Nick Thompson, welcome to the rate of change with York Wealth Management.
Thanks for having me.
Pleasure to be here.
Nick, many people know who you are in this wild world of finance, but some people may not be familiar with yourself.
So why don't we tell everyone a little bit about yourself and how you're going to finance.
A little bit about myself.
Yeah, I'm enough to have three kids.
been in finance for quite some time now, probably longer than I care to put a number to.
I've been here at Equasia for a
about nine years before that I was on the investment banking side at a few places.
I was at UBS, JP Morgan and a small Malaysian bank and I came across here to join some old colleagues who started EquaJet.
Before that many, many moons ago I started out life at AMP.
I worked on their listed property trusts which got taken over in the sort of.
early 2000s, which was interesting sort of introduction to your corporate career.
But I've done a few things.
So all up probably best part of 25 years or so in various forms of other property funds management or broader funds management and investment banking.
What's the biggest change that you've seen?
Biggest change you've seen is, look, in a way,
The circle sort of continues.
So there's new ideas or repackaged ideas.
Things move quicker nowadays.
There's more access to pockets of capital.
There's more international investors in things than there was in the past.
And I think the other thing is there's more sort of investment opportunities for the average punter out there in terms of be it either
wholesale or sophisticated, you know, can get way more exposure to things like international equities or private deals, private equity, private credit than, you know,
sort of 20, 25 years ago, most people were invested in equities because that's basically all there was for that they could get access to.
So I think there's a broader range for people.
It's more interesting.
People are more in tune with it as well.
Superannuation, you know, is well entrenched in our society in terms of
people managing that for their own retirement, they were empowered by that versus, you know, if you look back to your parents' generation, they didn't have super, they weren't
worried about where the markets were going.
They could also purchase a house for potentially that they could, what was it, two or three times the income?
I think what's the average now is this is 11, has it gone to 12 yet?
It's probably, and it's two incomes now, it's not one.
It is a two person game, buying a house in Sydney.
so yes, sorry, it's actually become three person.
It's you two plus your parents, the grandparents, bank and mom and dad.
or we do, we'll get onto the portfolio, but we do quite a bit of lending to properties, to residential.
And yeah, there's lots of three generation households where, you know, there's grandparents or somebody who were part of that, effectively part of the household.
yeah, that's, you know, the rise of property prices is changing some demographics.
It's changing how people live in terms of
apartment accommodation and the like versus, you know, the sort of traditional Australian dream of owning a quarter acre block.
But the flip side for people is if you can get on the property later and it's a way for people to create wealth and then invest that wealth for their own retirement.
leisure and travel and that sort of stuff.
it's, you know, we're always reasonably optimistic about the future here at Equator, even though things are expensive.
Yeah, leisure and travel.
right, so just came back from holidays and you kind of your half your brains there, half your brains back here, but a lot of fun.
No, we're joking off air saying, I think from what I took from that is the biggest change has probably been the access to assets and then the access to capital and it's kind of
like just all.
ramping up and evolving.
I think we've been joking on lines that discuss it like fantasy football.
Now it's essentially, it's essentially become fantasy football with asset managers, you know, it's like take your pick everything's becoming faster, more accessible.
You know, what do want to do?
And then finally, who's the best that operates then make your own team, right?
Yep, pick your own time and you can put together, you know, a wide variety of, of asset classes that if you want to invest in, you know, from
international equities through to local private credit, private equity, people, you know, effectively can get can get access to now if you're a wholesale investor, as opposed to,
you know, you don't have to be an institution or somebody operating out of New York to get exposure to a to a Blackstone or a KKR or somebody like that.
So there's a there's a wide range of choice for people.
And, you know, that has resulted in in opportunities.
for advisors to help people navigate that way through.
It's very different investment opportunity and opportunity set than just having an equities portfolio and maybe an investment property.
Nowadays, there's yielding, you're probably one and half or 2 % by the time you take out all the costs.
So, I think that's an empowerment of people and that's reflective of not just in investments.
things like social media, things like being able to do things over the internet, make people more empowered.
I was away recently overseas.
Where were you I was in the US and I was trying to buy something for my wife and I rang her and she was, whilst I was at the store, she was on the store website saying, that's
what I want.
Like that's amazing as opposed to not that long ago, you you would have been
sort of you would have been there yourself without being able to sort of have that contact.
So people are more empowered in a way it's more democratic that it's not just some special opportunities for insiders or the wealthy.
People can get access to pretty much whatever they like.
And so fast as well.
I remember when I first traveled, like first hit Europe when I was like 19, if you needed to do any form of communication, it was completely cut off until you ended up at a, you
know, cafe, random cafe.
And you're like, you're spending 10 euro for like an hour.
You're like, you're like, my god, I've got like 38, like your 300 emails to go through.
I've looked at this in 21 days.
People like, are you alive?
Are you alive?
What's happened to you?
Yeah.
But with whereas now you're, you know, you
That's probably in a way a bit of the downside of it.
You're, you're available 24 hours.
It's just FaceTime.
It's like, darling, what are you looking at?
You sure you're buying the right one?
Okay.
Look, put me on video.
Put me on video.
Turn the camera.
Not that one.
I want the other one.
The other one.
But at least you get it right.
At least you get it right.
That is.
positive driving force across, you know, multiple things and multiple industry, industry.
So, and investments and financial services are no different.
Absolutely.
Now, before we get into finance, which we'll wax lyrical about, you're into you're into fantasy as well.
So I'm a premier league diehard can't help myself.
It's just the generation we're brought up with.
What's your poison?
My poison is AFL fantasy.
I probably spend much time according to my family doing that, but can be a bit addictive.
And it's
It's not wildly different from a financial services portfolio really.
It really is and is it.
You're essentially picking players in your team.
In your team and you only got so much money to spend.
It's a lot of fun.
Yeah.
Who's your picks for this year?
will be interesting to see.
Season's about to ramp up?
You got to wait to see who's injured and who's not.
I haven't spent that much time as yet.
We'll see when it all gets a bit closer.
So if anyone's wondering why we're waxing Lyrical about fantasy, I was joking before.
Wasn't really joking.
I was just saying my approach to all of this is practically fantasy football with our fund managers.
these days, you know, which goes back to the whole access and everything.
It's, it's a great time which we live in.
So back to Equasia, why don't we just give everyone a bit of color around exactly, know, what the what the house does, you know, what funds are available, like, what's the
investment philosophy?
do do?
Yeah, sort of the the 30 second one minute on us, probably start at the start, which is usually the best place to begin.
So 15 years ago,
we were established, our two principal partners, there's about 20 of us, we're all owners of the firm in various components, our two principal partners founded Equasia, they were
running the Australian operations of the Dutch investment bank, ABN Amro, they left there, started Equasia.
We basically do two things within Equasia, corporate advisory, which is what we sort of...
originally first set up for.
So there we do M &A and IPO advice.
Over the years, our clients have been people like News Corporation, Transurban, IPH, the patent attorney business.
So that business continues on and is a great business and we've got great clients.
And our first funds that we did were probably about 13 or 14 years ago.
So
as well as the corporate advisor, was sort of its own separate business, we can tap into some of the resources there when we need it.
We have about 1.3, 1.4 billion dollars of funds under management in credit funds.
So we did a couple of credit funds coming out of the sort of wreckage of the GFC, where there was a couple of credit funds that had failed and we took them over and managed those
out and made some really good returns for our investors.
Out of that, we started our enhanced credit fund, which is
I've been going for about 13 years.
That is a fund that targets sort of cash plus three.
We have a short term liquidity fund, which is sort of cash plus one and a half.
And then I run our private investment fund where we, our target return is 10 % after fees to investors.
We're coming up on about seven years of running that.
And just rough side, size wise, we're about $550 million.
So all of our funds management is on
is focused on credit.
The vast majority of our credit investments are asset heavy.
So the Enhanced Credit Fund invests in lot of mortgages and asset backed loans for things like auto warehouses.
And then on the private investment side, we invest in emerging companies and real estate with a
with a sort of bias towards hard asset backing.
if usually first ranking mortgages either a piece of property or a company, as companies, usually like them to have some sort of assets.
So we don't sort of do cashflow or people business type lens.
want some hard assets.
So the origins of it, the credit side wasn't because I'm going to the origins come really from the people.
So one of our partners ran all the markets business at ABN Amro before that at Citigroup in Australia and offshore.
So was sort of the heritage of the people.
And my colleague who's been managing the enhanced credit fund for 13 years, he's been managing it the whole time.
He was a credit trader and credit derivatives trader and did it.
So what my question is, normally what happens, what I've found is this like, I normally hear from a lot of, you know, other competitors, right?
You know, they've seen essentially what happened in the GFC.
And then essentially, the an opportunity was created, right?
They didn't want to deal with it anymore.
So you needed a middleman.
And then essentially, you go get $100 million bank, you know, facility from the bank, and then you're essentially middleman in the transaction, which makes a lot of sense.
But did you say that how you got into the credit is because you ended up with a deal with a deal.
So so did that happen?
So there was
this predated my time, but there was a receiver auction of some failed credit funds.
put together a small syndicate of family and friends and high net worths, bought that credit fund, managed it out.
I think the returns on that were about a 30 % IRR, sort of 2010.
So was coming, know, late 2010 coming out of the wreckage of the GFC.
Those investors then went into a second fund and from there we started an open-ended fund.
So that's probably
you know, something in terms of in terms of our funds, maybe a little bit different from from some other people around town is we don't have any leverage in our funds.
So all of our $1.3 billion is investors money.
So there's no leverage overlay or anything on that.
And we sort of haven't been traditional brokers of deals.
We've always been an investor where we've raised money and then invested on behalf of investors.
So that was sort of the origin.
And in a sort of strange way, each of the funds has almost sort of grown out of one or the other.
So our enhanced credit fund was doing quite well.
was seeing individual standalone deals that they liked the deals, but they weren't permitted under its mandate.
So from that, we started the private investment fund.
I think our first close was...
about 10 or $15 million.
So from that, we've grown over that period.
So we sort of take our time when we seed something.
But it's reacting to opportunities in the market and trying to marry up the capital with the opportunities.
All of our funds, and I'm sure all the people you speak to on the private credit side is the same, know, is partly driven by the same thing, which are the banking regulations,
which mean banks do less and less commercial style lending.
I'd sort of broadly put it, and they're encouraged by their capital charges to do more mortgages.
So that has provided us with scope and clients who are looking for funding solutions.
And there's been a reasonable opportunity set, which has continued to grow.
So it's just been a natural evolution, essentially.
a natural evolution and you sort of...
you sort of tap into those opportunities as they come along.
The good thing for us is, I think as I touched on, we're staff owned.
you know, we have things like independent investment committee members and the like, but we don't report into some corporate in Hong Kong or Zurich or New York or something.
you know, we manage the business ourselves.
So that gives you some flexibility to be able to
to grow and start things and seed them and not be sort of panicked or in a blind rush to complete things.
So we've just grown very organically and hopefully grown with our investors.
What's the expression?
Show me how someone's remunerating.
I'll show you how they behave.
Behave, yeah.
Yeah, I think that we've got a pretty simple structure here.
We charge a management fee on our putting aside the corporate advisory stuff, which is pretty standard.
We charge a management fee.
And as we're owners of the business, we're incentivised to all work together.
it maybe avoids some of the nuances or difficulties.
If people are on commission and things like that, it's sort of not catch and kill your own.
which sometimes doesn't engender the greatest sort of collaborative working environment.
And the good thing is almost all of us work together somewhere else before Equasio.
So we've all known each other for a long time.
that's a good opportunity to be able to continue those relationships.
So we're not, you know.
Some of my colleagues have been here since the start.
They've been here 15 years.
It builds an environment where you work together and hopefully grow together.
So the fund which you personally oversees the Equasia Private Investment Fund, right?
So why don't we just dig into the mechanics.
you've covered a little bit, but what exactly does it do?
Why don't we start with what's the performance been, right?
Yeah, I'll give you a rundown.
hopefully what we do and performance.
So last 12 months to December we did, after our fees to investors, we did about 14.6 % return, which is good, which is very healthy and we're very pleased with.
So we provide usually first rankings.
So for example, at the moment, we've only got 1 % of the book in senior, but we provide loans.
to across four portfolio components.
So one is real estate, which has always been the biggest component of the portfolio.
That's about 70%.
I'll come back to that in detail.
Emerging companies, so that's where as a business, we have a first ranking mortgage.
We help founders or investors or companies grow, take on an acquisition.
Hopefully they grow and then we get refinanced out by a bank or a sale.
And we can do...
two other components.
One, opportunistic credit is sometimes there's some mispriced securities out there or some bridge financing, for example.
And we can do convertible notes over the years.
We've only done one or two of those.
So they're the four components of the portfolio that we invest in.
A good chunk of our book is related to real estate.
Our typical real estate loan is a sort of
18 month to 24 month loan at a loan to value ratio of about 60 to 65%.
So we fund things like land subdivisions where we will have a borrower who has, say, sold 25 or 30 % of the lots in pre-sales to end mum and dads.
We help them settle the land and help fund putting in the services.
So roads, sewer, power, electricity,
We don't fund the end housing construction, the home building, the end mom and dad purchaser who's paid a 10 % deposit.
When we deliver, we, a borrower delivers a clear block of land, they call the deposit, the deposit's already been paid, they call for settlement, they settle the land, then the mom
and dad engages with a home building company to build their four or five bedroom house.
So a lot of that is in the suburbs of Sydney and Melbourne and Brisbane.
We like those markets.
Housing is expensive, but the supply is very hard with infrastructure councils and government red tape.
And there has been, over the last few years in particular post COVID, there's been very healthy levels of migration, which has sort of forced up demand for housing either.
by rental or for home purchases.
So we've done quite a bit of that in the portfolio.
We've done over the years, little bit of construction for apartments.
We've got about two or three apartment projects left.
We've really focused on one area.
Mixed use or just apartments?
Mainly just apartments, often a little bit of retail downstairs.
But most of our apartment stuff that we've done is not sort of the
10 or 15 level apartment, sort of two bedroom apartments.
We sort of have tapped into a bit of a niche in terms of the downsize of market.
So three or four levels, for example, they're going for so much money.
Oh my God.
some in Rose Bay.
We've had them in Brighton and Melrose.
Townhouses are going for like $3 million.
Yeah.
And look, that's, that the construction market has been very difficult because in terms of
supply materials post COVID, then supply labour, construction costs are up a lot.
That market we like, people are selling their family home, they're making a lifestyle decision and they want a really nice three, sometimes four bedroom apartment, enough room
for the grandkids.
They're not as sensitive to if interest rates go up or down 25 basis points because they've made a decision where they're
they're moving there for the next stage of their life.
So we've been able to tap into that for a bit.
done a few of those, probably a bit less so at the moment.
We've sort of been able to steer clear or navigate our way from, you know, we haven't done that sort of three tower, 500 apartments.
That's not where we can complete.
No, I really like the space.
I was chatting to another mate who's a developer, real estate agent.
He was chatting to his mates that knows a bunch of developers.
And to give it a rough number, say 30 of them which he knows, you know, North Shore, out of the 30, 10 or 11 or 12 of them have actually turned their attention to exactly this
particular market you're discussing.
And what they're looking at predominantly is getting large blocks, putting townhouses on them.
So you still have access to essentially what the family can come in and attain in the back.
Right.
But these things are going for like,
$3 million and the profit margin in comparison said someone's downsizing say, you know, grew up Roseville Chatswood, know, where they've Linfield and then the relocating to these
lovely places that are half the size.
But as you mentioned, they got the cash and they're to pay for it.
It's happy for that.
They help fund their retirement.
So they take some cash off the table, but and also they, you know, invariably.
close to, like it's where they live, right?
They don't necessarily want to move away.
You know, a funny one that was over the years, we funded one on the Gold Coast, which was whole floor apartments, which if you said to us just top down, this is probably a bit
reflective of sort of our philosophies.
If you said top down, do you want to fund apartments on the Gold Coast?
We're like, well, that's not for us.
But this was a sort of project that was a bit specific.
were,
right on the beach, we went through all the pre-sales contracts, we actually knew some of the purchases that were executives in listed companies.
And so that was one we funded and we got a really great return, got about 14 and half percent return from a senior loan.
And so...
there's different drivers for different markets.
And for us, we're a nice size fund.
We always like to get bigger, there's some broadly competitors of ours who've got eight, 10, $20 billion portfolios.
We don't have that size of portfolio.
So we can be not only selective, but pretty sort of nimble and target the things that we like because we haven't got
amount of money that we have to redeploy all the time.
So these opportunities come along.
We like those opportunities.
We've done quite a bit in industrial over the years.
We were involved in a syndicate for a land purchase of a very large parcel of land out near the new airport where our borough ended up selling that to a superfund.
That was a really good deal.
liked the
the drivers of industrial, work from home or Amazon style delivery.
you say industrial, what type of industrial?
So this was land that was gonna be developed into, it was a very large parcel of land, all that was 300 hectares.
Part of that will, over time will be developed into data centers, which are, you
incredibly large and getting larger and general distribution.
more and more of our goods are getting delivered to us.
They have to be taken off a ship or a plane broken down into smaller components and then shipped to you.
That's my holy grail of industrial.
Essentially those are what do call them?
The distribution warehouses.
So the two that I see that are phenomenal, correct if I'm wrong, is distribution warehouses and light industrial.
capacity for essentially some like my family's I'm news out right so it's always a running joke you can't get a job in there so I'll be can bring one so now from the m1 all the way
up practically crepe crepe made it swears Jesus you name it these light industrial things are popping up everywhere they're going for what 550 grand to about 750 800,000 you got
yourself a walk up to roll the doors either side you know I could I could have my
practice there, could have someone making surfboards, you could have a dude selling Pokemon cards, it's irrelevant, but they're phenomenal.
And they're flying off the shelves and the land's coming difficult to find now.
So you've got drivers like that, and then you've got things at the bigger end in terms of larger distribution centers for the Woolies and Coles and those people.
Amazon.
Amazon's who have, you know, they have very large space requirements.
This is sort of, we've been refinanced out of that loan, the people who are gonna be the end users there were the likes of the DHLs and Amazons of the world.
And then you've got data centers which are relatively, in a way relatively new.
They are big space users, big energy users, and they wanna be well located in terms of access to transport or in particular power.
they, you know, their margins on their business have seen things like air trunk have been sold for multiple billions of dollars.
Them buying the land to be able to establish a new centre is helping drive up the price as well because they need the space and they're sort of building capacity for things like,
you know, when AI continues to grow, they're going to be very big users of space.
we try and sort of tap into some
some things like that.
And underlying, if we lend at a reasonable loan to value ratio of 60 to 65%, that gives you a bit of headroom.
Because if you're involved in a component where our borrower's doing some development, we do a lot of work with them.
They have timelines, they have plans, things.
don't always go exactly to time.
They either take longer or there's twists and turns.
So you've got a bit of a headroom there to protect yourself.
But so far so good.
We've done in our fund, is now $550 million roughly of investors' money, over the seven years, we have invested in about 1.4.
billion of loans that have either been repaid or the loans in the portfolio now.
So all up we've done about 81, 82 loans that have been have been cycled through the through the fund.
What's the size of the loans?
Typical size for us is sort of about that 20 to $40 million that you know, we think that's bit of a sweet spot for us given our size.
If it's if it's a loan that's under $5 million, that's often done by sort of
family and friends, or, you know, sort of people's individual networks.
It's a big loan that's over a hundred, $150 million.
You often bump into bigger credit funds, banks, some hedge funds.
So for us, we like that, that size rises.
Now we have done bigger and smaller, but that's, that's sort of our target market is around that.
with the mechanics, is it purely
the money which you're using from the fund from investors or do you have a bank warehouse facility sitting in the back?
We have no bank warehouse facility.
We have no leverage.
we just, it's just investors money.
So we think that gives us extra control in terms of there's no leverage or bank provider that we have to comply comply covenants with.
If there is
alone that gets repaid, that money gets repaid to our investors.
The return goes to our investors.
We're not paying interest to some other provider.
Just a simple question is just for my benefit.
think I know the answer, but maybe people aren't familiar with this.
If you've got a bank warehouse facilities in the back compared to how you're running things and you say that essentially it's like first mortgage, you need to do your first
one on it.
If with the warehouse facility, does that mean that essentially, you know, if everything goes sideways,
the bank can essentially put the fund manager under in order to take the assets.
Does that make sense?
Well, probably depends in detail on how structured structure, put it this way, if you've got just, I'll talk for us and you know, so if you've got a hundred dollar loan, we've
invested a hundred dollars in it.
If you've got a hundred dollar loan and you've got a sort of a warehouse facility, maybe they've put the first 40 in and you've put 60 in.
So extreme example.
You know, if you, if things go badly and, and we have to sell the property or the company and we get $60 back, we would give that $60 to our investors.
Um, and they would have incurred a bit of a loss.
Um, if you get in the same example,
you get the $60 back, well, the credit provider is giving you 40, they get all their money, they get all their money back.
And then essentially, the investors are screwed.
And essentially, the funds, yeah, so as well, is in a bit of trouble.
that's, that's how I thought it was, I was just short term, that debt is probably at a lower cost.
So it can enhance your returns.
But there is a there is a price to be paid for that.
And you know,
Thankfully, this is not a visual medium, but as you can see, I've got a bit of gray hair.
We've all got a bit of gray hair around here.
So, you know, the leverage in, we don't use any leverage and that's not something that we've sort of ever used.
You know, we have over the years been in second ranking or mezzanine positions where we've gone, you know, behind a bank or another credit fund or.
Sometimes you've had a blend between a senior position and a mezzanine position to enhance your returns.
So we do that, but there's no leverage within our funds.
So we control our destiny for our investors and we answer to our investors, not to some credit provider or warehouse provider as well.
One actually thing before I forget on how the performance has worked out, because I had a client on the phone with you guys as well.
just to discussing how this works.
So if you look at the performance on the monthly is paying say 1 % as an average, right?
But then you've done 14.
So we were discussing it off air.
Where does the extra couple of points come from?
the way our funds are structured.
in not every loan, but in most loans, our borrowers pay an interest rate, they might pay a line fee and they pay what is known as an upfront fee for the deal sort of coming
together.
There are different models for different private credit funds, but where we are able to negotiate an upfront fee or the like from our borrowers, if that gets paid, that money
Some managers take some of that for the work that they've done.
We put the upfront fee back into the return for investors.
In some cases, we are able to exit fees or penalties or some default interest.
All of that goes into the return as well.
There are different models where some of that will go to the manager.
So, you know, in our 14.6%, we had...
probably one and a half to 2 % of that return was from some upfront fees.
We had a couple of quirky things that happened over the course of 2024.
We were in a reasonable, quite a big loan for the portfolio.
It had two pieces of security.
sold one of that.
We rolled our debt against the other piece of land.
We were able to negotiate quite a healthy upfront that enhanced the return.
The other thing was
our money was not repaid to us and then had to be reinvested.
It was state invested the whole time.
We had another one where we had an opportunistic credit deal, which was a borrower who has been a borrower of mine and also the enhanced credit fund.
know them well.
They were sort of after some, speaking, a sort of a some bridge financing.
We were able to negotiate quite a nice upfront.
That was for a seven month loan.
that effectively got for our investors about a 19 % internal rate of return.
They don't come along every day, those opportunities.
So there's a sort of couple of quirky things when they're in terms of upfront fees and a little bit of extension fees, but that's what goes into the returns.
So on a monthly basis, the in-place stuff in the portfolio does about one to 1.1.
Our return is enhanced by some of those upfront fees.
So we had a few months where we did
120 basis points or 145 that that that enhance the return.
That's important to go through because when I was looking at the the numbers, you know, for historically, not to toot your horn, but you're doing bloody well.
I think you currently top of the charts, you know, if we're talking about music reference, you top of the charts.
But I was trying to work out, know, you know, where does the extra points come from?
But essentially, what you're saying is you're passing on.
We're passing on.
those those
upfront fees that the borrowers pay or any extension fees and line fees.
So we've, but to be clear, we have a target rate of return of 10 % for investors.
So in the almost seven years since inception, we've been about 10.4%.
So that's after the management fees and our management fee structure is pretty straightforward.
We have a base management fee of 1 % and then we get 20 % of our performance over the 10%.
So the other thing is.
in a strange way, the pricing on our on our loans hasn't changed that much.
But you know, for a good chunk of the period of the life of the fund that was, you know, during COVID, where base interest rates were zero.
So there's a few years there where we probably did nine, nine and a half percent.
So you know, as a margin, we were getting 900 over.
RBA cash rate was nine is huge.
And, and the cash rate
now is 4.3 maybe going down, who knows?
we've done 14.6%.
So the margin is not that wildly different, but the starting point for the base rate is substantially I'm glad you brought up the historic as well.
What's changed in the past five years?
Because the five year average has been what, 10 and a bit percent, and now we've done 14 for this year.
So what's really changed?
we had some opportunities that came to us, some of the up fronts and a few things sort of drove that.
So the base portfolio is probably producing you at a top line rate about 13%.
So it's been topped up a bit from that.
It's sort of been trending that way, but like I said, since inception, our returns 10.4%.
So it's, you know, we're in the business of forecasting.
out but you know the portfolio should the in-place deals that we're seeing at the moment are for senior loans at around that sort of 12 to 14 percent mark that's what we're
seeing.
Will that you know if they if they start to reduce interest rates would that come down a bit?
Yeah probably it's not perfectly linear that you click your fingers
Our book is about 60, 57 % floating, 43 % fixed rates.
So it's not like they will replace automatically, but we tend to follow with a little bit of a lag where base rates go.
For example, my colleague who runs our enhanced fund, his stuff is all floating rates.
So that reprices at the end of each month.
if there's an interest rate change.
because that's what I was wondering is you mentioned some of the lines you like doing what 18 months to two years.
Yeah, so I was wondering if there was a lag on lower rates from historical stuff, a little bit of a lag that's starting to work its way out.
But then as you mentioned, you got fixed and floating as well as well as just trying to work out you know, where Yeah, there's components.
And the other thing is, by nature, and I suppose the benefit away of lending relatively short is
the average remaining life of the portfolio of our in-place loans is about 0.84 of a year.
So we've always got money coming back.
So over the course of 2024, about 60 % of the book got repaid and reinvested.
So one of the things for us is to try and line up new deals so we don't have drag.
And whenever you're reinvesting, effectively you're of retouching the market as to what...
market conditions are for pricing.
you know, we've got a little bit more cash than we would ordinarily like.
We like to run the book at about five to 7 % cash portfolio.
It's probably around the 10 % mark.
We've got a few things that'll be repaying in the first quarter.
for us, about 55 million cash, you know, looking for a home currently.
Yeah, well, a little bit of that builds up.
We obviously pay distributions and the like.
probably important thing to just touch on in terms of the nature of the fund.
So for our investors, we accept applications on a monthly basis.
We pay distributions and redemptions on a quarterly basis.
that's one of the other advantages of lending short is we've got money coming back.
So on average, like I said,
book has about 0.84 of a year to run.
if we were to, God forbid, if we were to stop everything today, those loans would repay over the sort of course of a year or so, a less than a year, and we could return that
money to invest.
Whilst we're on this point, I was chatting to a colleague before regarding one of the issues a lot of advisors are having with platforms.
So platforms, if people aren't familiar with it, is essentially like your login portal, which gives you access to all these funds, which is fantastic because it's just one place.
But the main benefit of some of these platforms is they essentially, you guys see just the platform name coming through, not the client.
So what's great about that is say you got a million dollar minimum, right?
Hypothetically.
What's the minimum for this one?
minimum, look, we have a minimum of about $50,000.
And then you can tick the box for reinvestment or top up.
So the top up component can be less than that.
So the reinvestment is essentially what we're discussing, which is a problem on platforms.
So if anyone's listening on a platform right now, we'd love to fix this across the board across the board.
Because essentially, if just to play it out, what's happening is as follows is we're getting beautiful returns from
you know, your fund or others, right?
And then what's happening is that income is being paid into our accounts, potentially a delay anywhere from two weeks up until like 45 days or longer, right?
Or maybe longer if it's quarterly, right?
You know, up to 90 days or 120.
And then we're losing potentially like a number of weeks of the income.
Then we receive the cash.
Then we have to reallocate.
Then we have to wait for the window to go back in.
just don't understand why it's so difficult for these platforms to potentially create, as we're discussing with Tim, another dealer code for the fund.
It's just like, you know, with CBA, so we can just decide, we want DVP, or DRP, different areas, best man plan.
Why the hell can't we just do that and then tick the box and then we can get compound interest instead of receiving the cash all the time?
It's driving me up the goddamn wall.
So to be clear, you can tick the box for DRP with the fund, but...
but you're right.
does.
No, obviously if you go to obviously if you go direct, but what's happening is with, with the platforms, it is clunky.
Effectively.
We, we pay the money out and then it gets reallocated.
And as you say, depending on the fund and depending on the timeframe, there's, there's a sort of lag there that you get that cash back.
And if you might want to put it back to work, takes a little while greater minds than I.
to solve that in terms of how the platforms adjust to that or can control that.
Is there any thought process about how to fix that?
We've had some thoughts, yes.
What is the thoughts?
Oh, happily.
I'm generally interested, right?
Because there's a lot of people, because remember, a lot of people that listen to this, some people go direct, right?
Absolutely, right.
And but the problem with going direct, have to do with the paperwork.
And God forbid if there's a crash, whatever it we've seen it before with the GFC, scrambling to get 20 different funds out in paperwork is a massive headache.
So the platforms are phenomenal for easy use and access.
They're amazing.
I've just identified one little area we need to fix and I'd love to hear your thoughts.
And then I'm the one that's going to go knock, knock, hey, mate, how do we, because essentially what I'm noticing is essentially they listen to advisors and the clients and
the money components to make a fix instead of the product.
So I'm just trying to, yeah, what's the solution?
It really comes down to the individual client's liquidity profile, I think, because there must be some mechanics.
know Tim and my colleagues have met with them in terms of, as you say, tick the box for a different class, a different class of unit that then merges into the ordinary units, but
there must be a way.
But it does seem to be very difficult that effectively the cash has to be paid out and then reinvested as opposed to just
just retained.
But I'm not an expert in how the platforms work.
It's driving me up the wall.
So with your payout terms, with the platform, how many days are we actually losing you reckon?
So we pay...
quarterly.
So distributions for, you know, for the last quarter that finished being the end of the end of the year, 31 December, we paid that distribution in about the 19th of January.
So there's a little bit of lag, have to, you know, agree all the numbers.
So it's usually about anywhere between 14 to 21 days after that.
Now you can then reinvest that
with us because we're monthly.
know, I know.
But I want everyone to come through me.
Obviously, I'm just joking.
I've been completely cheeky here.
But the reason the reason why we're having these conversations, it was like, mate, it's your business.
Why are you discussing this?
Why would you do this?
Because at the end of the day, the whole point of this is to shine transparency and solve problems to make things more efficient and better for the investors and overall and make
it easier.
Correct.
It's in their it's in their best interest across the board.
But I'm just trying to ascertain.
Is it just too hard for the these funds?
Was it too difficult?
I think it's too difficult because effectively.
depends on the underlying investor.
you know, they may want to, they may want that income to live off or make other investments or do other other things with so I think there's a component there between the
relationship between the advisor and the underlying investor.
So just but it does seem to be pretty difficult.
just some bad math, right?
That's 21 days, four times a year.
Yeah, yeah.
21 days, four times a year, right?
And if it's paying 12%, come on, you're better than the math component.
I'm going to the strategy that Tommy.
So essentially, what's that?
That's 84 days, 84 days.
Have you 360 or what?
Over 12%.
a second.
No, we're looking at about 2.4 2.5 % loss.
Jesus Christ.
So we still, with the money that we're in, so, you know, sticking to million dollars, we're still receiving that amount of But I'm just saying like the thought of compound
interest, know, I'll solve this problem.
Don't you worry everyone out there.
Any advisors out there, come on, let's get a class action to get this crew and get and fix this problem.
I'm all for it.
And when you do solve it, let us know.
Yeah, I think every fund manager will be very, very happy about it.
Yeah, no, very, very interesting.
With the mechanics, is there anything else we haven't covered?
No, the only thing that probably my internal legal always remind me of is our underlying loans are illiquid.
you know, we don't own ASX listed shares that I could sell at the drop of a hat.
So, you know, in the extreme, if there was.
COVID style or GFC, we've not had to do this.
But if everybody, not unlike the Commonwealth Bank, if everybody wanted to get their money out on the same day, we would have to wait for the loans to mature and repay it.
Like I said, we haven't had to have that difficulty and confront that as yet.
Hence the reason we always have a bit of cash and a bit of liquidity in the portfolio.
makes a lot of sense.
So let's get into the fun stuff, macro economics.
My god, the regime change.
You know, I've listened to it again, way too much Rogan as everyone knows.
And he keeps referring to like, you know, like the days of our lives.
It's like, what's new?
What's the latest episode?
And this is our world.
Oh, my god, it's been a gripping TV show.
It has been a great year.
The returning president has been there for less than a month.
think since he's been sworn in, but and there's been a lot going on.
the you know, we're not macro forecasters.
know.
I suppose where I was going with this.
Yeah, well, what was going along this lines is, you know, two things is what's your thoughts.
And then secondly, you know, how do these potentially changes impact you guys?
Because you know, as the expression goes, us sneezes, we catch a cold.
Yeah.
So starting with the US,
very prepared to say, don't know what's going to happen from one day to the next.
you know, clearly there's been the imposition of tariffs.
There seems to be some big, you know, big tax cut program coming.
The best thing I heard somebody say about Donald Trump in terms of politically is you should listen to him.
Don't take him literally, but take him seriously.
you know, whether it exactly plays out what he wants to do.
But that's, you his intent is clearly to get things like manufacturing back to the US as much as possible.
Now, whether he's successful on that in the long term, who knows?
So, but you his focus is, ironically, even though there's tariffs that are going to affect everybody, it's very much domestically focused.
He's trying to look after the people who supported him and voted him in.
So that will...
be a bit of a wild ride and will probably impact some things like commodities and, know, drill baby drill, you know, what happens to the oil price and gas and those sorts of
things.
But I think that will play out.
You know, we don't sort of muck around in commodities or mining or anything like that in terms of our lending.
Domestically, the economy is patchy.
What's the old?
song line, the rich are getting richer, the poor get the picture.
You know, it's tough for young people to get into the housing market.
It appears that there'll be some sort of interest rate cut this month that appears to be where the market is predicting things.
I have different views on that from different colleagues, but that appears where it's heading.
The interesting thing has been what's the rate of change and just the nature from when we went from zero to 4.3 % over a fairly compressed period.
The Australian economy ironically has of handled that pretty well, but it is patchy and it's soft.
And then there's other components like energy costs and general inflation that has been difficult for businesses and in particular small businesses.
we're cautious on things.
For us, we have a reasonable amount of property exposure.
If we're lending, a lot of our stuff
is against land in the suburbs of northwest of Sydney, southwest of Sydney, a in Melbourne in the west and in the north.
We've been refinanced on a couple of things down there recently.
Those markets, there's continued drivers and demands in terms of household formation and population growth.
So that sort of helps underpin you.
And we really don't...
you know, we need our borrowers to either sell the projects or deliver the projects.
And they need to be able to do that at current prices.
if the price for the underlying house or land goes up, that's great.
They make more profit.
That's great.
But you know, we're after getting our investment return.
We don't necessarily need that price to go up.
So, you know, we're cautious on things.
I think it's patchy.
Anybody in
in business or has got sort of more exposure to underlying consumer demand.
That's been relatively tough and you'd think that might stay subdued for a little while.
Then you've got the other complexity of for whatever reason, we have an election in May and that people usually sit on their hands a bit coming into that to see what's gonna come
out the other side in terms of policy.
that's a bit of a dampener in terms of activity.
So we're cautious about things.
I've been droning onto my investors for quite some time about this, but over probably the course of the last two years, we have pivoted our book slightly.
So if you go back to 2020, 2021, we probably had...
in subordinated positions, so second ranking mezzanine loans, were about 25 or 30 % of our portfolio.
We thought it was a right way around trade in terms of asset values are increasing, we were getting a premium and we liked where that position was in terms of the capital
structure.
We have 1 % of our portfolio in subordinated positions at the moment.
We have reinvested that money out of subordinated as it's been repaid into senior loans.
we want to be first ranking mortgages so that if something goes wrong, you can enforce, sell the asset or rework the asset or recapitalise it.
So we think risk reward within our portfolio, even though we've been doing quite a nice return, like I said, a typical loan at the moment, you can get anywhere on a first ranking
mortgage, 12 to 14 % return.
We think that's a better return risk reward than
getting say 15 or 17 % in a mezzanine position, just where the market is, we would rather have that first ranking position.
So that's how we're finding things.
Things will come out of things like the election, there'll be stimulus and expenditure and the like, whether that's for good or for ill.
So there's a few forces at play where people are sort of taking a little bit of wait and see approach.
Flip side is we also see it when we like it, when our borrowers, we have a lot of repeat customers or people that we've led to in the past.
We always like it when people we know need money or are looking to undertake things and we can deploy it relatively quickly.
We don't answer into an investment committee in Hong Kong or somewhere where all my independent investment committee members
within 10 minutes of the office.
So if we have to have, you know, have a chat on something quickly, we can all get together.
So we've got some flexibility to be able to deploy things and deploy funds relatively quickly.
Yeah, that's good to know.
The other thing I love chatting to lenders, especially in the property space about is you guys say where all the loans are coming from, and essentially what you know, John rest
projects and etc, etc.
So
I'm very interested to hear what you're hearing on the street regarding you know, I suppose what's what was once great, that's essentially becoming a weak area.
And then secondly, essentially, where's the boom?
Because if you're looking at the city market, it kind of feels like a lot of the profits unless the specific areas are starting to become more difficult.
Meanwhile, the boom up in Queensland is just ripping.
So I'm just curious on what you're saying.
Yeah.
That's probably not a bad summation, So, Sydney is expensive, the land is expensive.
Construction costs over the last two or three years have gone up.
Not that we do that much construction, but they've gone up significantly.
So the impact of that is it's harder for developers to stack a site up because they bought the land at a certain price.
The construction is a big component of it's gone up.
That impacts your land value or your...
or you need growth in the underlying, you know, apartment price or whatever to be able to make a profit.
You've seen them pivot to things like townhouses, which are less construction intensive.
That's sort of why we like the land.
Over the years, we've done quite a bit in Queensland.
We haven't got much exposure there at the moment because it's, yes, it's been booming and growing, but it's also coming into some of the same things where...
construction costs are basically the same in Queensland.
So if you've got same construction costs in Brisbane versus Sydney and prices there are 30 % below the Sydney market, you either need a much lower land value or you also can't stack
up developments.
Then you've got the other added overlay there of the Olympics are coming.
there's a ramp up in sort of infrastructure spending.
They have a big program of hospital refurbishment.
you got sort of forces on labour supply there, which in turn are making things more expensive.
So it's a harder market for us to get in and get into.
The good thing in terms of sourcing our deals, like I said, we have our own networks, there's brokers that bring you deals.
We've put on...
an origination, some colleagues of mine who we've done a lot of deals with over the years, they had their own business, they've effectively folded in with us.
So they are an origination function for us.
So, you know, they're doing a great job.
And then, you know, we get repeat customers who have funded in the past, or we can roll from one project to the next with them.
there's a good pipeline of things.
You've just got to
you know, work your way through it.
And for us, you know, reinvesting money from expiring loans is obviously important because not dissimilar to your discussion on the platforms and the DRP, you know, we want to be
able to recycle our money from one project into the next and have as little down lag and drag on the performance as possible.
Yeah, I couldn't agree with you more.
It's just interesting this entire space.
And the other question I for you as well is how does the private credit or the private lending space in Australia compare to international?
Because this topic actually comes up quite a bit.
And specifically, you take listed managers and people that I'm familiar with, they're looking at this thing going, when you bullet down a brass tax, from my understanding,
please correct me wrong, Australia's probably got the best laws and regulations to protect.
investors in the private credit space in Australia compared to the world?
Is that accurate?
what's your opinion?
got well developed consumer protection, know, investment management requirements for for investors.
If you compare it to different markets, obviously, in particular, the US, their private credit market is larger than ours.
They've always probably had a
a larger capital markets banking component rather than just bank finance.
Australia has been very much traditionally a bank market.
The funds that we see in terms of private credit in the US, they probably do more lending to private equity businesses.
Back to the earlier topic that we touched on in terms of leverage, they often have more leverage within their funds, sometimes substantially more.
and some of those funds are exchange traded.
So, you know, the price may fluctuate for the underlying investors.
So they're probably larger and more diverse, have more inherent leverage in them.
The difference, I suppose, for us is probably we have a more, I'd say this broadly in the Australian market, we have a more
property and hard asset focused rather than, you there are different strategies in terms of private credit in Australia.
Quite a few who invest to lend to private equity sponsored businesses, but they're probably, you know, more I'd argue that are probably a bit similar to us people like
Metrix and Qualitas and Max Capon that they have a reasonable amount of property within their portfolio.
That's an interesting space.
Regarding
We have to always cover the risks.
What's the biggest risk upcoming that you guys face?
Our biggest risk is always, in a way, time and delivery of things because our rates are relatively high, right?
So our borrowers want to pay us back as quick as possible.
And we have, you know, a couple of, there's always a couple that you're putting some more work into.
We have a few people who are going through sale processes.
There's a lot of diligence been done.
Looks like it's headed in the right direction, but you're not done until you're done.
So that's the component for us is, when you lend relatively short, you're in contact with your borrowers and there's a plan that they are executing their way through.
So it's just to make them, make sure that they get that way through and
get through their processes.
And the other component for some of the property things that we lend to is just
if you need rezoning or if you need some component like that, there's a timetable that you work through, but that is not within your control.
DA is not in your control.
It's up to the council which you're dealing with.
Yeah.
And that is a reasonable estimate.
When you go into something that is a reasonable estimate and everybody, you know, agrees and signs off on it.
But like I said, it's
it's not something that you can make happen if you've got a regulatory overlay.
So that's a component that you sort of work your way through.
I hope you have enough sort of leeway and maybe a little bit of slack in your timetable.
And we think councils do a great job.
They could maybe do it a little bit quicker, would be helpful.
Efficiency of a council.
Yeah, no, well.
Well, my wife's Greg, so try dealing with the Greek embassy who trying to get the kids passports, dual passports.
I think the process is still going on two or three years later.
It's a little bit more efficient than some other, you know, embassies around the world.
That would be difficult.
There's no doubt about that.
And, you know, probably to come back to one of your earlier points about, you know, the macro environment, one of the amazing things I think that people are probably
whether you like Trump or not is the Elon Musk led, you know, sort of doge stuff in terms of government efficiency, but that might be his biggest export or legacy is people want
things like approval authorities and government expenditure to be more efficient and work for them.
It shouldn't take you two years to get a passport no matter where it is.
The other thing which I actually love what he's doing is
like we run our own businesses, right?
So we're to kind of do what we want with an extent, you know, essentially, we're beholden to our investors, right?
And what I love about Elon is, as Elon is doing these presentations in the Oval Office, he's got his kid on his shoulders.
I love that, right?
You know, a lot of a lot of families back in the day, thank God for technology, right?
You know, we can have couldn't have that.
We both have kids, right?
So it's so good to actually be able to be there in the thick of it, instead of you're leaving at six, you're back at seven.
And it's like, you know, really say that.
So I thought that was so cool that he's just under bringing like the family and he's just these little kids just run it around and doing laps.
Meanwhile, he's given like he's addressing the entire world on like huge topics regarding the Doge.
I just was like, wow, that's awesome.
And more accepted by people.
I love how it's more accepted.
In a way, one of the good byproducts of COVID was you had a lot of zoom meetings and so you got to meet people's dogs or kids or whoever wanted you in the room.
Some of the bloopers on major TV stations that have were amazing.
Yes.
So people got used to it in a way.
So it's reflective of the nature of change.
Yeah, it's been fantastic.
Is there anything else that we haven't Don't think so.
From our point of view, it probably sounds a bit boring, but we've been running this fund and running our other stuff for sort of
13 or 14 years.
So, you know, we're not we're not starting a Bitcoin fund or anything like that.
It's it's business as usual for us, navigating the ups and downs of things.
And we you brought up Bitcoin, a guy which I follow Cardone, was a great card and cracker.
I remember his first name.
He just launched the first ever Bitcoin into property fund in the States.
Did you see that Grant Cardone?
Grant Cardone.
Have you heard about this?
I haven't heard about that.
No, no, I thought I'd bring it up as a gig was the first one that's ever happened.
he holds so Bitcoin can come in is my understanding, right?
You can the cash components held as Bitcoin, but then he converts it.
So it's an internal hedge, internal currency hedge, and then uses the Bitcoin to essentially purchase property inside of a think Southern unit trust.
Okay.
Thoughts?
Not for me.
Not for me as an investor or a manager.
Yeah, we tried.
No, no, I'm not.
not.
pushing.
I was just like I heard it.
I was like it was the first of its kind.
And I was like, how fascinating.
That's where things are going.
Yeah, it might be one of those things that in five years time, we're all doing but thank you.
Japan's talking about holding XRP and uses illegal exchange as well.
So all these wild things are starting to happen that becoming more normalized.
Yeah, they are.
things that not that long ago you would say what central bank would be be mucking around, but they're, they're going to invest in digital currency.
we're just going to keep doing what we're doing and then they do what you do and do it well.
That's hard enough without trying to understand the vagaries of Bitcoin into property.
Absolutely.
Well, Nick, I've really enjoyed this conversation.
And thank you very much for coming on the rate of change with your wealth management.
I really appreciate your time.
Thank you.
Have a good day.