on the balance sheet and just working out how much capital was to be returned there

710
00:47:19,560 --> 00:47:22,400
over time and full credit to the team at Sunland.

711
00:47:22,400 --> 00:47:24,480
They did an amazing job of that.

712
00:47:24,480 --> 00:47:27,880
We were pretty passive through the process, didn't have a lot of contact with them throughout

713
00:47:27,880 --> 00:47:28,880
that process.

714
00:47:28,880 --> 00:47:32,640
It was pretty easy to work most of it out ourselves.

715
00:47:32,640 --> 00:47:41,760
Sorry, I tell that story because we want an active, buoyant merger, market and takeover

716
00:47:41,760 --> 00:47:42,760
market in Australia.

717
00:47:42,760 --> 00:47:48,320
For sure, benefits our strategy, but in all market cycles, there are different versions

718
00:47:48,320 --> 00:47:50,160
of the same sorts of transactions.

719
00:47:50,160 --> 00:47:54,440
So it might be a merger, but it might be a spin off or it might be a liquidation.

720
00:47:54,440 --> 00:48:00,880
It might be an asset sale with a capital return and then some residual assets left behind.

721
00:48:00,880 --> 00:48:05,520
There's so many permutations of this that tend to get mispriced.

722
00:48:05,520 --> 00:48:12,120
So pretty rich opportunity set for the most part, much more so than I think people would

723
00:48:12,120 --> 00:48:13,120
appreciate.

724
00:48:13,120 --> 00:48:16,120
Yes, quite interesting.

725
00:48:16,120 --> 00:48:22,400
Starting on the mechanics, you mentioned a while ago that the minimum is only two and

726
00:48:22,400 --> 00:48:30,000
a half thousand, which is quite uncommon for a strategy of your ilk.

727
00:48:30,000 --> 00:48:31,680
Is this wholesale only?

728
00:48:31,680 --> 00:48:36,120
Can anyone access the fund and why have you done that that way?

729
00:48:36,120 --> 00:48:42,040
Yeah, rightly or wrongly, I regret this five times a year at least, but it's a retail fund.

730
00:48:42,040 --> 00:48:44,480
I mean, I joke when I say that.

731
00:48:44,480 --> 00:48:51,280
I think I mentioned before, I didn't come from wealth or a family of means.

732
00:48:51,280 --> 00:48:57,760
When we're setting up the fund, the question was asked from our trustee, well, you want

733
00:48:57,760 --> 00:48:58,760
the minimum to be?

734
00:48:58,760 --> 00:49:02,040
I said, well, talk to me about what's the difference?

735
00:49:02,040 --> 00:49:06,040
What is the minimum it can be and does it cost me more or less or cost the fund more

736
00:49:06,040 --> 00:49:08,320
or less if it's 2,000 or 50,000 or whatever?

737
00:49:08,320 --> 00:49:13,640
I said, look, it's $2,000 and it doesn't make any difference.

738
00:49:13,640 --> 00:49:20,400
I said, well, why do some people do 50 or 100 or 250 and it's basically marketing and

739
00:49:20,400 --> 00:49:25,720
ego and something seems more out of reach if it's 50 grand or 250 grand than if it's

740
00:49:25,720 --> 00:49:26,720
two.

741
00:49:26,720 --> 00:49:31,440
So I guess our view is that if someone's got $2,000 and they want to put it into our fund

742
00:49:31,440 --> 00:49:36,080
and they believe in what we're doing, then you're absolutely welcome them doing that.

743
00:49:36,080 --> 00:49:41,000
I mean, clearly, if you have wholesale fund, you need to have a $500,000 minimum or you

744
00:49:41,000 --> 00:49:44,960
need someone to be a sophisticated investor, but that's not the case here.

745
00:49:44,960 --> 00:49:49,300
It is a little bit more expensive and time consuming to run a retail fund, but we felt

746
00:49:49,300 --> 00:49:53,680
pretty strongly about it being accessible to as many people as possible.

747
00:49:53,680 --> 00:49:58,360
It has daily liquidity, so it's available on a number of platforms.

748
00:49:58,360 --> 00:50:02,520
I know financial advisors generally, a lot of them prefer to have daily liquidity and

749
00:50:02,520 --> 00:50:04,600
a lot of the researchers prefer daily liquidity.

750
00:50:04,600 --> 00:50:12,960
So daily price retail fund accessible to everyone is basically the nuts and bolts of it.

751
00:50:12,960 --> 00:50:19,720
Yeah, it's just so interesting, this strategy and you're saying what only player in Australia

752
00:50:19,720 --> 00:50:25,600
currently operating this was this and there's a number offshore.

753
00:50:25,600 --> 00:50:27,080
What's the main reason for that?

754
00:50:27,080 --> 00:50:34,280
Yeah, so I think, look, this type of strategy, probably 20 years ago, guys who were propped

755
00:50:34,280 --> 00:50:39,120
up, propped traders working on the propped desk and investment banks for the guys that

756
00:50:39,120 --> 00:50:40,480
were doing this type of stuff.

757
00:50:40,480 --> 00:50:44,780
So a couple of other managers in Australia that I'm aware of who started out as propped

758
00:50:44,780 --> 00:50:47,960
traders doing that, they don't do a job now, they do something different.

759
00:50:47,960 --> 00:50:53,640
But if you think about being in an investment banking environment like that, your cost of

760
00:50:53,640 --> 00:50:58,080
capital is really low, so you're usually using bank balance sheet to do that and you're just

761
00:50:58,080 --> 00:50:59,960
super plugged into the market.

762
00:50:59,960 --> 00:51:04,200
By virtue of the fact that you have so many different divisions within your bank, investment

763
00:51:04,200 --> 00:51:11,320
banking, trading, usually what we would call wealth advisory now, but in old school terms,

764
00:51:11,320 --> 00:51:14,520
stock brokers and the like, I think you're just really plugged into the market.

765
00:51:14,520 --> 00:51:18,280
You're across transactions and there's just loopholes everywhere to be exploited.

766
00:51:18,280 --> 00:51:24,560
And when you're using bank capital and you're a small team, then you can sort of chase nearly

767
00:51:24,560 --> 00:51:25,560
all opportunities, right?

768
00:51:25,560 --> 00:51:30,320
No matter how small they are, because if you and I working together on a propped desk and

769
00:51:30,320 --> 00:51:36,240
we can find ways to make five grand in 10 minutes and 20 grand in three days and whatever,

770
00:51:36,240 --> 00:51:41,520
we're just racking up as many gains as we can over that period to our ultimate benefit

771
00:51:41,520 --> 00:51:42,760
come bonus time, right?

772
00:51:42,760 --> 00:51:47,640
And I'm not necessarily sure that, I mean, you have to account for your cost of capital,

773
00:51:47,640 --> 00:51:48,640
absolutely.

774
00:51:48,640 --> 00:51:52,100
But I think banks were kind of far less focused on that back then.

775
00:51:52,100 --> 00:51:55,280
Some of the risk ratings they had to give to various different strategies and uses of

776
00:51:55,280 --> 00:51:58,360
capital looked a lot different back then than they do now.

777
00:51:58,360 --> 00:52:08,120
So a lot of those regulatory changes around capital ratios, but also some of those local

778
00:52:08,120 --> 00:52:11,640
legislation that was enacted in the US in the first instance post-JFC just basically

779
00:52:11,640 --> 00:52:17,000
meant that all of these investment banks no longer had propped desks in the sense of what

780
00:52:17,000 --> 00:52:18,240
they once did.

781
00:52:18,240 --> 00:52:23,120
So the choice for those guys is to be one of those private individuals that I mentioned

782
00:52:23,120 --> 00:52:28,320
who I know of who sit at home with their own Bloombergs and whatever else and trade mergers

783
00:52:28,320 --> 00:52:32,160
or Arben events, or you go out and set up a fund.

784
00:52:32,160 --> 00:52:38,480
And I think our ultimate capacity in this strategy in Australia, so focusing on Australia

785
00:52:38,480 --> 00:52:41,760
alone is probably $400 or $500 million would be my guess.

786
00:52:41,760 --> 00:52:45,640
So that's not big in anyone's terms, right?

787
00:52:45,640 --> 00:52:52,320
If I'm a big fund manager, whether it's offshore here, and you look at our returns, you say,

788
00:52:52,320 --> 00:52:55,600
geez, those returns are pretty good and we could raise $400 or $500 million.

789
00:52:55,600 --> 00:53:02,360
Well, we've got a team of five people and I just don't think it passes the hurdle rate

790
00:53:02,360 --> 00:53:08,240
for most bigger firms to set up a team with five people and Bloombergs and Iris and all

791
00:53:08,240 --> 00:53:09,240
the different things we need.

792
00:53:09,240 --> 00:53:16,760
We've got a full-time coder who works in our team to I guess make the process of gathering

793
00:53:16,760 --> 00:53:23,520
information and monitoring both announcements and media and prices and whatnot just more

794
00:53:23,520 --> 00:53:25,480
efficient because you can't buy that off the shelf.

795
00:53:25,480 --> 00:53:27,840
So we do a lot of that ourselves.

796
00:53:27,840 --> 00:53:32,080
That works when I have a lot of my own capital invested, when our team members have a lot

797
00:53:32,080 --> 00:53:36,320
of their own capital invested.

798
00:53:36,320 --> 00:53:40,600
We don't take anything in terms of management fee out of the fund.

799
00:53:40,600 --> 00:53:46,920
We pay external expenses only and they're remunerated in bulk by performance fees.

800
00:53:46,920 --> 00:53:51,960
So we've got really good alignment and the economics work for a small team who are pretty

801
00:53:51,960 --> 00:53:57,720
passionate about finding mispriced opportunities.

802
00:53:57,720 --> 00:54:02,200
I think the likelihood of someone setting up to do that in a professional sense is quite

803
00:54:02,200 --> 00:54:07,000
unlikely and look, in terms of the big funds offshore, a lot of people don't think much

804
00:54:07,000 --> 00:54:11,680
about this in Australia, but it's very common internationally.

805
00:54:11,680 --> 00:54:15,800
Those guys are just too big.

806
00:54:15,800 --> 00:54:22,000
If you've got a billion dollars or $3 billion or $5 billion, they just can't deploy money

807
00:54:22,000 --> 00:54:27,120
efficiently into a lot of the smaller situations that they were able to benefit from.

808
00:54:27,120 --> 00:54:30,840
So lots of them were trying to do that pre-COVID, I would say.

809
00:54:30,840 --> 00:54:33,360
There were some funds that had raised quite a lot of money who were pretty active down

810
00:54:33,360 --> 00:54:34,360
here.

811
00:54:34,360 --> 00:54:38,480
It's actually a pretty frustrating period for us because they were willing to trade

812
00:54:38,480 --> 00:54:41,400
things on far tighter spreads than we would have been.

813
00:54:41,400 --> 00:54:45,440
So when I said before, we like to, for expecting a dollar in three months, we probably want

814
00:54:45,440 --> 00:54:47,280
to pay 96 or 97 cents for it.

815
00:54:47,280 --> 00:54:49,640
They're happy to pay like 99 cents for it.

816
00:54:49,640 --> 00:54:55,280
So they're making a cent, they're leveraging it three or four times to make the numbers

817
00:54:55,280 --> 00:54:56,280
work.

818
00:54:56,280 --> 00:55:00,840
That's great when everything's working well, but when you have a deal break or you have

819
00:55:00,840 --> 00:55:04,080
lots of volatility like we did during COVID, that doesn't work very well.

820
00:55:04,080 --> 00:55:09,800
So I think that scared a lot of those funds off from doing smaller stuff in Australia.

821
00:55:09,800 --> 00:55:13,720
And look, I've got no doubt they're doing some of it in bits and pieces and they're

822
00:55:13,720 --> 00:55:20,280
very much active, like Origin as an example would have heaps and heaps of offshore merger

823
00:55:20,280 --> 00:55:22,840
up guys playing in the name.

824
00:55:22,840 --> 00:55:27,440
Liontown would have been the same when BHP bought Oz Minerals, that was sort of big enough

825
00:55:27,440 --> 00:55:29,400
to attract that as well.

826
00:55:29,400 --> 00:55:33,200
So those situations are pretty efficient.

827
00:55:33,200 --> 00:55:38,640
The likelihood of counterbids, the really big names and big transactions, it's not

828
00:55:38,640 --> 00:55:42,520
impossible to think of a counterbidder for Origin, but the potential pool of counterbidders

829
00:55:42,520 --> 00:55:51,320
for Origin is far, far smaller than your average 250 mil market cap company that I might have

830
00:55:51,320 --> 00:55:53,760
in the portfolio at the moment.

831
00:55:53,760 --> 00:55:58,440
Not only is it harder to raise the capital or have the financial firepower to buy Origin,

832
00:55:58,440 --> 00:56:04,600
but you've got a whole bunch of regulatory hurdles to clear as part of that process.

833
00:56:04,600 --> 00:56:12,080
So yeah, look, it's sort of a weird situation where we're just kind of big enough that we

834
00:56:12,080 --> 00:56:16,080
can kind of deploy capital in a professional systematic way, but not so big that we're

835
00:56:16,080 --> 00:56:21,880
pricing ourselves out of opportunities that I think others just can't access.

836
00:56:21,880 --> 00:56:24,280
And the other thing is too, it's not at all sexy, right?

837
00:56:24,280 --> 00:56:29,040
Like it's in some ways, as I said, I knew it out on it, but I think for a lot of people,

838
00:56:29,040 --> 00:56:30,040
it's super boring, right?

839
00:56:30,040 --> 00:56:34,480
You have to read, I mean, your average scheme document probably is like 160 pages.

840
00:56:34,480 --> 00:56:41,280
I think we had one for a small mining company the other day, it was like 420 or 480 or something.

841
00:56:41,280 --> 00:56:43,400
And you just can't afford not to read it, right?

842
00:56:43,400 --> 00:56:48,280
Like some of the best things we've ever found have been on like page 234 of like a 400 page

843
00:56:48,280 --> 00:56:49,840
booklet.

844
00:56:49,840 --> 00:56:53,920
And if you get so lazy or so complacent that you start skim reading, that's the type of

845
00:56:53,920 --> 00:56:54,920
thing you could miss.

846
00:56:54,920 --> 00:56:58,720
But I think if I say to most people, look, you can buy this thing for 96 cents, you'll

847
00:56:58,720 --> 00:57:03,760
have to read 480 pages, you'll have to be really organized around all of the dates and

848
00:57:03,760 --> 00:57:06,040
conditions and then you'll get a dollar at the end of it.

849
00:57:06,040 --> 00:57:09,840
Oh, and by the way, if you get it wrong, you might end up only getting 50 cents.

850
00:57:09,840 --> 00:57:15,400
It doesn't really scream compelling investment opportunity, I suppose, is what I would say.

851
00:57:15,400 --> 00:57:18,200
I can understand why you said you wish you studied law.

852
00:57:18,200 --> 00:57:24,320
All the reading you're doing is predominantly what a lot of my friends are doing that are

853
00:57:24,320 --> 00:57:25,320
lawyers.

854
00:57:25,320 --> 00:57:27,040
Yeah, I think there's overlap for sure.

855
00:57:27,040 --> 00:57:36,040
I think it's some part psychologist, part fund manager and part lawyer, I think.

856
00:57:36,040 --> 00:57:41,560
One thing I've always found quite interesting just looking at the cyclical nature of markets,

857
00:57:41,560 --> 00:57:48,600
I've always noticed a trend when you're looking at patterns, especially in cyclical asset

858
00:57:48,600 --> 00:57:54,720
classes where the smart players, you kind of keep abreast as you said, you mentioned

859
00:57:54,720 --> 00:58:02,040
two names, who look at doing these acquisitions, they kind of have the cash balance to essentially

860
00:58:02,040 --> 00:58:09,360
wait until the pressure's on and so commodity price and lithium is 600,000 down to 140,000

861
00:58:09,360 --> 00:58:13,760
maybe consolidating here, but then it just what's the number one business cash flow,

862
00:58:13,760 --> 00:58:14,840
cash is king.

863
00:58:14,840 --> 00:58:20,120
So when people are so rich and cash poor and they can't raise and finding equities difficult,

864
00:58:20,120 --> 00:58:25,940
I've always found it quite an interesting pattern how most acquisitions tend to really

865
00:58:25,940 --> 00:58:30,040
start to ramp up near the bottom of the cycle.

866
00:58:30,040 --> 00:58:33,280
On the negative side, a lot of acquisitions happen at the top of the cycle, which you

867
00:58:33,280 --> 00:58:37,960
kind of want to avoid, but I've always seen it as a leading indicator.

868
00:58:37,960 --> 00:58:42,160
Like as an example in the lithium space right now, some acquisitions are starting to come

869
00:58:42,160 --> 00:58:46,800
through at these lower levels and then there's like almost like consolidation play.

870
00:58:46,800 --> 00:58:51,000
I think we've also seen the same thing in the online gambling space right now.

871
00:58:51,000 --> 00:58:52,720
Exactly the same thing is happening.

872
00:58:52,720 --> 00:58:58,720
There's a gigantic consolidation play from the big cash type players looking at consolidating

873
00:58:58,720 --> 00:59:01,560
32 small companies into about eight.

874
00:59:01,560 --> 00:59:13,760
I know the pattern exists, but would you say that's a very good leading indicator on changing

875
00:59:13,760 --> 00:59:22,440
tide from like a MACD to a very big perspective on the cycle or it's just pace by pace?

876
00:59:22,440 --> 00:59:27,120
I think that's a factor for sure.

877
00:59:27,120 --> 00:59:30,400
Lithium is interesting because I think what you're seeing in lithium at the moment is

878
00:59:30,400 --> 00:59:34,120
there's sort of two factors at play, right?

879
00:59:34,120 --> 00:59:39,040
Yes, the lithium price is off a little bit and in some ways it's kind of counterintuitive

880
00:59:39,040 --> 00:59:43,000
that there's so much interest in lithium right now and lithium M&A and the kind of land grab

881
00:59:43,000 --> 00:59:47,640
that's happening in the face of falling prices, right?

882
00:59:47,640 --> 00:59:55,840
Even SQM with his bid for AZS at the moment and obviously Gina and Chris Ellison have

883
00:59:55,840 --> 01:00:00,720
been in there as well and Gina and Chris are buying up everything everywhere, right?

884
01:00:00,720 --> 01:00:06,960
Like 20% in WCA Wildcat I think it's called and Delta Lithium and whatever, right?

885
01:00:06,960 --> 01:00:11,960
So they're everywhere at the moment and it's almost like intuitively you go, okay, well

886
01:00:11,960 --> 01:00:18,920
when lithium prices are sort of in freefall, usually you don't expect to see the M&A aspect

887
01:00:18,920 --> 01:00:21,000
until there's sort of a stabilization, right?

888
01:00:21,000 --> 01:00:24,720
So if we ignore lithium for a second, let's talk about sort of tech, right?

889
01:00:24,720 --> 01:00:32,680
So tech flying high kind of into the backend of 2021, I guess, and then sort of early 2022,

890
01:00:32,680 --> 01:00:36,840
we kind of have this reckoning in tech, at least for a lot of the more speculative stuff,

891
01:00:36,840 --> 01:00:37,840
right?

892
01:00:37,840 --> 01:00:42,960
So businesses that kind of had good ARR numbers in terms of growth and had had investors throwing

893
01:00:42,960 --> 01:00:46,800
heaps of money at them to, it's fine, just keep losing money, keep losing money.

894
01:00:46,800 --> 01:00:47,800
It's all about growth.

895
01:00:47,800 --> 01:00:50,600
It's all about getting as big as you can get as quickly as you can that the profits will

896
01:00:50,600 --> 01:00:56,760
come to, well, okay, money's not free anymore and you guys are burning heaps of cash and

897
01:00:56,760 --> 01:01:02,080
we can't keep funding this on its current trajectory.

898
01:01:02,080 --> 01:01:06,600
What we sort of saw late last year is not a lot of tech M&A in the first half of the

899
01:01:06,600 --> 01:01:10,560
year, but in the second half of the year as tech had kind of stabilized and bottomed,

900
01:01:10,560 --> 01:01:14,660
well all of a sudden it's like, okay, we can actually figure out here now which businesses

901
01:01:14,660 --> 01:01:20,480
are viable and have good long-term trajectory and it just, to your point before and a bit

902
01:01:20,480 --> 01:01:22,160
of a hold because they've run out of cash.

903
01:01:22,160 --> 01:01:26,600
So the asset is good, the business is good, but they just completely mismatch revenues

904
01:01:26,600 --> 01:01:27,600
with expenses.

905
01:01:27,600 --> 01:01:31,480
So you saw some bids last year where that was the case, right?

906
01:01:31,480 --> 01:01:36,640
So Nitro was one of those which Potenture ended up buying, it sort of developed into

907
01:01:36,640 --> 01:01:38,960
a bit of a bidding war.

908
01:01:38,960 --> 01:01:44,320
And that was sort of interesting because those guys waited to bid until the market had stabilized

909
01:01:44,320 --> 01:01:48,760
somewhat, but as the bid was on foot, the market started to recover.

910
01:01:48,760 --> 01:01:53,680
And what was sort of happening was they were just kind of one step behind the whole way

911
01:01:53,680 --> 01:01:56,600
because people started going, well, hang on, if you guys weren't bidding for this, this

912
01:01:56,600 --> 01:02:00,640
thing would be probably up more than it is because of your bid, right?

913
01:02:00,640 --> 01:02:05,440
So I said before, a falling market shouldn't really impact on our strategy too much if

914
01:02:05,440 --> 01:02:06,440
we construct the portfolio.

915
01:02:06,440 --> 01:02:10,080
Well, a rising market can help it in some instances, right?

916
01:02:10,080 --> 01:02:15,120
Because if the backdrop is that the prices fundamentally of whatever these companies

917
01:02:15,120 --> 01:02:21,080
are would be increasing otherwise, it puts a bit of pressure on bidders to kind of have

918
01:02:21,080 --> 01:02:22,080
to up the ante.

919
01:02:22,080 --> 01:02:23,720
I mean, that's what's happened to these guys in Origin, right?

920
01:02:23,720 --> 01:02:27,440
They started working on this deal like a year and a half ago when most people in the Australian

921
01:02:27,440 --> 01:02:30,080
market hated Origin.

922
01:02:30,080 --> 01:02:35,320
The earnings outlook for the company wasn't as good as it is now, but they've since had

923
01:02:35,320 --> 01:02:39,880
I think two results, certainly one more recently that kind of woke everyone up to what the

924
01:02:39,880 --> 01:02:40,880
value was.

925
01:02:40,880 --> 01:02:47,600
Plus they've got this kind of octopus investment in the UK, which I think no one thought about

926
01:02:47,600 --> 01:02:52,120
before and now it's kind of sky's the limit in terms of what the valuation is.

927
01:02:52,120 --> 01:02:55,360
But it's sort of funny how markets work, right?

928
01:02:55,360 --> 01:02:59,080
So I guess my point is in tech there, people are waiting.

929
01:02:59,080 --> 01:03:00,440
They're not trying to catch the falling knife.

930
01:03:00,440 --> 01:03:03,920
They're waiting for the knife to stick in the ground and then you make your bid.

931
01:03:03,920 --> 01:03:05,040
That's not happening in lithium.

932
01:03:05,040 --> 01:03:08,000
And I think the reason for that is it's also a land grab, right?

933
01:03:08,000 --> 01:03:14,000
I think all these guys have realized there's only so much land to go around and sometimes

934
01:03:14,000 --> 01:03:18,160
you just pay what you have to irrespective of market backdrop because you feel like if

935
01:03:18,160 --> 01:03:19,800
you don't move now, you'll miss out.

936
01:03:19,800 --> 01:03:22,920
And that bid that I mentioned before where it started at a dollar and finished north

937
01:03:22,920 --> 01:03:25,240
of eight, it's in a company called Pure Energy.

938
01:03:25,240 --> 01:03:29,840
PES I think was the code and it was when the coal seam gas boom was happening in Australia,

939
01:03:29,840 --> 01:03:34,040
which I think was sort of circa 2009, I want to say.

940
01:03:34,040 --> 01:03:37,700
You had Queensland Gas, you had Pure Energy, you had Arrow Energy, like all these companies

941
01:03:37,700 --> 01:03:40,840
and same thing, it just became a land grab and consolidation.

942
01:03:40,840 --> 01:03:45,240
It's what you're seeing in lithium now for sure.

943
01:03:45,240 --> 01:03:49,540
So yeah, sorry, it was a long way of answering the question, but it's a factor, absolutely.

944
01:03:49,540 --> 01:03:55,100
And I think there's lots of reasons that M&A happens and that's why I'm not super concerned

945
01:03:55,100 --> 01:04:01,200
about market cycle, far less now than I was 10 or five years ago because sometimes M&A

946
01:04:01,200 --> 01:04:05,020
happens in sectors that have been bombed out and are stabilizing.

947
01:04:05,020 --> 01:04:10,600
Sometimes it happens at the top of the market for strategic reasons, like in a land grab

948
01:04:10,600 --> 01:04:12,640
type situation.

949
01:04:12,640 --> 01:04:17,200
Sometimes it happens because people just go one step too far and get too caught up in

950
01:04:17,200 --> 01:04:21,640
the mania of booming markets and decide to do ridiculous mergers at the absolute top

951
01:04:21,640 --> 01:04:22,640
of the market.

952
01:04:22,640 --> 01:04:26,160
I mean, Elon kind of bought Twitter at the top of the market, right?

953
01:04:26,160 --> 01:04:29,240
If he'd waited four more weeks, not only would he probably not have bought it, but if he'd

954
01:04:29,240 --> 01:04:32,560
wanted to, he would have paid half the price that he had to pay.

955
01:04:32,560 --> 01:04:38,880
So the interesting thing, there's people behind all of these transactions, right?

956
01:04:38,880 --> 01:04:40,680
So none of it happens in a vacuum.

957
01:04:40,680 --> 01:04:45,040
And I think it comes down to some boards won't do a deal and I watch all their competitors

958
01:04:45,040 --> 01:04:47,640
do a deal and then I'll watch the competitors do another deal.

959
01:04:47,640 --> 01:04:50,480
And then eventually, that's the end, right?

960
01:04:50,480 --> 01:04:53,040
I mean, I've got a group of mates who probably do too.

961
01:04:53,040 --> 01:04:56,640
We all joke about like Sydney residential property, right?

962
01:04:56,640 --> 01:05:01,940
I've got mates who have refused to buy a house for the last 15 years because the market's

963
01:05:01,940 --> 01:05:03,080
going to crash, right?

964
01:05:03,080 --> 01:05:05,320
Now market hasn't really crashed.

965
01:05:05,320 --> 01:05:09,560
It's had a couple of corrections arguably along the way, but the joke is now that Sydney

966
01:05:09,560 --> 01:05:13,400
property could correct by 50% and there's still no better off than if they just bought

967
01:05:13,400 --> 01:05:15,160
a house 10 years ago, right?

968
01:05:15,160 --> 01:05:21,360
So people do things for weird reasons, but their big fear is, which I completely understand,

969
01:05:21,360 --> 01:05:23,960
is having not bought a house for 10 years.

970
01:05:23,960 --> 01:05:29,700
You can't then jump in and buy a house at a moment's notice because you feel like you're

971
01:05:29,700 --> 01:05:32,400
buying the top of the market just before a correction comes, right?

972
01:05:32,400 --> 01:05:34,120
So the more something like-

973
01:05:34,120 --> 01:05:40,760
What was it, probably what, 2% and now people are paying 6s and 7s.

974
01:05:40,760 --> 01:05:45,800
This poor people, their bills have gone up 200 odd percent.

975
01:05:45,800 --> 01:05:50,760
And the amount of money which they're borrowing is, I live in Lake Cove, the average price

976
01:05:50,760 --> 01:05:54,000
was what, a million bucks before COVID, now it's like three.

977
01:05:54,000 --> 01:05:55,000
Yeah, right.

978
01:05:55,000 --> 01:06:00,200
But I think my point sort of is there, right?

979
01:06:00,200 --> 01:06:04,280
There are a whole bunch of people who bought during COVID, went interest rates at 2% because

980
01:06:04,280 --> 01:06:05,880
of the fear of missing out, right?

981
01:06:05,880 --> 01:06:07,160
Boards do that as well, right?

982
01:06:07,160 --> 01:06:09,960
You can sit there and go, well, companies make better decisions and they've got governance

983
01:06:09,960 --> 01:06:13,520
and whatever, not necessarily, right?

984
01:06:13,520 --> 01:06:17,680
Some acquisitions are really smart, some acquisitions are really dumb.

985
01:06:17,680 --> 01:06:19,720
We don't really mind whether they're smart or dumb.

986
01:06:19,720 --> 01:06:25,440
We just want to margin and ideally a competitive bidding process.

987
01:06:25,440 --> 01:06:31,080
The one that always I think about doing the deal at the wrong time and then the consequences

988
01:06:31,080 --> 01:06:34,120
of it was QBA, like a decade ago.

989
01:06:34,120 --> 01:06:38,040
And they were paying for that for years.

990
01:06:38,040 --> 01:06:42,720
So that's why I always say that as a pattern, people doing deals at the wrong time and then

991
01:06:42,720 --> 01:06:43,720
they have to hold it.

992
01:06:43,720 --> 01:06:46,040
I mean, they get talked into it.

993
01:06:46,040 --> 01:06:50,200
I mean, we're a bit off topic, but they get talked into it by investment bankers and brokers

994
01:06:50,200 --> 01:06:51,320
sometimes too, right?

995
01:06:51,320 --> 01:06:52,320
And sometimes shareholders.

996
01:06:52,320 --> 01:06:56,160
I mean, I won't name the company, but we're involved in something at the moment where

997
01:06:56,160 --> 01:07:00,400
the CEO and founder got kicked out not that long ago by a bunch of shareholders who wanted

998
01:07:00,400 --> 01:07:01,640
it gone.

999
01:07:01,640 --> 01:07:05,840
And then there was a raid on the register like a week and a half later.

1000
01:07:05,840 --> 01:07:08,800
And all these shareholders that led to the founder getting kicked out sold all of their

1001
01:07:08,800 --> 01:07:09,800
stock.

1002
01:07:09,800 --> 01:07:10,800
And now the company's in no man's land.

1003
01:07:10,800 --> 01:07:11,800
It's subject to a bid.

1004
01:07:11,800 --> 01:07:17,400
The founder's no longer the CEO and the shareholders who wanted the CEO kicked out are now gone.

1005
01:07:17,400 --> 01:07:21,080
Now I'm not passing judgment one way or the other on whether that was a good decision

1006
01:07:21,080 --> 01:07:28,360
or not, but it's an unusual situation where someone's being kicked out by some shareholders

1007
01:07:28,360 --> 01:07:30,720
that are no longer there.

1008
01:07:30,720 --> 01:07:31,720
And the founder's still there.

1009
01:07:31,720 --> 01:07:33,520
He's still a shareholder and now they're defending this bid.

1010
01:07:33,520 --> 01:07:37,520
I think that happens all the time in companies that do capital raisings, get talked into

1011
01:07:37,520 --> 01:07:43,120
it by investment bankers or they get talked into it by brokers or shareholders.

1012
01:07:43,120 --> 01:07:44,120
It's a factor for sure.

1013
01:07:44,120 --> 01:07:48,520
People just sometimes think the champagne's never going to stop flowing.

1014
01:07:48,520 --> 01:07:49,520
Yeah.

1015
01:07:49,520 --> 01:07:51,680
Or you use fear to tell them, hey, it has stopped flowing.

1016
01:07:51,680 --> 01:07:52,680
It's never going to flow again.

1017
01:07:52,680 --> 01:07:55,840
So you better take action and raise a bunch of money and pay us a bunch of fees on the

1018
01:07:55,840 --> 01:07:59,240
way through.

1019
01:07:59,240 --> 01:08:04,320
Everyone I guess in all facets of life, the markets, they need to play a fear and greed.

1020
01:08:04,320 --> 01:08:07,840
You just got to figure out which side of that you're currently on and try and get back a

1021
01:08:07,840 --> 01:08:09,960
bit more towards the center.

1022
01:08:09,960 --> 01:08:13,320
Well your investing universe is pretty interesting.

1023
01:08:13,320 --> 01:08:18,560
So my favorite question to finish on is what keeps you up at night and what gets you out

1024
01:08:18,560 --> 01:08:20,560
of bed in the morning?

1025
01:08:20,560 --> 01:08:21,560
Yeah.

1026
01:08:21,560 --> 01:08:24,480
The answer to that question is probably the same thing.

1027
01:08:24,480 --> 01:08:27,000
I hope it comes across when we're talking about this.

1028
01:08:27,000 --> 01:08:32,400
I'm just absolutely fascinated by this strategy and the opportunities that exist.

1029
01:08:32,400 --> 01:08:37,960
I think this concept that if you just dig a little and you read and you push and whatever,

1030
01:08:37,960 --> 01:08:43,080
that I sometimes talk about, it's just like a big pile of money sitting over the corner

1031
01:08:43,080 --> 01:08:44,600
in the corner covered up by a blanket.

1032
01:08:44,600 --> 01:08:48,680
You just have to be curious enough to go over and lift up the blanket and see what's underneath

1033
01:08:48,680 --> 01:08:49,680
it.

1034
01:08:49,680 --> 01:08:51,120
So that's what gets me up.

1035
01:08:51,120 --> 01:08:53,840
I'm really passionate about what we're doing.

1036
01:08:53,840 --> 01:08:59,400
It's probably also what keeps you awake at night a little bit.

1037
01:08:59,400 --> 01:09:02,760
You can't ever be too complacent in this role.

1038
01:09:02,760 --> 01:09:07,440
So you've got to make sure that you're really crossing the T's, dotting the I's and that

1039
01:09:07,440 --> 01:09:09,240
your research is thorough.

1040
01:09:09,240 --> 01:09:11,480
You've got to have this kind of sense of skepticism.

1041
01:09:11,480 --> 01:09:14,080
You have enough confidence to believe you've got an edge and you know what you're doing,

1042
01:09:14,080 --> 01:09:19,320
but also I think be humble enough to realize that you might be missing something and maybe

1043
01:09:19,320 --> 01:09:23,160
someone knows something that you don't.

1044
01:09:23,160 --> 01:09:27,320
I would say I sleep pretty well most of the time, but I definitely have been known to

1045
01:09:27,320 --> 01:09:31,320
be making notes in my iPhone five minutes before going to sleep to remind myself to

1046
01:09:31,320 --> 01:09:33,560
do something the next morning.

1047
01:09:33,560 --> 01:09:40,760
So yeah, look, I feel very privileged that I get to do this for a job.

1048
01:09:40,760 --> 01:09:48,640
I think it definitely has its moments and bad, but on balance, I think it's a pretty

1049
01:09:48,640 --> 01:09:51,600
fun thing to wake up and do every day.

1050
01:09:51,600 --> 01:09:56,360
If anyone listening wants to learn more about the strategy and yourself, how can they find

1051
01:09:56,360 --> 01:09:57,360
you?

1052
01:09:57,360 --> 01:10:05,200
Yeah, look, I mean, you know, our website, obviously, so www.harvestlaneam.com.au.

1053
01:10:05,200 --> 01:10:06,520
I'm not super active on Twitter.

1054
01:10:06,520 --> 01:10:11,360
I have a reasonable number of Twitter followers for someone who doesn't tend to tweet much,

1055
01:10:11,360 --> 01:10:16,320
but you know, there's bits and pieces like white papers and interviews and things that

1056
01:10:16,320 --> 01:10:19,360
I've done or contributed to floating around on the net.

1057
01:10:19,360 --> 01:10:24,360
But look, I think if anyone feels strongly enough about it, we've put together a pretty

1058
01:10:24,360 --> 01:10:30,040
solid recommended reading list over the years for anyone who's sufficiently interested in

1059
01:10:30,040 --> 01:10:31,040
what we're doing.

1060
01:10:31,040 --> 01:10:35,240
So someone reaches out to me via email, through the website, I'd be more than happy or through

1061
01:10:35,240 --> 01:10:37,640
Twitter for that matter to share that.

1062
01:10:37,640 --> 01:10:42,640
So I joke it'll either lead to a career in merger up or I help people sleep at night.

1063
01:10:42,640 --> 01:10:43,640
So either way.

1064
01:10:43,640 --> 01:10:44,960
Really, really good having you on.

1065
01:10:44,960 --> 01:10:45,960
I really appreciate it.

1066
01:10:45,960 --> 01:10:46,960
Thanks very much.

1067
01:10:46,960 --> 01:10:47,960
I appreciate the opportunity.

1068
01:10:47,960 --> 01:10:48,960
It's good to chat to you.

1069
01:10:48,960 --> 01:10:49,960
All right.

1070
01:10:49,960 --> 01:10:50,960
Have a good one.

1071
01:10:50,960 --> 01:10:51,960
Thanks.

1072
01:10:51,960 --> 01:10:52,960
You too.

1073
01:10:52,960 --> 01:11:10,240
Any views expressed in this recording do not represent the view of any other third party

1074
01:11:10,240 --> 01:11:12,920
and other sole personal opinions of the speaker.

1075
01:11:12,920 --> 01:11:16,640
Any reference to financial product does not constitute advice or recommendation.

1076
01:11:16,640 --> 01:11:20,880
And before any action, you should seek proper advice from your financial professional.

1077
01:11:20,880 --> 01:11:27,720
Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial

1078
01:11:27,720 --> 01:11:28,720
advice.

1079
01:11:28,720 --> 01:11:51,440
To get in touch with York, head to our website, www.yorkwealth.com.au.