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Speaker 1: Welcome to the Fear and Greed Business Interview. I'm sure, Alma.

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Speaker 1: The private credit industry has grown enormously in the last decade,

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Speaker 1: tripling to around one point five trillion US dollars the

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Speaker 1: start of this year. It's forecast to hit two point

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Speaker 1: eight trillion by twenty twenty eight, although some fund managers

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Speaker 1: like investment giant black Rock, so it could get to

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Speaker 1: three and a half trillion. Locally it's taken off, but

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Speaker 1: the global private market is much larger and very different

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Speaker 1: to private credit. Here today, we're going to find out

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Speaker 1: how they're different and how local investors can gain access

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Speaker 1: to the global market. Remember this is general information only.

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Speaker 1: You should seek professional advice before making investment decisions. Near

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Speaker 1: Maya Richardson is the chief executive officer of Panghana Credit,

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Speaker 1: a supporter of this podcast. Panghana, in association with mrser

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Speaker 1: recently launched a listed investment trust, the Pangana Global Private

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Speaker 1: Credit Trust, along with online term accounts term Plus, to

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Speaker 1: provide fixed income from global private credit investments. May Am,

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Speaker 1: I welcome to Fearing Greed.

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Speaker 2: Thank you very much, Sean. I appreciate you you having

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Speaker 2: me here.

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Speaker 1: So you say, comparing local and global private credit is

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Speaker 1: like comparing apples and oranges.

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Speaker 2: How so yeah, so I guess what it really was

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Speaker 2: referring to to there is that whilst the private credit

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Speaker 2: markets in Australia and globally when we say global, what

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Speaker 2: we're specifically talking about at Pangana is the US and Europe,

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Speaker 2: And what we're referring to is whilst there's bank regulation

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Speaker 2: that has been imposed on banks here as well as

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Speaker 2: offshore in the global markets that have really sought to

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Speaker 2: reduce the risk that sits within banks, you know, to

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Speaker 2: help protect you know, the financial services industry and to

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Speaker 2: help protect and particularly deposit holders. Now, the way in

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Speaker 2: which the reasons why that has occurred and the ways

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Speaker 2: in which that has actually been prosecuted by bank regulators

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Speaker 2: has been different in Australia and globally for a number

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Speaker 2: of different reasons. And in particular when I say apples

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Speaker 2: and oranges, so that's similar. What's different in the apples

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Speaker 2: and urg just side is the drivers of bank regulatory

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Speaker 2: changes in the US and Europe were very different than

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Speaker 2: they were in Australia. And the US and Europe posted

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Speaker 2: GFC and if you were recalled, the GFC was both

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Speaker 2: a credit crisis in the subprime mortgage market predominantly, and

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Speaker 2: a liquidity crisis where people wanted to withdraw cash out

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Speaker 2: of banks and banks had to be able to liquidate

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Speaker 2: assets in order to pay people their deposits. Now, one

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Speaker 2: of the things that actually happened as a result of that,

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Speaker 2: in order to improve financial system stability in the US

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Speaker 2: and Europe, the regulators wanted to ensure that the banks

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Speaker 2: no longer ran these big mismatches between at call deposits,

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Speaker 2: which then funded longer term loans and in particular corporate loans. Okay,

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Speaker 2: So corporate loans would have a duration of sort of

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Speaker 2: three years to five years and maybe up to seven years.

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Speaker 2: So of course, if someone wants to rip their at

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Speaker 2: called the positi out of the bank, you can't sell

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Speaker 2: a three year loan very easily that sits on a

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Speaker 2: bank balance sheepe Okay. In Australia you had a different

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Speaker 2: phenomena where you know, we're very well regulated. The liquidity

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Speaker 2: side of things is much better managed in Australia, and

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Speaker 2: therefore the way that the regulators have sought to kind

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Speaker 2: of protect the system, if you will, is to impose

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Speaker 2: capital requirements on banks. That meant banks are very disincented

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Speaker 2: from lending into certain types of asset classes.

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Speaker 1: So the capital rules overseays are different to the capital

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Speaker 1: rules here when it comes to this sector.

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Speaker 2: Yes, and I guess the way you're putting it is

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Speaker 2: capital rules. The methodology around how you look at the

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Speaker 2: capital rules is broadly similar. The way that they were

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Speaker 2: applied is what actually creates the differences. So, for example,

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Speaker 2: in Australia, what you'll find is the private credit market

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Speaker 2: is actually participating where banks don't have risk appetite, and

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Speaker 2: some of that is because of the increased capital requirements,

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Speaker 2: meaning they have to hold more capital for every dollar

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Speaker 2: that they actually land into those markets that being predominantly

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Speaker 2: commercial property, subordinated positions in asset backed vehicles and sort

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Speaker 2: of large, highly leveraged M and A transactions. That's predominantly

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Speaker 2: where you see the private credit managers in this country participating.

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Speaker 2: And the other fact is in Australia about ninety percent

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Speaker 2: of all credit is underwritten by the banks and ten

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Speaker 2: percent by profit credit managers, and that ten percent is

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Speaker 2: concentrated into those asset classes predominantly.

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Speaker 1: So in the US and Europe, it is it broader

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Speaker 1: in the US and Europe.

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Speaker 2: Yeah, So in the US and Europe, you find is

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Speaker 2: because they really wanted to get rid of that mismatch

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Speaker 2: between those at call deposits and longer term corporate lines. Basically,

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Speaker 2: what used to sit on bank balance sheets and what

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Speaker 2: banks would still today be happy to underwrite is loans

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Speaker 2: to mid market credit. But the problem mid market companies.

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Speaker 2: But the problem is they now have to hold more

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Speaker 2: capital against that, so they get a lower return on

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Speaker 2: those assets and therefore no longer have a big disincentive

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Speaker 2: to lend to mid market companies, being companies that are

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Speaker 2: about a billion to three or billion to five billion

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Speaker 2: dollars in size. Now, what has then happened is asset

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Speaker 2: managers emerged, funded by institutional investors to kind of step

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Speaker 2: in and fill in that gap. So what you have

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Speaker 2: in the mid market of the US in Europe is

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Speaker 2: about eighty five percent of all lending to those companies

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Speaker 2: is done by product credit managers and fifteen percent is

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Speaker 2: done by banks. And that divide, or that structural gap,

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Speaker 2: if you will, you know, continues to grow, particularly after

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Speaker 2: what you saw on you know, twenty twenty two. You know,

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Speaker 2: in Silicon Valley bank credit SUITEE, you have these major

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Speaker 2: bank failures, which then kind of cause regulators to go

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Speaker 2: further in terms of the types of assets that they

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Speaker 2: want to get off bank shoots and put into the

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Speaker 2: private credit system for system stability and safety purposes.

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Speaker 1: Stay with me nearmay We'll be back in a minute.

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Speaker 1: I'm speaking to Neamiah Richardson, CEO of Pangana Credit. Okay,

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Speaker 1: so let's bring that back to investors here. So I'm

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Speaker 1: with you so far. The point there, then, if you're

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Speaker 1: running a global fund, as you guys are, suddenly the

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Speaker 1: assets that can be involved are greater than potentially in

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Speaker 1: Australia or at least more mixed, shall we say. I mean,

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Speaker 1: I know that you talk about the greater accessibility for

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Speaker 1: all investors, and I know you're talking more specifically about

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Speaker 1: you don't have to be an institutional investor to get

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Speaker 1: involved in this, and I kind of want to get

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Speaker 1: to that point there. But even just the asset classes

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Speaker 1: that you're talking about when you're investing globally is broader,

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Speaker 1: which of course is helpful and diversification sense.

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Speaker 2: Yes, correct. And one of the great things about global

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Speaker 2: private credit is that you do have this very wide diversity. So,

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Speaker 2: for example, many of the companies that you'll see in portfolios,

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Speaker 2: particularly these these corporates will be very defensive in nature,

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Speaker 2: so you have a big supply demand gap. It means

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Speaker 2: a provit credit manager can decide where they want to play,

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Speaker 2: and so where do they play. They go and try

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Speaker 2: to find defensive companies and what does that mean. That

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Speaker 2: means in non cyclical industries, essential services, so that the

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Speaker 2: predictability of the income or the predictably of the revenue

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Speaker 2: that's actually earned by these companies is very solid. Okay. Secondly,

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Speaker 2: they look for companies that have market leading positions, you know,

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Speaker 2: very long term contracts, those types of things that are

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Speaker 2: very defensive in terms of sustainability of cash flow, flexible

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Speaker 2: cost bases, so if the revenue starts to actually be

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Speaker 2: under pressure, they have the ability to you know, very

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Speaker 2: quickly scale down their cost base to at the end

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Speaker 2: of the day generate you know, predictable cash flows to

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Speaker 2: pay back, to pay the interest and to repay the loans. Now,

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Speaker 2: the other thing that's really important here when we say

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Speaker 2: defensive is your time about you know, information technology industries

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Speaker 2: where you have sort of B to B you know,

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Speaker 2: software companies. So software companies that for example, provide you know,

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Speaker 2: essential software to run big companies and that are very

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Speaker 2: hard to kind of transition out of once once they're

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Speaker 2: in those companies. So those are the kinds of characteristics

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Speaker 2: that you'll see. Secondly, you generally want to see them

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Speaker 2: in the same type of commercial property type exposures as

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Speaker 2: you see here. So we don't invest with managers that

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Speaker 2: you know that would take big development risk as an example,

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Speaker 2: or big office risk. So, you know, because they're such

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Speaker 2: large markets, because there's the biggest supply demand gap, the

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Speaker 2: managers can pick and choose where they actually want to

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Speaker 2: play and as a result of that, you know, generate

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Speaker 2: better returns with with lower losses than you would find,

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Speaker 2: you know, even at banks.

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Speaker 1: Okay, so I'm going to slightly argue against you when

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Speaker 1: you talk about the need for simplicity in this isn't

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Speaker 1: what you're talking about potentially making it less simple.

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Speaker 2: Yes, well, I think the thing about simplicity is. Firstly,

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Speaker 2: what I'd start with is provact credit is actually no

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Speaker 2: different than the business of banking. Provact credit has been

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Speaker 2: around forever, right, The notion of lending money to a

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Speaker 2: company to allow that company to grow has been around

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Speaker 2: for a very long time, and the way which that's

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Speaker 2: actually prosecuted been around for a long time now. One

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Speaker 2: of the things that we actually sought to do is

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Speaker 2: with the myriad of choices, the myriad of managers, et cetera,

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Speaker 2: and the myriad of choices that there are for institutional investors,

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Speaker 2: not so much for retail investors. What we've sought to

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Speaker 2: do is to really simplify that in our partnership with Mercer.

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Speaker 2: So what we've gone out and done is specifically sought

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Speaker 2: to invest, identify and invest with managers that do buy

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Speaker 2: ladderal loans to these mid market companies. So those one

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Speaker 2: to three billion dollars do that in bilateral contracts, so

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Speaker 2: financial contracts that caused the barer to have obligations for repayment,

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Speaker 2: for payment of interest, for payment as capital. They come

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Speaker 2: with information rights for the manager, so the manager is

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Speaker 2: able to effectively monitor the performance of the company and

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Speaker 2: intervene if it gets self tracked in order to protect

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Speaker 2: the income and protect the capital, and also have ownership

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Speaker 2: or the ability to exercise security rights which allow them

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Speaker 2: to sell assets on the ballot sheet or take control

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Speaker 2: of the company and sell the company to get their

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Speaker 2: money back if things go wrong. So that is a

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Speaker 2: very simple set of notion has been around for a

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Speaker 2: long time, very complex if you don't actually have somebody

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Speaker 2: who can pull all that together, identify the managers in

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Speaker 2: those spaces and create vehicles that allow investors to access

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Speaker 2: the asset class and what it has to offer. And

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Speaker 2: that's what we've really sought to do, is to say, well,

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Speaker 2: if you're going to go back at buy a bank,

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Speaker 2: you know, say a bank termed pozzitor, if you want

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Speaker 2: to buy a bank hybrid, all you're really doing is

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Speaker 2: buying a package of the money that the bank has

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Speaker 2: lent to customers, earn some income, and they pay that

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Speaker 2: out to the various types of investors who invest in

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Speaker 2: their instruments. We've actually done the same thing. We've built

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Speaker 2: a portfolio of top rated managers who play in very

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Speaker 2: defensive parts of the private credit space in the US

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Speaker 2: and Europe. They generate income that then actually supports the

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Speaker 2: yield payments to investors as well as ensure and manage

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Speaker 2: to get their capital back.

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Speaker 1: And as the least investment trust, the ping gana global

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Speaker 1: private credit trust, it's accessible with small amounts of money

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Speaker 1: the point there too, So I can I don't know

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Speaker 1: about me personally, am I, but you know people like

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Speaker 1: me can go and put tens of thousands of dollars in.

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Speaker 1: You don't need to be millions putting millions in.

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Speaker 2: Yes, precisely. And what we've really what we're very excited about.

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Speaker 2: I'm glad you said that, Sean, is what we're really

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Speaker 2: excited about is we've got we've really wanted two products

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Speaker 2: to in effect try to democratize the access right because

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Speaker 2: you have institutions who can go and do this, you know,

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Speaker 2: and manage it on their own, but it's very difficult

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Speaker 2: obviously for the likes of you and need to be

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Speaker 2: able to do that without the infrastructure and the resources,

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Speaker 2: et cetera, to be able to go, be able to

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Speaker 2: identify and invest. So we've actually done two things. So

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Speaker 2: one is our listed trust, which provides access to investors.

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Speaker 2: You can go and buy it on the ASX, and

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Speaker 2: we also make it quite easy if you don't want

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Speaker 2: to trade out of it on the market because for

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Speaker 2: whatever reason, if this traded at a discount to the

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Speaker 2: underlying net asset value of the assets and the fund.

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Speaker 2: Every quarter we will make off market buyback offers to

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Speaker 2: investors for up to by percent of the outstanding units,

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Speaker 2: where if you tender into those buybacks, are able to

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Speaker 2: retrieve your capital at the net asset value at that time.

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Speaker 2: The other product that we've actually released, which are extremely

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Speaker 2: excited about, is a term account product. So the product

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Speaker 2: that we call ternplus, and what that was really born

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Speaker 2: of was, well, you have a great asset class's generating

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Speaker 2: really nice returns that are actually very stable and by

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Speaker 2: managers in a way that you know, seeks to minimize

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Speaker 2: loss and and I guess to give you a proof point,

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Speaker 2: if you look across you know, our senior direct lending

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Speaker 2: managers and our portfolio, their average net loss rates, you know,

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Speaker 2: since the GFC are twenty basis points over point two

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Speaker 2: of a percent, which is you know, some of them

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Speaker 2: have actually been zero over that period of time, so

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Speaker 2: very very defensive, you know, very stable, attractive assets. Now,

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Speaker 2: what we've done is we've been able to kind of

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Speaker 2: take that and say, okay, if you take a clean

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Speaker 2: sheet of paper and you look at all the sort

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Speaker 2: of term account products that are available for investors to

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Speaker 2: invest in, you know, how could we create something that

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Speaker 2: could deliver those attractive features to investors. So our minimum balance,

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Speaker 2: you know, the minimum investments we would require is two

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Speaker 2: thousand dollars on that but it's very quick and easy

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Speaker 2: and compliant onboarding online. You get a floating rate of

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Speaker 2: return that kind of moves with movements in the RBA

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Speaker 2: cash right, So it's it would have been, if you

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Speaker 2: think about the interest rate rises over the last eighteen months,

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Speaker 2: a great hedge against inflation. You can take your income

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Speaker 2: monthly or you can reinvest in and compare that at

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Speaker 2: the target rate, and it really is just aiming to

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Speaker 2: provide that stable income. One of the other things that

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Speaker 2: we've done with the product, right, and you have a

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Speaker 2: choice of one two in five years, is not only

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Speaker 2: do you have the defensive characteristics of the asset class,

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Speaker 2: we've also built in additional protections. And what that means

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Speaker 2: is we invest five cents in what we call a

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Speaker 2: support account. So every dollar we get from an investor,

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Speaker 2: we will invest five cents ourselves in a support account.

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Speaker 2: And what that does is it helps to support the

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Speaker 2: payment of investor's income and it also supports repayment of

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Speaker 2: their balance at maturity. You know, in certain circumstances of things,

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Speaker 2: for whatever reason, you know, don't go to plan and

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Speaker 2: so we kind of feel like with the defensive nature

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Speaker 2: of the asset, with those other built in protections, there's

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Speaker 2: a really attractive alternative of available to investors looking for

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Speaker 2: sort of you know, one two or five year and

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Speaker 2: with a lower balance like a minimum two thousand. You know,

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Speaker 2: it does make it much more accessible to the average investor.

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Speaker 1: Well, naamah, good luck with it, and thank you photoging

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Speaker 1: to Fear and Greed.

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Speaker 2: Okay, thank you very much for your time.

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Speaker 1: That was Nami Richardson, CEO of Pengana Credit, a supporter

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Speaker 1: of Fear and Greed. This is the Fear and Greed

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Speaker 1: Business Interview. Remember this is general information only and you

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Speaker 1: should always seek professional advice before making investment decisions. Join

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Speaker 1: us every morning for the full episode of Fear and

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Speaker 1: Greed business news for people who make their own decisions.

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Speaker 1: I'm Sean Elmer. Enjoy your day.