Speaker 0:
Welcome to Asset T V's Master Class on private debt with Me, Joanne Benham. Today I'm joined by Dina Zucco, head of product development and distribution, Westbrook Alternative Asset Management. Adam Balkin, head of manager Research Glacier Invest and Brent Blank, field fund manager in private debt at Westbrook Alternative Asset Management. Welcome to you all.

Speaker 0:
Private debt is a very exciting asset class. From all I managed to Google, it was, I think, the numbers said about $250 billion in size in 2010. With this year looking like it's get to about 1.4 trillion and the expectations are correct, this asset class could grow to 2.3 trillion by 2027.

Speaker 0:
I did think that start was quite interesting after NVIDIA's results with that company as a market cap of one trillion or a bit more. So, it will be double the NVIDIA's market cap, but clearly still a very exciting asset class and one that's growing very nicely. So Brent, I'm gonna kick off with you.

Speaker 0:
What is private debt?

Speaker 0:
Private debt is essentially lending in a non bank environment to a range of businesses across the capital structure.

Speaker 0:
So private debt is an entire asset class, Uh, is kind of the consolidation of a range of different strategies. So it goes all the way from Let's call it your senior secured traditional private lending all the way across into your mezzanine type lending into distressed debt investing. And then you've got specialty, kind of, uh, products or lends, uh, such as, uh, let's call it aircraft finance or some specific asset class.

Speaker 0:
And really, what it is is it's lending capital to businesses for a range of opportunities in a non bank environment. OK, so non bank. So the one of the terms you often see in the markets and Adam there's questions for you is shadow banking, and it's all a bit scary. And what's going on. How does private debt differ from shadow banking? Or is it a subsector of

Speaker 1:
it? It's a subsector of it.

Speaker 1:
Um, I suppose what they mean by Shadow banking is that it's not regulated in the same way as banks are regulated. Um, and it is an important point in terms of risk because, um, why, whereas a bank is required to, uh, maintain certain capital adequacy ratios they have certain standards in terms of, um, who they can lend to what they have to do.

Speaker 1:
Uh, the private debt space is less regulated. There's private companies doing lending. I mean, you could be your own private lender, arrange capital from family and friends and start lending out into the market as long as you're not. You know, for example, selling to the public, that would be lending. I mean, if you lend to a friend, it could be private lending. So? So what? What they mean by shadow market, Uh, shadow, shadow banking is is this kind of less regulated or more private, part of of the lending market?

Speaker 1:
Um, and in terms of what you were saying about, you know, capital flows coming into this market, you have seen, um um banks because of higher regulation, like bars or regulations. Uh um, for example. And Stella regulations you've seen, um, uh, uh um uh, banks, um, pulling back from lending to some degree. You know, the standards the capital adequacy that they have to provide for lending

Speaker 1:
are higher, and therefore the cost of lending are higher for those banks. So what that means is that they've pulled back somewhat from markets, especially, for example, in the US and Europe.

Speaker 1:
Um, and to fill that gap have come in private lenders. So you still have businesses that require funding that require debt for for any purpose, you know, that normal commercial purpose. Um, and then you find private lenders, you know, lending into that which

Speaker 1:
which does bring into requirement if you if you are someone who is investing in a private lender providing capital to a private lender to lend on, you need to be able to understand what that private lender is doing because it is less regulated. So

Speaker 0:
we're gonna go into that in quite a lot of detail here because I think, you know, it's an alternative space, I think, as we mentioned in the beginning. So I just want to before we kind of get over the what is private debt? Do you know a question for you is how does a private debt fund and

Speaker 0:
it's probably quite obvious to to a corporate debt fund so I can go to Private debt fund or I can go to corporate debt fund. They're still both credit, you know, what's the difference between the two. So I think generally Joanne, a debt fund in the traditional sense that many of our clients and clients watching this will have interacted with before, invests in underlying credit, which is listed in nature. So

Speaker 0:
listed credits is subject to the same peculiarities and nuances that one would often find with any form of a listed instrument. The price changes and that price can go up and down, and the price can move with reference to a variety of factors which may or may not have something to do with the actual nature of the underlying investment that they are referencing.

Speaker 0:
Private debt fund in its substance is very similar. It's loans fund of loans. But the big difference is that in a private debt fund, the loans are not listed

Speaker 0:
and they're not liquid, and they're not priced on a daily basis. And so I suppose it It also, by extension, gets into this conversation, which is a little bit wider around what is the big difference between alternatives and the more traditional markets. And I prefer to use the word private market assets for alternatives because I think it's a better way of describing what it is. So a private debt fund. Many speak when it comes to the benefits of things like more stable returns, lack of correlation, increased diversification

Speaker 0:
and potentially higher returns. But generally the stop you there, I mean, is that not just marketing speak? Sometimes you know, lack of correlation or less correlation. It's just because you don't price them. I mean, lots of asset classes would look really good if you didn't price them. Volatility would be really low if you didn't price them, you know. So is that a true statement, or was that just marketing hype? I think it's a bit of both. You're 100% right that the counter argument to the steady return argument is that

Speaker 0:
the unlisted nature of the instrument hides the inherent fluctuations in value. I agree with that. I do think that in the listed market there are many things that result in price changes of a particular instrument that may not necessarily be reflective of the intrinsic value of a particular underlying investment. However, on the flip side of that is behaviour of investors and how many times do we see it with clients where clients tell tend to buy high and then sell low type thing.

Speaker 0:
And often that's because of human emotion and human emotion is often driven by movements in pricing. So really, what you're doing in a private debt fund is you're taking out some of that emotion. Um, and you're taking out the ability to be able to do things that perhaps you shouldn't. So maybe the right way of saying it is. It's a portfolio of underlying instruments where you're forced to hold them to term.

Speaker 0:
OK, so let's go back to holding them to term. Um, Adam, what are the investment risks in investing in private debt funds?

Speaker 1:
It's a very broad topic. I suppose we could

Speaker 1:
categorise that or separate that into a couple of risks. I mean, the one would be your liquidity risk, which Dino touched on now. So when you're investing in private credit, typically, Um, although there are what are known as evergreen structures, which provide limited liquidity. But typically you you, as an investor, you are locked in for a certain period.

Speaker 1:
Some private credit funds have a very long lock in, you know, five years, seven years, 10 years, where you it's a closed ended fund. You cannot redeem out of that fund even if you need to. Um, others have, Um um this evergreen structure, which basically means that you have to give AAA an extended period of time before you can liquidate. So sometimes it can be three months, six months and and so forth. Um,

Speaker 1:
there are some which provide a mechanism for liquidity, but but overall, it's an illiquid market because the underlying, uh, instruments are long dated by long dated loans. So I mean, you have to match that. So if you're an investor, you must be aware that once you invest, you know, depending obviously, on the terms of the fund that you invest in that it's that you're gonna be it's gonna be ID that you're not gonna be able to get out. Um, if you want to. So that's liquidity risk. Um,

Speaker 1:
there's investment risk, you lending to parties. And so, um, if a borrower defaults, that is gonna have an impact on the returns of the fund. And obviously, uh, um uh uh, an impact on your on your on your returns.

Speaker 0:
So before you go there, Adam, just just back to liquidity risk. Uh, You know, it's obviously a long lock up, and you have to give, you know, time before you get your money out. But there's also this kind of self liquidating issue that you've spoken about before. Just explain to us what that means in plain English, because self liquidating is a great term. What does it mean?

Speaker 1:
Yeah, so? So it's a It's a very good question. So and And I think this comes back to the the the question you asked about price and and volatility.

Speaker 1:
So typically, what happens is when you're borrowing when you're lending to A to a company in the private market. Typically the loans are floating rate loans. What that means is that they're referenced of some kind of, um, rate like, um, the LIBOR rate or Sorry. Now the sofa rate, Um, or in South Africa and when, or prime or whatever your reference rate increases, you've got a, um uh uh uh uh um uh,

Speaker 1:
sorry

Speaker 0:
yield over and

Speaker 1:
above that. So So it adjusts with it. So prime goes up, the rate goes up, prime goes down, the rate goes down. So there's a There's a floating rate. Um, um not that nature to it. Um, and typically, if it's if it's, uh, senior secured, there's no equity like kicker to it, and we'll probably get to that discussion. But typically, what that means is that

Speaker 1:
the capital value of your loan remains steady. And you you're earning the yield as as the as the creditor pays as the debtor pays to your fund, Um, you the the fund accrues yield. So the way that the debt is structured, the the the debtor is paying interest and or, uh, capital in an amortising,

Speaker 1:
um, way. And as the fund receives that that capital back and and interest um, depending again on the terms of the fund, it can then start paying that back to the investor. So often we see, um, private credit funds where the, um where the, uh, investor elects to receive, um, distributions back and then that the investors then

Speaker 1:
back money on a monthly or quarterly or some kind of periodic

Speaker 0:
basis. OK, so that will help with the liquidity argument. So if you if you you're not locked in as badly as it sounds because you're getting some money back every quarter, depending on the terms of the private debt fund. OK, we'll come back to all the different forms of private debt and who the borrowers and lenders are. Let's just stick to the kind of the access issue. Now

Speaker 0:
you talk about liquidity. Adam Brent. How do people access private debt funds? Because if I listen to you, it doesn't sound like it's monthly liquidity. It sounds like it's maybe yearly or quarterly liquidity from an interest rate perspective. So how do you put that into a unit trust vehicle? You know who Who's your audience? How do you access this? Because? Because it's clearly an asset class People want to access. But how

Speaker 0:
do not think this is a question for Dino. Sorry. No, no, that's fine. I just thought about to answer this because you're more the the business distribution side of things. Dino, can you answer this? Yeah, so I'll try and keep it succinct, because now you opening a very large can of worms. So But if people are excited by this as a class today, which hopefully they will be listening to you guys, they're gonna go. Well, how do I buy it? So how do they buy it? so in South Africa. At the moment, there's generally

Speaker 0:
two ways you can access a private credit fund. You can come direct to the manager, and you can invest directly with them. There are a very limited number of platform providers in the country who offer private debt. Um, for allocation. Problem is, in South Africa, platforms were generally designed for listed instruments. So in order to make an investment offering available on a platform, you need generally daily pricing and daily liquidity and the ability to trade in and out.

Speaker 0:
We don't have that in the vast majority of platforms in South Africa. The same issue is true of a collective investment scheme. A collective investment scheme needs liquidity and it needs pricing for a For a big CIS, liquidity is a little bit less of an issue.

Speaker 0:
Why? Because if you've got 100 billion rand CIS and you're putting a 1 billion rand allocation into private debts, the fact that it's a liquid is unlikely to cause a big issue for the fund. But what does cause a big issue is the fact that a collective investment scheme generally has investors at the top level who are trading in and out of that fund every day. Now the fact that a private debt fund will only price generally on a quarterly basis, sometimes monthly, is a problem. Because if an investor wants to buy in or out of that fund two weeks in,

Speaker 0:
what's the price? Uh, becomes the issue? So I'd say in general, Japan Japan access is a problem in South Africa. It's generally directly accessed, and as a consequence, in South Africa, at least, private debt is something that's historically been accessed more by high net worth individuals, uh, either directly or through a wealth manager. The level of institutional uptake is a little bit more limited,

Speaker 0:
Um, but what we have started to see and I always talk about pushes and pulls. This is It's a very interesting concept, which is that for many years we've gone to investors and said, Come, look, pulling investors. This is why private debt is relevant in today's world. Um, what we started to see changing a little bit is that there's now a push, which is that I think the traditional investment avenues increasingly and this is something a Adam can probably talk to a bit more are not necessarily entirely filling the needs of an Allocator.

Speaker 0:
And they are being forced to look for something different. Um, and so we have increasingly seen allocators come to us trying to find ways to do it. The the short answer is we will need a change of some sort in legislation in South Africa, like we've seen in places like the UK and America in order to make private, uh, credit and the wider world of alternatives more accessible, it will come in time. Um, but in the in the in interim, it is challenging.

Speaker 0:
The easiest way to do it is to list something. But then the debate is, if you list something or you're not taking some of the inherent benefits of an alternative and making it more vanilla again or more price discovery, I guess, um, Adam, kind of that was a Segway to you. All right, so we've got no high note with individuals can come directly to private debt funds in your world, running a sort of multi management products, big institutional funds. How do you think about allocating to private debt? And how do you do it?

Speaker 1:
Yeah. So it's still a challenge, especially if you want to try and, um, provide that to, um, retail clients. Um, um, we have some retail products, like living annuities, which enable one to access private credit through a broader portfolio. So not as a single, uh, uh, access point. But, um, as part of a broader portfolio, which is what de Dino was talking about. You know where,

Speaker 1:
um because you in a in a larger product and because of this, uh, cash generation that I spoke about in, uh, earlier. You know, you are able to make it part of that portfolio, and that's able to provide, um, living annuity income to to clients so you can access it. But that's nondiscretionary,

Speaker 1:
um, money. Um, that's that's living annuity money. So we've been able to access it for the for retail clients in that way. But in terms of of providing it to, uh, discretionary retail savers, which I actually think would be great, you know, it it is a It is a very worthwhile uh um um asset class. And I'll, I'll speak about some of the reasons, if you like Jane. Why? Why? We think that, um, but, uh, but Yeah, but that's a challenge on the institutional.

Speaker 1:
Somewhat less of a challenge. So there we are able to put it as part of our, uh, our private markets allocations or alternatives allocations again within a broader portfolio. So where you have, um, a regulation 28 pension fund or the like, um, and And there are the regulation allows you to invest in in private debt. We do so, um, again, as part of that, um, as part of that broader portfolio. But that's more within the pension fund.

Speaker 1:
Um,

Speaker 0:
and I guess pension funds have a long time so they can take advantage of liquidity premium. You know, that's the big advantage. OK, so let's get back to the nuts and bolts of private debt. I think we discussed some of the investment risks. We discussed some of the access points. So this one's for you, Brent. I hope,

Speaker 0:
um, what are the different types of private debt out there? And now we we throw away, throw away comments like distressed debt, direct lending, mezzanine in plain English. Let's go through some of these different debt instruments and how they differ. Perfect. So I think there's Let's call it different subclasses of private debt as well as then different sectors in the economy or kind of scale of businesses that you then operate in.

Speaker 0:
But in general, you've got let's call it direct lending and direct lending is, uh, a private debt fund. Lends money to a private business for Capex and acquisition or working capital or any form of funding need that it needs. That can be. Let's call it a senior debt line. It can be a me or like a second ranking deadline. But really, what it is is it's a probably your more vanilla type. Lend

Speaker 0:
Uh, and that's more the direct lending. That's where we've seen the largest amount of growth in the private credit market to date. Then you kind of move up in terms of the risk curve, and then you go into a mezzanine type facility or mezzanine type debt fund, and that is often looking to play in maybe the second tier of the capital structure or the third tier, where you're sitting behind the direct lender or behind a bank in terms of your security, your access to security and you're targeting higher returns because you're taking slightly higher risk.

Speaker 0:
Those mezzanine funds often look to earn their return as a combination of an interest rate and potentially equity warrants or upside or profit shares or anything along those lines. And that's what looks for them to juice their returns through, kind of maybe taking a bit more risk. Then you go into more distressed debt

Speaker 0:
and distressed debts. Uh, I think recently has been raising a lot of capital kind of waiting for problems to come in the market. Uh, like we're seeing. Because of the rising interest rates, lots of borrowers potentially have been over geared, definitely overseas. We've seen a lot of that where these lenders or these, uh uh, private equity funds or the likes have been handing back the keys to the lenders.

Speaker 0:
Distressed debt funds actually look to buy that debt or invest debt into these businesses and convert that debt to equity. Or they buy it at a at a significant discount to the trading value and then look to realise the value of the full loan and, as such, increase their returns. That's obviously that's a very nuanced and niche sector. You have to be very specialised in terms of,

Speaker 0:
uh, your risk appetite as well as your ability to, uh, from a legal perspective, a security perspective and all of that, and then you go more into let's call it your niche asset classes where, uh, as I mentioned as, uh like, uh, asset finance or aircraft finance or royalty finance. And that is really

Speaker 0:
where these funds have raised institutional or capital from investors with a specific mandate where they see an arbitrage or an opportunity to lend money into a specific sector where they've got enhanced knowledge or experience. So that's kind of the broad range, and then you've got

Speaker 0:
a a range of managers that then focus on different parts of the economy. So you've got some managers that focus more on the lower to middle market economy. And then you've now got, uh, a lot of your big, uh, private credit Funds overseas are now moving into your your top and yeah, your massive corporate type facilities where now they're competing, actually, with the big global banks. So so you've got

Speaker 0:
across kind of this whole subset. You've now got the ability to play in the lower middle market of all these companies as Well as now, uh, ever increasing into kind of the top market or the top tier corporate clear. A lot of range here and a lot of different risks. Adam, from your perspective, when you hear something like a distressed debt fund and you see a direct lending where you're top of the capital structure,

Speaker 0:
you kind of go Well, if it's direct, I mean, distressed it. That's kind of more equity, like, and you pocket that in a sort of an equity bucket in terms of the risk profile. And you say direct lending is more fixed income bucket and I kind of So my question, I guess, is not all private data is equal. So are they very different characteristics from a portfolio construction perspective?

Speaker 1:
So, yeah, I mean, I think you have to understand

Speaker 1:
the risks that you're getting into, and then hopefully you need to be compensated for the risk that you getting into by the return. So in terms of what Bent was saying, if you're investing in, um, mezzanine debt or what they call stretch senior junior debt, what that basically means is that the borrower hasn't given you as the lender,

Speaker 1:
um, the most security that they can. Either they've given that security to a bank or to another lender before you. And so if anything goes wrong, the assets that they have, um, a security, you know, which you could sell to to pay back the capital if the business went bankrupt or, you know, something happened that they couldn't repay the debt

Speaker 1:
that would first be used for the senior secured, um, holder. And then thereafter, if there was anything left, it would it would go to you as the junior or the mezzanine debt. And, uh so but obviously with that, higher risk comes higher, expected higher returns. So as the investor, you need to know the risk that you're taking

Speaker 1:
and therefore the return that you expect. And you must be aware that of how much return you should be getting for that for that risk. So it all depends where you are in the capital structure,

Speaker 1:
how much risk you only take

Speaker 0:
OK, let's get some numbers here. Let's say, um, South Africa. I think Dr is nine or something. What's Dr at the moment? Help me out here. What is Dr Ok, Ok. All right. So if you're going into, Let's pretend there's a distressed debt fund in South Africa. OK,

Speaker 0:
uh, let's say you want 7%. You want 6% above that. Do you want 10% above that? I'm just trying to feel what that means or or you're saying if I want. If I'm direct lending, I want 3% above and then I'm compensate of that risk. Given what

Speaker 1:
you've just said in South Africa, I would say, OK, let's

Speaker 0:
make it UK. It's easier because this market is quite small. I

Speaker 1:
mean, it would be the same, but, I mean, I think I think if you're taking your basic bank rate as your reference point,

Speaker 1:
you you would want a margin in terms of distressed debt, um, or anything where you're taking a lot of risk, right? You you you wanting something? Um, probably over, um, Well, over 6 7% for that, Um, probably around it, you know, depending on the risk, you know, kind of 10 10%. So

Speaker 1:
yeah. All

Speaker 0:
right. So that's quite a big margin. You want for that kind of level Now, the high yield debt market in the US today is trading. How many basis points above. I think it's about 203 100. It's quite low at the moment. So you're saying in private debt markets for that distress type of debt or or junk junk, it's much higher. Would that be because I think we've got to We got to make this distinction very clear, right? So this is how I think of it. When you say private debt, you're talking about

Speaker 0:
a situation where someone other than a bank has made a loan now that loan and and that that introduces risks, right, so private debt. And and I think it's a misconception because a lot of people say, Oh, private debt, it's an alternative. It must be riskier

Speaker 0:
I. I disagree with that statement. To a degree, I think it is riskier if you just let's just say private debt. It is riskier because it is inherently illiquid, whereas a bank and this is an important distinction to make. Why is there so much regulation on a bank? It's because generally a bank raises its capital from a deposit holder and says Joanne, you can get your money

Speaker 0:
next minute. If you want, I will underpin that. You'll get it a private lender makes no such promise. They say I'm gonna go and make loans. And if now this is, you gotta be a bit careful because not everybody matches the lock in of the client to the duration of the underlying loans. But if they do their jobs right, they've managed the liquidity such that there isn't a mismatch. So private debt means you're taking potentially more risk on liquidity. Then you've got to get into OK, now, where within private debt are you playing?

Speaker 0:
And, for example, we as a business have made loans to companies that are secured loans. So you've got an asset or some form of a, uh, a secured claim against a business that that business has also got listed bonds and those listed bonds, by their nature, are generally unsecured.

Speaker 0:
So I would argue that in that instance we are better protected than the owner of a bond. So I think you've got to delineate the two. You've got the liquidity risk considerations around private debt, and then you got to get into Are you in distressed debt or are you potentially just a non bank lender that's looking to compete with the bank on other things. Speed, complexity, the quality of that now. But I just want to get a feel for

Speaker 0:
distressed it, and we'll get back to South Africa because I think there's probably less of that taking place here. But the distressed debt market to Adam answered that question by saying he wants 607 100 basis points above whatever that bank rate is. So at the moment, and to your point, it's probably safer than the listed markets where there isn't security around these things. So I understand the safety argument. I just kind of a feel for what the yield should be,

Speaker 0:
given how you would portfolio position this. So let's go back to Dina the funds you guys run in South Africa. All right, So when you look at your portfolio, is it more the direct lending? Is it kind of the lower the higher part of the capital structure more secured? Let's let's talk about the actual money you run. So is that the place you play in or do you play in the distressed debt as well? Where do you where do you sit?

Speaker 0:
Early on in, in my journey within the business. A client looked at me and this comment has always resonated. He said, um, if you're gonna eat me apples, give me apples. If you're gonna give me pears, give me pears. But please don't give me a fruit salad.

Speaker 0:
And I always like that analogy because I think what tends to happen And that's kind of the point I was trying to make on your high yield bond fund is you. The answer to that question is, depends what the risk is of the underlying you know. Is it distressed debt or is it just high yield bonds for another reason? So what we try to do is provide clients with pure play offerings in the sense that we've got a bucket of capital that is focused on what we would consider to be senior first ranking debt that generally for us means that you're first charge lender. There isn't another bank that's sitting,

Speaker 0:
uh, ahead of you in the capital stack. Um, and we move from there into what we would what we call dynamic opportunities, which is, um,

Speaker 0:
you know, a little bit more Pref and me second ranking type instruments,

Speaker 0:
and that that's a different That's a different fund, completely. So you have one siloed fund, which is very low risk and presumably quite low returns relative on the spectrum. OK, all right, carry on. Uh, and so we and then we move up, and then the way it's offered to a client is you can choose so you can have the pensioner who's looking for a stable return in his or her life in order to fund retirement is probably gonna be in the low end of the capital stack. Now, Brent will tell you that's quite a hard proposition for him,

Speaker 0:
because in South Africa as an example, now he's competing with the big banks. Right, because at least what we're trying to do is, and it's a point you and I have discussed previously. We're not trying to do loans that the banks don't want to do. We're trying to do loans that the banks can't do for whatever reason, and we can get into that. And so I think it's a very important distinction that I'd like to make is that

Speaker 0:
you're not necessarily doing lends that are are high risk or the junk that no one else wants. You're doing it for a different reason. And there's generally three reasons. There's speed that you can work with. There's complexity that you can deal with. And then there's the duration of the instrument that you write. Banks generally are slow. They generally want to write term loans of five years, plus,

Speaker 0:
um, and you know, from a complexity perspective, they generally and again, this is like you gotta be very careful when you make generalisations because there are some great banks in South Africa. But there's a tick box that is applied, and we see that even more prevalent in places like the UK, where the loan fits the the boxes and it fits the model or it doesn't right, Um, and so

Speaker 0:
if you're a younger client or you're a client who's got a bigger portfolio or making a small allocation, then some of the stuff might be more appropriate for you. Um, and we trot off in the spectrum. OK, so let's just get back to numbers again, because I think these are great concepts. But I'm sitting in front of a client and let's pretend they're a high net worth individuals so they can actually access it.

Speaker 0:
I can go to the very low end and I can get maybe what? 304 100 above. What are we talking about here? What is the kind of going rate at the moment? So we probably netting for our clients on the senior prime. Plus 2 to +32 to 3. OK, now we go to the mezzanine debt and it's a bit high load on the capital structure and now we

Speaker 0:
16 to 20% in in rands. Um, like at that level at prime becomes less of a reference point and we start to move more towards absolute value numbers just OK, all right. Just the nature of the capital. You like somewhere between debt and equity. Now, OK, so now it's not a floating rate concept as much anymore. It's more of an equity kicker,

Speaker 0:
and now we go to the very far end. What are we talking about? Equity in South Africa is 25 plus, most likely. OK, so that gives us a good feeling. Anyone listening to this saying like If you want the cash plus instrument, it's the lower end. If you're looking for a bit of a kicker, the equity it's kind of a quasi of the two. And then it becomes quite equity, like, just to caveat that that's in our world. You know, Adam might have a slightly different view on on returns in a more institutional

Speaker 1:
environment. I wanted to touch on a couple of points.

Speaker 1:
Yeah, I mean, just to be clear from our perspective and I'm here, I'm talking about the multi manager. I mean, we've been very careful about where we want to play in that credit structure. And we are not typically in investing in,

Speaker 1:
um, distressed debt. Um, and our allocations to higher capital structure, um, debt, like mezzanine debt is is limited. We We like the idea of senior secure debt both domestically and globally. But I think the very important point I want to get across, which is actually we argue with with Dino, is that

Speaker 1:
the advantage of private credit is that you are getting what we think is a higher return for commenced risk than not you should be getting. But then what you can get in public markets. So what do I mean by that? So you you talked about, like, high yield. So if you offshore, which is like a A much more let's say it's a deeper market. It's a bigger market. There's a lot more pricing, a lot more competition. So it's kind of a fairer market or a more mature market. Right

Speaker 1:
when you invest in senior secured debt at the moment, So the risk is lower. Much, um, arguably much lower than than, um

Speaker 1:
uh, then high yield. Because you're investing in companies where it's senior secured, right? You can get net returns in dollars of 10%. Plus, at the moment, it's obviously as the base rates in the states or in Europe, for they may have moved up so, like, 5%. And you, you you're getting a margin. But even then, with the withdrawal from the banks of the markets, um, and still the need for for capital,

Speaker 1:
Um, uh, and the size of the companies. Um, exactly for the reason that that Dino has mentioned you know, these borrowers need the money. They can make money out of the out of their what their debt, and so they are prepared to pay higher rates. So you you, as I said, you're talking about, uh, net net 10% plus returns in dollars for senior secured debt. Now there is some risk because you're not dealing with a large multinational,

Speaker 1:
uh, company here In terms of your senior security, you're dealing with a smaller company in in the mid market space in America. That can be a bit of like $10 million up to maybe $100 million that kind of space. So in our world, in South Africa, those are big companies. But, um but but But I mean, they still mid market companies in the States. You still you're taking senior secured debt on those companies and you're getting that type of return.

Speaker 1:
Now, if you compare that to the public markets and that's where you got to look at like OK, so where else could I invest for this si similar risk? You're not getting that type type of return, so we think that given the risk and there is ID, but given the risk that that you're taking,

Speaker 1:
the returns that you're getting are compelling. So

Speaker 0:
just to sum it up, you're getting higher. Forget about liquidity risk for a second. You're getting higher returns for less default risk from the sounds of things No, no, no. And we're against that now. So that's where you come in. And

Speaker 1:
the same Sorry. Sorry, Jane. The same for for South Africa. I mean, it's the same the same concept. So

Speaker 1:
we've spoken about the risks. They are important to bear in mind. But we do think that overall private debt offers, like a very compelling opportunity for an investor where you're getting probably higher returns than the risk that

Speaker 1:
investment risk the risk of default or risk of. OK,

Speaker 0:
so let's talk about this risk of default. Um, and when I get back to a question on how you analyse managers, But I want you to now say you're analysing people you lend to give us a feel for how that works. I mean,

Speaker 0:
presumably, you never want to give money to people who want money. That's usually the rule of thumb, right, because you know, why do they want it in the first place? So let's just discuss two issues here. One is this argument that banks are not in this market anymore, and and the silicon me struggles with that because I believe bank managers probably quite good at their jobs. They know what they're doing. They've been in the credit market for a long time. Why on earth do you think you're better? And why shouldn't if this is such juicy returns for so little default risk,

Speaker 0:
you know? Hello. Don't banks want to do that too? So maybe just explain that So people believe you, and then the other thing is kind of what do you look for when you want to lend money to people? So I think there's two parts to it. There's loss given default and then there's the risk of default and you obviously have to marry the two. But I think I fully agree with you. The banks are playing in the space the way where where we look to operate and we, uh, where we believe we've got. The advantage is in this middle market

Speaker 0:
where where you are able to extract attractive returns relative to the risk that we're taking and the banks are operating there. But the challenge with the banks is really they want to do deals north of 100 million rand and upwards. So it's not often worth their time to do a 40 million rand deal like Dino mentioned where you have to operate quickly and with complexity in the transaction it just doesn't fit into. Let's call it their risk appetite as well as just their budgets. They were much bigger budgets that they've got to hit,

Speaker 0:
so that's the one opportunity. Fully agree. Once again, you don't want just lend to businesses that need money. But you want to lend to businesses that have an opportunity that they've seen, like Adam said, where they can make more money out of it. So we are able to understand the opportunity. We're able to fund them where we uh

Speaker 0:
So I guess the key is then understanding their track record and their history and their performance in order to take a view on their ability to generate the capital to repay you. So just I understand clearly these are companies that are historically would have gone to a bank.

Speaker 0:
If you think about it and before all three rules come along, they would have gone to the bank and said, Look, I've got a really good idea here. I think I can make money of it. Here's my balance sheet. Please lend to me. So now they're coming to you guys because the banks aren't playing in that smaller space today. Is that what they are? But not in this kind of space that you're playing or is it a time? It's time. The big thing here. So it's It's definitely time. Time is the one big thing.

Speaker 0:
And then I guess I think complexity is quite a big thing, because what happens is, once you're dealing with, uh, your smaller top tier type transactions,

Speaker 0:
then it needs to fit into a specific product. It doesn't make sense to try and understand a complex group structure. You need an invoice discounting facility or an overdraft facility, or just a term loan back by mortgage bond, and then it works. But to try and understand the comp like a complex structure where there's a

Speaker 0:
buying opportunity and there's equity value here that's gonna be unlocked through something else, and there's asset value here to try and unlock something for 40 million rand just doesn't often fit within. Let's call it the credit risk mandate of these, uh, these, uh, smaller or or your more commercial type banks. So So they. So it's more complexity, and then it's that ability to operate quickly in that environment. So so that's where we are able to potentially extract, uh,

Speaker 0:
more attractive returns because we are able to operate quicker in a more complex environment. But it also be a true statement. Just hold on that. A lot of the guys that work at Westbrook used to work for banks, so they've kind of cut their teeth, having been there already, it's not like they're new to this game. Is that a true statement? Almost all of them. And I think we we like to think we're bringing an investment banking type transaction into your middle market type.

Speaker 0:
Yeah, uh, into the middle market collection. Ex bankers. I was gonna try

Speaker 1:
and give a concrete example. So So, for example, let's say you had a property developer and a property deal came up. Although Westbrook doesn't tend to claim property, so it's it's not necessarily an example for them, but But, I mean, this is an example that you you may be able to to relate to, so it's a property developer.

Speaker 1:
An opportunity has come up. He wants to buy a particular property, but he actually he needs to move quickly, because if he doesn't either somebody else is gonna take that property. Or there's some other reason why this deal has come about now. Maybe the the guy who's willing to sell needs liquidity now, but maybe he can see through. See it through and you know, then the opportunity will fall. Whatever. Whatever reason, the the the buyer want needs to act quickly. Now,

Speaker 1:
if he goes to the bank, he may be able to to to get that loan. But it's gonna take a lot of time, and he's gonna have to go through various credit committees. It's gonna take a long time for him to to to get the loan.

Speaker 1:
You go to a private credit, uh, lender. Who's a specialist in property.

Speaker 1:
The investment committee is, uh, is are the same people doing the deal? Same people interacting with him. They can take a much quicker decision,

Speaker 1:
an informed decision because I mean they are experts in in property, but they they they don't have to go. They don't have to write AAA credit report, which then goes to this junior credit analyst, then goes to that senior credit analyst, then goes to the the board and then they can move a lot quicker. So so so And then you might say the property developer might say, Look,

Speaker 1:
I need to do this deal. The interest rate is high, but I can buy this property in six months time. When everything is done, I can refinance. Um, the the the borrower makes his his interest rate, Um, and then

Speaker 0:
short term funding.

Speaker 1:
Well, I do want to stress that short term funding is typically not what private lenders private lenders like to do because they also want to have, you know, like

Speaker 0:
you have to keep reinvesting the money. I guess, at the bit to say something. So I just I think what a what Adam is saying is so pertinent, because it there's an interplay here between what you just described and then the discussion that we've had around liquidity, right?

Speaker 0:
So, for example, when we started our private credit business, we had this conundrum, which was, at least in South Africa, when it comes to investing in debt or just generally investing in South Africa, a high net worth individual, which is where we cut our teeth initially, doesn't want to lock their money in for too long and, of course, to the discussion we were having earlier. As you wanna bring your product set to be more accessible, you've got to have shorter lock ins now. How does one manage liquidity in a private credit fund?

Speaker 0:
There's only so many ways you can do it. The way we try to do it is we try to reduce what they call the the Elco Mismatch the Asset Liability Committee mismatch. So if we have investors locked in for 12 months, let's say as an example, and then they can give six months notice thereafter. They're locked in for a period of 18 months from when they invest. We know that, and so if we can manage our portfolio at the underlying such that the average duration on the loans

Speaker 0:
is 18 months, we we're in a comfortable place there because we know that if everything falls down, we will, you know, and provided that our loans repay on time, which is a big if we're not gonna have a situation where clients have asked for their money back and we can't give it to them.

Speaker 0:
There are other ways you can manage liquidity, you can run what's called an alchemist match so you can run five year loans at the underlying and give investors six months notice at the top. But then, when the drama invariably happens, you've got a problem, and that problem results generally in private debt. What's called gating? So you've asked your money back and the answer is no, you've got to wait, not just private debt. That's alternatives. Full stop. Correct. Yes, so so. But the reason I just want to bring this in is because

Speaker 0:
now, when you go to a borrower, you've got a different proposition, which is Hold on, we're a We're a collection of ex bankers who we think can give you a high quality investment banking level service. But maybe we actually more keen to give you a 24 month loan than we are a five year loan because that allows you to manage the the better

Speaker 0:
and the banks when the banks, when they get when there's a 30 million rand opportunity that they've got to turn in three weeks and it's for an 18 month loan, the juice just isn't worth it. Hey guys, we are running out of time, and there's so much more. I still want to cover just OK, so we agree. Let's pretend we agree. The banks aren't interested. They're not quick enough. It's too much work.

Speaker 0:
Fish based. OK, but now what about all the other private debt funds? Because I started this commentary saying, This is an asset class that's going by leaps and bounds so maybe your banks aren't competing with you anymore, But by all the other private debt guys, Now you see, these mega deals offshore in private equity now are now doing private debt. They seem to be doing the same thing.

Speaker 0:
Is there a race at the bottom? Are we seeing it yet in South Africa on our yields, compressing because other people are saying, Well, we we also ex ex investment bankers. We can also do this deal in three minutes. What are we seeing here? Because what's deal flow like? So, yeah, I think you're 100% right. I think over the last 12 months, we've definitely seen more people coming into the private credit market in South Africa. Um, so the yeah, so competition has increased,

Speaker 0:
and I think South Africa is in a challenging position where there's limited assets for that market. So so we are starting to see yields compress. And it's a challenge, right? The way we look at transactions is always what is the risk that we are taking? Are we being adequately compensated for the risk and how do we get our money back? And that comes through obviously the pricing, the structure and then making sure that we've got the right protections in order to get our capital back. We are starting

Speaker 0:
to see, and you've seen it globally where they call these type transactions. And that is really just because there's so much capital overseas chasing the same deals that it becomes a borrower's environment. A borrower is able to dictate the terms that they want, the covenant, that they want the ability to raise more debt, et cetera,

Speaker 0:
And that's flown massively in the UK and and the US and kind of the more developed world. South Africa. We still quite far away from that. So you've still got very strong lender protections, very strong, uh, kind of covenant security, et cetera. But there has been quite a lot more capital that's coming into the environment and and into the market. And then all that does is it just forces you to be a lot more selective on the transactions that that you are going to do.

Speaker 0:
We do think the the borrower market is expanding over time, as the banks kind of do tend to push up towards the bigger type transaction. So the market in S a is still big enough. But it is becoming more competitive

Speaker 0:
because, Adam, all the questions I wanted to ask you earlier listening to both Dino and Brent. They're very good salesmen, you know, It's all so simple. They're really good at identifying credit. They're really good at valuing it when you want to buy a private debt fund. And I'm not just talking about these two but private debts generally, what kind of homework do you have to do? Because it sounds like such a simple asset class. It seems so easy. Yeah,

Speaker 1:
so I mean, January very right in any asset class. Um, if capital flows in, prices are gonna go down. So

Speaker 1:
at the moment it's getting a bit hot, and you have to be careful, um, both from the the lenders, uh, perspective and from us as investors like you. There's so many people are now competing for your money. Um, and then and you get cowboys, right? And salesmen, Um, you know, salesman who tell you I can get you 15% at the same the same risk. Um, you know, I'm I'm I'm great.

Speaker 1:
Um, so you you you're right. You have it. You have caveat. Or you have to be careful. Now you can't just, you know, give money to anybody, and there's a there. There's a lot of homework that you do, um, that you do have to do. Um,

Speaker 1:
So how do we do it? Who do? Who do we look for? Um, so we look, we look for for people, and it's it's a lot more possible offshore than domestically who have long track records who know what they're doing. Who are experts in the field who have seen this movie. Power track records Track record is one.

Speaker 1:
um, obviously, you try and do your homework on the on the the people behind it, um, in South Africa, it's a lot easier because it's a smaller market. You know, many of the players in the market and, um, their reputations and you know? Are they ethical? Are they? Are they? Are they Are they good at what they do? It's a lot easier. Well, sure it is. It it it is harder. I mean, you Can you do the searches that you can,

Speaker 1:
um you know, you You you look for as I said, people with long track records you do You try and verify them. You speak to creditors, if you can. You've dealt with them debtors. Do you

Speaker 0:
actually look at their contracts at all? So do you actually get to you like I rent to company XYZ What will all the collateral that he asked for?

Speaker 0:
What were the EE ratios he was looking at for liquidity risk? So you look at that as well.

Speaker 1:
Yeah, 100%. And part of a very important part of what we what we look at is the criteria for for lending. So, um, you know how how heavy are the covenants? You know, in terms of protection,

Speaker 1:
um, the loans to value the the net interest, cover the debt to ear all those types of metrics. Um, that they say that they do in terms of the loans you want to see confirmation of that in the actual portfolios that they've already lent.

Speaker 1:
Um, out. So you want to make sure that, um, what they say they do in terms of being conservative in terms of protecting the loans and all of that is actually there. So you you have a look at those types of things. You look at the metrics of the portfolio. You you do all of that kind of

Speaker 0:
reputational risk

Speaker 0:
the track record, and they have proper due diligence behind what they're

Speaker 1:
doing. And then you look at the underwriting process. How do they research the portfolio companies? What is the research that they do? What kind of companies do they like? Typically, you want lenders, you're gonna borrow to high quality companies. Non

Speaker 0:
stop you there because we are running out of time very quickly. Just high quality companies.

Speaker 0:
Give me some examples of sectors of today in South Africa that are high quality that you really like. What are you seeing? Perfect. Yeah. So look, I think it's challenging, and the way we've looked at it is we've looked for parts of the economy that are still growing. So we've seen quite a lot of growth in in the fibre space in the renewable space. We've seen quite a lot in

Speaker 0:
Let's call it your, uh your niche lenders that have developed opportunities to to find businesses that are specialising in these areas. And I think, uh, like Adam mentioned there's a lot of capital that's chasing after certain sectors and and that obviously brings down returns. But then we're looking more. Let's call it the picks and shovels on the, uh on the outskirts of that So outskirts of the fibre space outskirts of the renewable space. Um, seeing quite a lot there

Speaker 0:
not too much in the real estate space at the moment. Um, just because we think they so renewables, picks and shovels. And then, lastly, last question for you, Tina, Um, UK. Because you have UK and a South African fund. What kind of opportunities are you seeing there? Because obviously, clearly different market of South Africa and their their economy looks

Speaker 0:
quite dire at the moment. So what are you seeing there? So the UK, we've focused a lot in the real estate bridge lending space. The market is different. So in South Africa, if you go to an R and B and Investec, and you want a property lend. They're flipping good, even at small quantum. They know how to lend against property, and they back jockeys.

Speaker 0:
So it's much more difficult for us in that space. In South Africa, the UK is much more Computer says no. So loans of less than £20 million and specifically loans against real estate because it's easier to implement for short duration is an area that we've played a lot, what we have seen a little bit as well recently. On more, the pre and Mays lending side is backing private equity sponsors into M and AM BO, whatever it might be.

Speaker 0:
Why? Because in the UK, a four times leverage multiple was pretty normal in a 0% interest rate environment. Now, a two times leverage multiple is pretty normal from a senior bank. And what private equity are starting to realise is that now they got to put more equity in the equity returns on a model bank,

Speaker 0:
don't make sense anymore, and so they are increasingly looking for partners to come in alongside them in that mayor's pre equity space sort of equity, sort of debt. Exactly. So that is not as an example of something that would fall into a senior secure debt fund. No, no, totally. Get that, guys, we've run out of time.

Speaker 0:
Thank you so much. I think it's a really very interesting asset class. I'm I'm quite gutted. The retail pundit will struggle to buy this, to be honest, but I hopefully over time, structures will be developed that a lot of people can access this because who wouldn't want inflation will, you know, bank lending? Plus with very senior secure debt. I think this is a great asset class, so well done, guys. Thank you. Thank you.