1 00:00:05,790 --> 00:00:08,070 Sean Elmer: Welcome to the Fear and Greed Business interview. I'm Sean 2 00:00:08,070 --> 00:00:12,059 Sean Elmer: Elmer. Private credit has exploded in recent years. Tighter restrictions 3 00:00:12,059 --> 00:00:14,819 Sean Elmer: on banks has led to some corporate borrowers going elsewhere, 4 00:00:15,030 --> 00:00:17,250 Sean Elmer: and the private credit market has expanded to meet that 5 00:00:17,250 --> 00:00:20,730 Sean Elmer: demand both here and overseas. But as you might expect, 6 00:00:20,730 --> 00:00:22,980 Sean Elmer: when an industry grows so quickly, there's a need to 7 00:00:22,980 --> 00:00:26,669 Sean Elmer: ensure regulation can keep up. These questions were highlighted in 8 00:00:26,670 --> 00:00:29,850 Sean Elmer: an article in the Australian Financial Review earlier this week. 9 00:00:29,880 --> 00:00:32,700 Sean Elmer: It examined some of the challenges for the sector, including 10 00:00:32,700 --> 00:00:35,428 Sean Elmer: fees in due diligence over investments, and some of the 11 00:00:35,430 --> 00:00:38,160 Sean Elmer: instances where the high returns being offered by private credit 12 00:00:38,370 --> 00:00:40,950 Sean Elmer: haven't been realized. I wanted to take a closer look 13 00:00:40,950 --> 00:00:43,530 Sean Elmer: at the state of the industry and whether those operating 14 00:00:43,530 --> 00:00:46,380 Sean Elmer: in this space think that it could benefit from additional 15 00:00:46,380 --> 00:00:50,519 Sean Elmer: regulation or transparency. Patrick William is the co- founder and 16 00:00:50,519 --> 00:00:54,570 Sean Elmer: managing director of Rixon Capital, a private credit investment manager 17 00:00:54,570 --> 00:00:56,850 Sean Elmer: established a couple of years ago. Patrick himself has been 18 00:00:56,850 --> 00:01:00,780 Sean Elmer: involved in the industry since 2018. Rixon Capital is a great 19 00:01:00,780 --> 00:01:04,049 Sean Elmer: supporter of this podcast. Remember, this is general information only 20 00:01:04,050 --> 00:01:07,050 Sean Elmer: and you should seek professional advice before making investment decisions. 21 00:01:07,319 --> 00:01:08,909 Sean Elmer: Patrick William, welcome to Fear and Greed. 22 00:01:09,299 --> 00:01:10,259 Patrick William: Thanks for having me, Sean. 23 00:01:10,770 --> 00:01:13,110 Sean Elmer: Wel; l, in that introduction I mentioned that Rixon Capital 24 00:01:13,110 --> 00:01:15,959 Sean Elmer: has been in Australia since 2018, 6 years, so it's 25 00:01:15,959 --> 00:01:18,450 Sean Elmer: not like it's a new industry, and there's many funds 26 00:01:18,450 --> 00:01:20,429 Sean Elmer: that have been around for a lot longer than you. 27 00:01:20,610 --> 00:01:22,798 Sean Elmer: We're just hearing about it more, but there is quite 28 00:01:22,800 --> 00:01:24,119 Sean Elmer: a history with private credit. 29 00:01:24,450 --> 00:01:27,180 Patrick William: Yeah, look, the sector's been around for a long time. 30 00:01:27,719 --> 00:01:29,580 Patrick William: It used to be called non- bank lending, and it 31 00:01:29,580 --> 00:01:33,270 Patrick William: just picked up niche segments that the banks didn't bank. 32 00:01:33,840 --> 00:01:37,530 Patrick William: But come 2018, post the Hay Royal Commission, we saw 33 00:01:37,530 --> 00:01:40,590 Patrick William: the banks really begin to pull out, particularly in SME 34 00:01:40,770 --> 00:01:43,619 Patrick William: lending at that point in time. And that's what saw 35 00:01:43,620 --> 00:01:47,160 Patrick William: the explosion of private credit because all these businesses could 36 00:01:47,160 --> 00:01:49,920 Patrick William: no longer access bank debt when they're looking for checks 37 00:01:49,920 --> 00:01:53,250 Patrick William: of below $ 20 million. So that was really the catalyst 38 00:01:53,490 --> 00:01:57,060 Patrick William: for the emergence of mainstream private credit in the Australian market. 39 00:01:57,630 --> 00:02:00,870 Sean Elmer: Okay, so if we look at the market, broadly, the 40 00:02:00,870 --> 00:02:05,309 Sean Elmer: criticism really comes down to transparency. How transparent is the 41 00:02:05,309 --> 00:02:06,870 Sean Elmer: private credit market in Australia? 42 00:02:07,350 --> 00:02:10,589 Patrick William: That's a very good question. It comes down to how 43 00:02:10,590 --> 00:02:13,470 Patrick William: new the player is. The newer you are, the more 44 00:02:13,470 --> 00:02:15,900 Patrick William: transparent you are because you've got to compete and get 45 00:02:15,900 --> 00:02:19,738 Patrick William: capital. But some of the more mature players that started 46 00:02:19,740 --> 00:02:23,729 Patrick William: in 2017, '18, '19, by virtue of it being a very new 47 00:02:23,730 --> 00:02:27,149 Patrick William: asset class, were probably less transparent and there's nothing sinister 48 00:02:27,150 --> 00:02:30,300 Patrick William: about it. Most investors are familiar with how an equity 49 00:02:30,300 --> 00:02:33,360 Patrick William: fund operates. You pick a sector, you pick a manager 50 00:02:33,360 --> 00:02:35,729 Patrick William: you like and off you go. And those funds were 51 00:02:35,730 --> 00:02:40,260 Patrick William: set up on that basis. Unfortunately, without the underlying detail, 52 00:02:40,740 --> 00:02:43,260 Patrick William: it becomes harder and harder for investors actually to vet 53 00:02:43,320 --> 00:02:47,220 Patrick William: what the underlying risk is. Because with equity it's you 54 00:02:47,220 --> 00:02:49,320 Patrick William: get all the upside, you wear all the downside. It's 55 00:02:49,320 --> 00:02:52,260 Patrick William: really not that hard. Whereas with private credit, it's not 56 00:02:52,260 --> 00:02:55,290 Patrick William: a single asset class. You've got to consider the risk 57 00:02:55,290 --> 00:03:00,418 Patrick William: of the sector, the availability or unavailability of security, ranking 58 00:03:00,419 --> 00:03:03,300 Patrick William: of the debt, whether it pays interest, whether it doesn't, 59 00:03:03,540 --> 00:03:05,580 Patrick William: whether it pays cash interest or does not pay cash 60 00:03:05,580 --> 00:03:08,639 Patrick William: interest. So there are lots and lots of variables and 61 00:03:08,639 --> 00:03:11,489 Patrick William: if you don't understand what all those variables are and what 62 00:03:11,490 --> 00:03:14,280 Patrick William: those categories are for a fund, it's actually very hard 63 00:03:14,280 --> 00:03:15,480 Patrick William: to make an investment decision. 64 00:03:15,900 --> 00:03:18,720 Sean Elmer: So does that mean that it is far better set 65 00:03:18,720 --> 00:03:23,310 Sean Elmer: up for institutional or wholesale or even home offices, assuming 66 00:03:23,310 --> 00:03:26,610 Sean Elmer: they have the skills, to get involved in private credit 67 00:03:26,610 --> 00:03:28,470 Sean Elmer: much more than a retail investor, for example? 68 00:03:28,710 --> 00:03:32,069 Patrick William: I'd say they've got an advantage in diligencing the funds 69 00:03:32,700 --> 00:03:35,340 Patrick William: because they get more access and they can ask or 70 00:03:35,340 --> 00:03:38,460 Patrick William: know to ask more detailed questions, whereas it still works 71 00:03:38,460 --> 00:03:42,240 Patrick William: for retail. But I find in our experience, retail investors 72 00:03:42,240 --> 00:03:45,809 Patrick William: tend to face that chase, the reward without understanding what 73 00:03:45,809 --> 00:03:49,079 Patrick William: the risk is. So you have a fund delivers 14%, it's better than 74 00:03:49,080 --> 00:03:51,960 Patrick William: a fund that delivers 10, without actually understanding there's a 75 00:03:51,960 --> 00:03:54,960 Patrick William: reason one's delivering 10 and one's delivering a higher number. 76 00:03:55,440 --> 00:03:58,230 Sean Elmer: Okay. So in terms of the Australian market, how do 77 00:03:58,230 --> 00:04:02,160 Sean Elmer: we rate compared to somewhere like the US? Inevitably we 78 00:04:02,160 --> 00:04:05,219 Sean Elmer: follow the US in many of these markets. Is it 79 00:04:05,219 --> 00:04:07,019 Sean Elmer: something that we can learn from what's happened in the 80 00:04:07,020 --> 00:04:09,420 Sean Elmer: US to address some of the criticisms here? 81 00:04:10,139 --> 00:04:12,840 Patrick William: Definitely. There's been a bit of press this morning in 82 00:04:12,840 --> 00:04:15,690 Patrick William: overseas publication about this, where they talk about how in the 83 00:04:15,690 --> 00:04:19,770 Patrick William: US... There are the things that are standard there that will come 84 00:04:19,770 --> 00:04:22,589 Patrick William: into play here over the next six months, 12 months... 85 00:04:22,950 --> 00:04:26,758 Patrick William: the use of third party trustees. So if something's going 86 00:04:26,759 --> 00:04:28,949 Patrick William: wrong with the loan book, you have a third party 87 00:04:28,949 --> 00:04:30,900 Patrick William: that says you need to call a default, as opposed 88 00:04:30,900 --> 00:04:34,140 Patrick William: to the investment manager being their own trustee. In the 89 00:04:34,140 --> 00:04:37,710 Patrick William: US they require quarterly valuations. So if anything's wrong with 90 00:04:37,710 --> 00:04:40,738 Patrick William: a business, you are forced to call it out and 91 00:04:40,740 --> 00:04:43,559 Patrick William: inform your investors. So the US has come a long 92 00:04:43,559 --> 00:04:46,169 Patrick William: way in terms of disclosure. We've just got to catch 93 00:04:46,170 --> 00:04:46,620 Patrick William: up to them. 94 00:04:47,250 --> 00:04:49,170 Sean Elmer: Stay with me, Patrick. We'll be back in a minute. 95 00:04:55,800 --> 00:04:58,770 Sean Elmer: My guest today is Patrick William, co- founder and managing 96 00:04:58,770 --> 00:05:02,969 Sean Elmer: director of Rixon Capital. I mean, one of the great 97 00:05:02,969 --> 00:05:08,070 Sean Elmer: things about private credit is that private credit allows SMEs 98 00:05:08,130 --> 00:05:10,799 Sean Elmer: or medium- sized businesses to access capital that they may 99 00:05:10,800 --> 00:05:14,160 Sean Elmer: not have done otherwise. Being devil's advocate on what you've 100 00:05:14,160 --> 00:05:16,800 Sean Elmer: said there, you don't want to make it overly bureaucratic. 101 00:05:16,800 --> 00:05:19,349 Sean Elmer: You certainly don't want to go down the route that 102 00:05:19,349 --> 00:05:22,409 Sean Elmer: one of the bank CEOs suggested in terms of having 103 00:05:22,410 --> 00:05:25,620 Sean Elmer: to hold reserves, capital requirements similar to banks. Suddenly you 104 00:05:25,620 --> 00:05:29,880 Sean Elmer: don't become competitive. So where's the line between being able 105 00:05:29,940 --> 00:05:33,178 Sean Elmer: to lend $ 20 million or $ 10 million to an SME 106 00:05:33,178 --> 00:05:37,260 Sean Elmer: that's growing fairly fast verse regulation? 107 00:05:38,190 --> 00:05:41,279 Patrick William: Look, this is a personal opinion. I think regulation will 108 00:05:41,279 --> 00:05:45,300 Patrick William: hinder the sector. What we're better off doing is actually 109 00:05:45,930 --> 00:05:48,900 Patrick William: having industry get together and say, we need to self- 110 00:05:48,900 --> 00:05:51,540 Patrick William: regulate. We need to all agree that you need to 111 00:05:51,540 --> 00:05:56,370 Patrick William: be disclosing particular variables in your advertising material, your marketing 112 00:05:56,370 --> 00:06:00,839 Patrick William: material, your investment documents, and in your fund reporting. Because 113 00:06:00,839 --> 00:06:03,510 Patrick William: once you start doing that, you're allowing investors to make 114 00:06:03,510 --> 00:06:06,690 Patrick William: a very educated decision on the risk profile. So if 115 00:06:06,690 --> 00:06:09,270 Patrick William: heaven forbid something goes wrong with the loan, per the 116 00:06:09,270 --> 00:06:11,880 Patrick William: article yesterday, investors shrug their shoulders and say, look, I 117 00:06:11,880 --> 00:06:15,329 Patrick William: knew about it, and that's fine because the return makes 118 00:06:15,330 --> 00:06:16,530 Patrick William: sense for that level of risk. 119 00:06:17,070 --> 00:06:20,250 Sean Elmer: Fees, we always talk about fees and for many retail 120 00:06:20,250 --> 00:06:25,230 Sean Elmer: investors, fees matter. Are they particularly high in private credit investments? 121 00:06:25,470 --> 00:06:27,900 Patrick William: It's also a very good question. So the headline fees 122 00:06:27,900 --> 00:06:31,709 Patrick William: in private credit aren't particularly high. They range from zero 123 00:06:31,710 --> 00:06:34,859 Patrick William: to about 1. 5% to 2% per annum. But the 124 00:06:34,859 --> 00:06:38,010 Patrick William: hidden fees are where private credit's taking a bit of 125 00:06:38,010 --> 00:06:41,820 Patrick William: criticism at the moment. So particularly with funders that lend 126 00:06:41,820 --> 00:06:44,609 Patrick William: to borrowers in the property space, but also in the 127 00:06:44,610 --> 00:06:47,580 Patrick William: corporate space, what you're seeing is some funds that are 128 00:06:47,580 --> 00:06:51,089 Patrick William: taking upfront fees for themselves as well. So to illustrate, 129 00:06:51,120 --> 00:06:53,580 Patrick William: you go to borrower and the borrower says, " Look, my 130 00:06:53,580 --> 00:06:56,910 Patrick William: board's approved a 15% cost to finance to you for 131 00:06:56,910 --> 00:07:00,060 Patrick William: 12 months. You do what you need to do." And 132 00:07:00,060 --> 00:07:02,070 Patrick William: what the fund does is they say, " Look, we'll take 133 00:07:02,070 --> 00:07:05,700 Patrick William: 3% as an upfront fee. We'll pay 12 to investors 134 00:07:05,700 --> 00:07:08,460 Patrick William: gross, and then we'll take a 1% fee off that 135 00:07:08,460 --> 00:07:11,100 Patrick William: as well." So the fund can disclose to investors, we 136 00:07:11,100 --> 00:07:13,530 Patrick William: have a 1% management fee, but the reality is they're 137 00:07:13,530 --> 00:07:16,950 Patrick William: booking a 4% fee. Where that comes undone is A, 138 00:07:17,280 --> 00:07:19,830 Patrick William: investors don't know the scale of the fee the fund's 139 00:07:19,830 --> 00:07:23,190 Patrick William: getting, and B, it's actually investing capital at risk. So 140 00:07:23,190 --> 00:07:25,350 Patrick William: you've got investors put their hard earned money at risk. 141 00:07:25,710 --> 00:07:29,819 Patrick William: They're earning 11 to 12% when in fact they're exposed 142 00:07:29,879 --> 00:07:31,049 Patrick William: to 15% risk. 143 00:07:31,860 --> 00:07:36,000 Sean Elmer: Yeah, okay. What about in terms of private credit as 144 00:07:36,000 --> 00:07:39,780 Sean Elmer: a liquid asset? So that's another issue that many investors 145 00:07:39,840 --> 00:07:42,329 Sean Elmer: worry about. Is it particularly liquid? 146 00:07:42,990 --> 00:07:45,210 Patrick William: Not particularly. It depends on the asset class. So you've 147 00:07:45,210 --> 00:07:50,250 Patrick William: got private debt funds that focus on bank debt, subordinated 148 00:07:50,250 --> 00:07:53,760 Patrick William: debt, listed debt. So there are liquid options. The returns 149 00:07:53,760 --> 00:07:57,780 Patrick William: aren't particularly compelling relative to the unlisted option. So it's 150 00:07:57,780 --> 00:08:00,599 Patrick William: not a liquid asset class in general, and my advice 151 00:08:00,599 --> 00:08:04,289 Patrick William: to investors is, look, you get compensated with an illiquidity 152 00:08:04,289 --> 00:08:07,770 Patrick William: premium. So if you want those double- digit returns, you 153 00:08:07,770 --> 00:08:10,619 Patrick William: get quarterly liquidity. If you're happy to take 6 to 154 00:08:10,620 --> 00:08:14,639 Patrick William: 7%, you can have nearly liquidity, but you're compensated for it. 155 00:08:15,540 --> 00:08:18,929 Sean Elmer: Okay. So the bottom line in all investing is that the 156 00:08:18,929 --> 00:08:21,659 Sean Elmer: return you're getting and where you are on the risk 157 00:08:21,660 --> 00:08:24,449 Sean Elmer: reward spectrum. The returns are pretty good though, aren't they? 158 00:08:24,449 --> 00:08:27,780 Sean Elmer: I mean, those are arguing against private credit. I suppose 159 00:08:27,780 --> 00:08:30,690 Sean Elmer: the point is if transparency can be improved, so people 160 00:08:30,690 --> 00:08:33,779 Sean Elmer: know what they're getting into, and that's important. They understand 161 00:08:33,780 --> 00:08:36,780 Sean Elmer: the risk reward, the actual returns are really good. 162 00:08:37,230 --> 00:08:40,919 Patrick William: The returns are exceptional for what they are. The all 163 00:08:40,920 --> 00:08:43,920 Patrick William: odds delivered, I think 7% return over the last 12 164 00:08:43,920 --> 00:08:47,610 Patrick William: months, and that's equity exposure. You can get a double- 165 00:08:47,610 --> 00:08:50,939 Patrick William: digit return with a good quality private credit fund sitting 166 00:08:50,940 --> 00:08:53,910 Patrick William: in debt, which ranks ahead of the equity. So it 167 00:08:53,910 --> 00:08:56,580 Patrick William: is a very compelling proposition, particularly in this market. 168 00:08:57,120 --> 00:09:00,389 Sean Elmer: So where do you think we'll go in terms...? Something 169 00:09:00,390 --> 00:09:03,120 Sean Elmer: will crack eventually. Do you think that the industry will 170 00:09:03,120 --> 00:09:06,420 Sean Elmer: come together and self- regulate? Do you think eventually ASIC 171 00:09:06,480 --> 00:09:09,510 Sean Elmer: and others will force the government to regulate? Where do 172 00:09:09,510 --> 00:09:10,230 Sean Elmer: you think we're heading? 173 00:09:11,010 --> 00:09:14,699 Patrick William: My prediction is the industry will self- regulate before ASIC 174 00:09:14,700 --> 00:09:19,020 Patrick William: cracks down. Articles like the piece by Jonathan Shapiro yesterday, 175 00:09:20,910 --> 00:09:23,280 Patrick William: it embarrasses a few players. Not particularly fair sometimes when 176 00:09:23,280 --> 00:09:25,290 Patrick William: you pick one or two people, but it is what 177 00:09:25,290 --> 00:09:27,328 Patrick William: it is. And I think it's a wake- up call 178 00:09:27,330 --> 00:09:29,519 Patrick William: for the sector to go, look, we need to be 179 00:09:29,520 --> 00:09:31,230 Patrick William: a lot more open and a lot more honest with 180 00:09:31,230 --> 00:09:34,349 Patrick William: our investors because by and large, the sector is doing 181 00:09:34,350 --> 00:09:37,200 Patrick William: the right thing. But you don't want a few stories 182 00:09:38,070 --> 00:09:40,650 Patrick William: that are a little unsavory, seeing ASIC come in and 183 00:09:41,040 --> 00:09:43,260 Patrick William: to the point that the bank as CEO may start 184 00:09:43,260 --> 00:09:45,300 Patrick William: forcing people to hold reserves because all of a sudden 185 00:09:45,540 --> 00:09:47,999 Patrick William: it becomes a very unattractive sector because you're holding dead money. 186 00:09:48,509 --> 00:09:51,209 Sean Elmer: Do you think it'll keep growing, private credit, as it 187 00:09:51,210 --> 00:09:54,029 Sean Elmer: has done in more recent times post banking Royal Commission? 188 00:09:54,240 --> 00:09:55,679 Patrick William: Oh, it's got a long way to go in the 189 00:09:55,679 --> 00:09:58,708 Patrick William: Australian market. The Big four banks are still withdrawing out 190 00:09:58,710 --> 00:10:01,920 Patrick William: of, well, they've already withdrawn from small SME. They're withdrawing 191 00:10:01,920 --> 00:10:05,580 Patrick William: from large SME lending as well. So we've easily got 192 00:10:06,450 --> 00:10:09,929 Patrick William: 3, 5, 6 years of very strong growth, just filling 193 00:10:09,929 --> 00:10:12,510 Patrick William: in that gap, and then once we fill that gap, 194 00:10:12,660 --> 00:10:14,700 Patrick William: it's about catering to the growth in the space. 195 00:10:15,390 --> 00:10:17,160 Sean Elmer: Patrick, thank you for talking to Fear and Greed. 196 00:10:17,400 --> 00:10:18,300 Patrick William: Thank you for the time, Sean. 197 00:10:18,900 --> 00:10:22,078 Sean Elmer: That's Patrick William, Co- founder and managing director of Rixon 198 00:10:22,170 --> 00:10:24,960 Sean Elmer: Capital, a great supporter of this podcast. This is the 199 00:10:24,960 --> 00:10:27,569 Sean Elmer: Fear and Greed business interview. Remember, this is general information 200 00:10:27,570 --> 00:10:30,000 Sean Elmer: only and you should always seek professional advice before making 201 00:10:30,000 --> 00:10:33,150 Sean Elmer: investment decisions. Join us every morning for the full episode 202 00:10:33,150 --> 00:10:35,488 Sean Elmer: of Fear and Greed, daily business news for people who 203 00:10:35,490 --> 00:10:38,549 Sean Elmer: make their own decisions. I'm Sean Elmer. Enjoy your day.