Speaker 0:
Hello and welcome to this Boutiques Connect session. Today I'm joined by Dino Zuccollo, Head of Product Development and Distribution at Westbrooke Alternative Asset Management. Welcome, Dino.

Speaker 1:
Hi, Chloe. Very nice to be here.

Speaker 0:
So do you know, perhaps you can give us a broad overview of Westbrooke Alternative Asset Management. And what are the specific asset classes that you specialise in?

Speaker 1:
Yeah, sure. So Chloe Westbrooke Alternative Asset Management was founded in 2012, by two individuals who today are still sort of our largest, uh, shareholders. The one is an individual by the name of Martin Sacks. It was originally founded by him and a partner, um, and then sort of later on in the evolution of the business. A few years later,

Speaker 1:
An individual by the name of Robbie Fihrer also invested in the business. Robbie is a business - Capricorn and Capricorn, in turn, are owned by reclusive billionaire South African family by the name of the Enthovens. Together, Martin and Rob have built Westbrooke Alternative Asset Management along with us within the team. The business today is focused on providing a South African client or capital connected to South Africa with exposure to the global world of alternatives

Speaker 1:
and alternatives, really in simple English can be defined as anything other than that which is listed in liquid. So some of the names that you'll know globally are Blackstone, Brookfield, K K R - Blackstone, now multi trillion dollar alternative asset manager in the US. Really, the mission of Westbrooke Alternative Asset Management is to give the South African client with exposure to the global world of alternatives, which is an extremely fast growing sector of the asset management industry. Sort of more widely.

Speaker 1:
Today we manage about 10 billion rand of client capital, that client capital is predominantly ultra high net worth individuals, wealth managers, clients and some institutions. And we do that through three offices. So our head office is in Johannesburg. We've also got an office in London. Uh, we've got nine investment professionals, 20 in Johannesburg

Speaker 1:
and then we've got two in the United States as well, and we play across four key asset classes within the world of alternatives. So the first is Private Debt. The second is a business called Hybrid Capital, which is sort of pref and mezz type instruments. It's almost like where debt meets equity.

Speaker 1:
The third is Real Estate Equity. And the fourth is Private Equity. And I think one of the things which stands sort of Westbrooke apart is not only the depth and skill of our investment teams, but the fact that we follow a very highly aligned investment model. So we generally are the largest investor in everything that we do. We seed new products with our own capital first to make sure that they work and that our partners are honest and that the structures we set up work the way we intend.

Speaker 1:
And then slowly we bring clients along for the ride as well. So, really, the proposition to a client is you as a client, get to invest alongside a group of people that you can due diligence and reference and trust. You know that they've got a lot of their own money invested alongside yours, and what we get in return is the ability

Speaker 1:
to achieve scale in hard currency offshore markets, where it might be difficult for us to do that on our own.

Speaker 0:
OK, so then focusing on to Private Debt as an asset class, what defines Private Debt specifically, do you know? And then what are the support of its growth in popularity?

Speaker 1:
Yeah, So Private Debt is one of the world's fastest growing alternative asset classes. Chloe,

Speaker 1:
and it's a lot of it was capitalised in 2008 from the global financial crisis. So, as we all know, GFC was a banking led crisis, and following GFC, there was Basel III. Now, Basel brought along with it a host of regulatory reforms that made it extremely difficult for banks to extend credit. There's a whole lot of regulation,

Speaker 1:
hoops and hurdles that banks need to jump through in order to do loans. And so the response on the part of banks was very simple. They made a rule that they only do loans which are profitable for them and generally in the case of the bank, those are larger sized loans. So in the UK, we will be talking a little bit. Today it's generally loans of £20 million and above, and generally, when banks write these larger size loans, they also want to write them for long period of time. That's at least five years, plus

Speaker 1:
why, Because anything less than that was sub optimal for the banks to do from a from a reward perspective relative to the cost of implementation.

Speaker 1:
But certainly that does not mean that globally, there isn't a whole host of businesses who are looking to access capital for smaller amounts or for shorter periods of time. And this left a dearth in the funding market. Um, where you're not necessarily making loans that are riskier, but you're looking for loans or making loans that the banks don't want to do for various reasons following 2008. And so in simple terms, private debt is where anyone other than a bank makes a loan to a company, to a business who

Speaker 1:
it may be against a property in our instance, et cetera. And I suppose as a consequence of the fact that this has been a section of the market where there's been a very large supply demand imbalance, there's been an advent of private debt funds and insurance companies, even private individuals who've come in and fill the gap that's been left by the banks in the funding markets, and that today is known as Private Debt. So

Speaker 0:
then what do clients need to take into consideration? Do you know if they want to include Private Debts as an asset class in their portfolio?

Speaker 1:
Yeah. So I think Private Debt is a very big

Speaker 1:
sort of. It's like Private Debts, like saying property. You know, it's like a whole market on its own. So I mean, the answer I'll give you is Private Debt with Westbrooke, maybe to give you a bit more of a sense. So in our world, Private Debt primarily comprises senior secured loan facilities that we write in the UK. That's generally against real estate. Um, although we are moving a little bit more into the corporate cash flow lending space in South Africa, it's a little bit more corporate cash flow, lending centric.

Speaker 1:
but really, what we are seeking to do as a business, Chloe, is we're looking to generate returns which are asymmetric to the level of risk we take so in English. what that means is we're looking to get higher returns than we should be getting from the loans that we write. And so how do we do that? We do that by playing in underserved niches of markets which kind of are akin to the description of Private Debt that I just gave you.

Speaker 1:
So from a Westbrooke perspective, I think the benefits are that you get higher returns on an absolute value basis than what you could find from, say, a fixed income product or a bond. They are a lot less volatile, the returns much more stable. There's a strong level of lack of correlation, which is something that I think a lot of our clients find attractive. You know everyone. Everyone's portfolio tends to move in the same direction when certain macroeconomic events happen, and incorporating private debt and alternatives

Speaker 1:
and more generally in one's portfolio helps reduce that level of correlation. Also, our products are structured quite nicely for tax, which also, as a South African investor, is an important consideration. However, those are the pros. The cons is in general,

Speaker 1:
and this is what makes a private lender different to a bank. The way a bank raises money is they take deposit holder money, and they tell their deposit holders that they can get their money out next minute if they want to by drawing it out of their bank account. And so a bank has all of this regulation on it for good reason. A private fund that raises money for private debt like ourselves does not give that promise to an investor, So our investors are generally locked in for a period of time when they come in to a Private Debt fund. And so I think the

Speaker 1:
big consideration for someone who wants to get exposure to private debt is that what you're really doing, if it's managed by a quality manager who's got a track record of performance, et cetera, is that you're trading off liquidity or higher returns, which are a little bit more stable and predictable in nature, you know.

Speaker 0:
So besides the liquidity components, of Private Debt is an asset class. Perhaps you can take us in through the Westbrooke Yield Plus fund and the benefits that investors can achieve, through allocations to your fund.

Speaker 1:
Yeah, sure. So Westbrooke Yield Plus is our flagship offering in the United Kingdom. We started it in 2016, driven by a need for our shareholders to invest offshore, and at the time, if you think back interest rates were pretty much zero

Speaker 1:
and so our principal were looking for an access point to the UK market, where they could get a higher return than zero without needing to necessarily move up the risk curve to do so. Um, so we created a capability in the UK in 2016, which has grown substantially and that today, uh, the flagship offering is Westbrooke Yield Plus. Westbrooke Yield Plus now has a

Speaker 1:
five year track record of performance. It's £100 million platform and really, what Westbrooke Yield Plus does in a nutshell. Chloe, through what is currently a portfolio of 48 underlying loan instruments, is it makes loans to real estate sponsors and businesses who operate in the small and middle market segment in the United Kingdom.

Speaker 1:
About 80% of the exposures in the fund are to real estate. And so really, what we're doing is we are making loans which are senior and secured in nature, generally against a real estate asset where we've got a bond over the property. Um, and those loans are being extended to sponsors who, for whatever

Speaker 1:
reason, aren't able to access capital from the banks now. It's not that the banks don't want to make loans to these sponsors, it's that they either can't or they won't, Um, and that is to my earlier explanation where we play in a specific niche. So the niche that Westbrooke Yield Plus plays in the real estate sector

Speaker 1:
is in the extension of credit for less than five years in in in nature, which is important. So we make 18-24 month loans because we only lock our clients up for a period of 18 months and then they can give six months' notice. So what we've got to do is match the duration that our investors are locked in in the fund at the top with how quickly our loan portfolio churns at the bottom.

Speaker 1:
So Westbrooke Yield Plus, plus effectively right now, is a hamster wheel that continually churns loans on an average duration of 16 months. And really, those real estate sponsors are coming to us because they need a partner who can move quickly. So generally we turn facilities a lot quicker than what the banks can. They need a partner who can deal with complexity better potentially than what the big banks can. The UK is very much a computer says no market If you spit the model spits out no, then you can't do the loan.

Speaker 1:
But if you come to a crowd who is a little bit more, uh, innovative and experienced in the world of structuring, it can be done. And the third is that we make smaller loans for shorter durations, whereas the banks want to make bigger loans for larger generations. And so, really, what Yield Plus does is property bridge lending in the UK in respect of 80% of the portfolio. And that is able to generate a very attractive yield to our clients, which is currently north of 9% in Sterling

Speaker 1:
and that 9% is also structured very nicely for tax. And so when investors invest, they come through a Jersey company.

Speaker 1:
And so the returns that they achieve from that Jersey company are either a dividend, which, um, is more attractive, I suppose, than income tax or a capital gain in nature. If you're a South African, so

Speaker 0:
do you know, um, through this proliferation of new products, perhaps that are coming to the market, but particularly in the private debt sector? Will it be possible then, for smaller retail investors to have an allocation to private debt and not for private debts to be reserved for a niche market of of clients.

Speaker 1:
Yeah, I mean, it's the question everybody asks me. So where is Westbrooke in this journey? So if you're one of the bigger global alternative asset managers, they generally don't want to talk to private clients full stop. They want to talk to the big pension funds around the world. We, as Westbrooke, are already different in the sense that we're focusing on a private client. So in our instance, Westbrooke Yield Plus has a minimum investment size of £100,000.

Speaker 1:
Or if you come through a wealth manager and there's 90 of them who allocate to us as a business, that minimum has dropped to £25,000. So that's 500,000 rand. I'd say that that is already quite far along the spectrum of bringing an offering, which is a little bit more niche and a little bit more complex to a bigger grouping of clients. I'm not sure that

Speaker 1:
an offering like this should be made available to the same spread of clients as say what you'd find on a listed share where people are buying, you know, 50,000 or 20,000 rands worth. And that is simply because the nature of what we do is a little bit more complex. And when you invest in the offering, there's certain things you got to consider. First of all, you're generally investing using offshore capital, so you need to externalise your rands into dollars

Speaker 1:
or pounds and then invest into the fund. There's lock ins so you can't get your money out tomorrow. So you've got to, you know, use a bucket of capital that's happy to be locked in for 24 months, and there are risks. Um, and so I think we're well along that journey. As the offering gets bigger and bigger. And as the asset class becomes more popular in South Africa, those minimums will naturally reduce, as we've seen sort of more widely in the market. Um, but I'm not sure it will ever get quite to the point where it's for a for a bona fide retail client, you know

Speaker 0:
Well, on that point, I want to thank you for sharing your insights into Westbrooke Alternative Asset Management. We appreciate your time.

Speaker 1:
Such a pleasure. Chloe. Thank you for hosting me