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Private markets - A beginner’s guide · The Money Puzzle

0:09
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirkby. Welcome aboard everybody. The biggest boom area in
0:17
Speaker 1: investment now, believe it or not, it's not the share market.
0:21
Speaker 1: It's the private market on listed investments, private credit, private equity.
0:26
Speaker 1: And in the recent past, you know, wealthy investors and
0:29
Speaker 1: big institutions like the Future Fund or universities made a
0:33
Speaker 1: lot of money here. The issue is it for you?
0:36
Speaker 1: What you need to know. My guest today is top
0:40
Speaker 1: rated financial advisor Charlie Viola of Viola Private Wealth. All Ai, Charlie,
0:45
Speaker 1: good times. I mean, broadly from what I gather, what
0:49
Speaker 1: I read, what we've talked about in the past, I mean,
0:52
Speaker 1: you're broadly enthusiastic about this private if I can call
0:59
Speaker 1: it a privatizer of investment, where there's much more than
1:02
Speaker 1: there used to be on the private markets for everybody.
1:06
Speaker 2: Look, we're probably more than enthusiastic about it. We were
1:09
Speaker 2: probably a very early mover in terms of using private
1:12
Speaker 2: market investments and unlisted investments for our client portfolios. And
1:16
Speaker 2: what we're very well known for in the market is
1:18
Speaker 2: making sure that we find those good quality, diverse assets
1:22
Speaker 2: for investors to allocate too. And you know, like we
1:27
Speaker 2: sort of always say we're big ones for diversity, we're
1:29
Speaker 2: big ones for the right type of asset allocation, and
1:32
Speaker 2: where we're big ones for asset quality. But I guess
1:36
Speaker 2: what's probably happened over the last I don't know, call
1:40
Speaker 2: it fifteen years, is this private market stuff has been
1:43
Speaker 2: democratized in a lot of ways. So once upon a time,
1:48
Speaker 2: this was only an area that you could get to
1:50
Speaker 2: if you were a large family office, you know, an
1:53
Speaker 2: institutional investor or a big super fund, whereas or a
1:57
Speaker 2: very high netwealth individual where you could hand or the
2:00
Speaker 2: significant lock up of the capital. What's happened over the
2:04
Speaker 2: last number of years is a lot of the funds
2:06
Speaker 2: have sort of seen the demand and the need for
2:09
Speaker 2: these types of investors, these types of investments in normal
2:13
Speaker 2: investment portfolios, and therefore they've created what we call evergreen
2:19
Speaker 2: vehicles where money can kind of go in all the time,
2:22
Speaker 2: where your money has invested straight away, and it gives
2:25
Speaker 2: normal investors access to those private markets. So we like it,
2:31
Speaker 2: you know, we think it gives investors a great way
2:33
Speaker 2: of diversifying. You know, most investors in Australia have had
2:37
Speaker 2: lots of kind of CBA and BAGP shares over their lifetime.
2:40
Speaker 2: You know, they've taken lots of kind of equity risk
2:43
Speaker 2: within their portfolios and ultimately that's done pretty well. Right
2:46
Speaker 2: Like since GFC, equity markets have basically done nothing but
2:49
Speaker 2: go up. But what we've seen is with the democratization
2:53
Speaker 2: of these private markets is now investors are getting access
2:57
Speaker 2: to all the things that they couldn't before. And as
2:59
Speaker 2: you said, before private equity, private debt, private credit, access
3:02
Speaker 2: to markets that generally were only available to really high
3:06
Speaker 2: night wealth individuals, family offices, institutional investors.
3:09
Speaker 1: Have we any reason to believe that there's better value
3:13
Speaker 1: in these markets that are understed compared to the share market.
3:18
Speaker 2: Now about it being better value, I don't think it's
3:20
Speaker 2: about diversity, and it's about it's about sort of having
3:23
Speaker 2: an uncorrelated level of risk compared to equity markets. I
3:28
Speaker 2: think lots of people will argue and their arguments are
3:30
Speaker 2: probably not that wrong that if you actually look at
3:33
Speaker 2: the last four or five years, public markets have done
3:36
Speaker 2: a heap of the heavy lifting. So you know, in
3:38
Speaker 2: the last three or four years you could have done
3:40
Speaker 2: nothing but invested you know, megacap US stocks and large
3:43
Speaker 2: cap domestic stocks in your returns would have been more
3:46
Speaker 2: than acceptable, right, they would have been ten or fifteen
3:47
Speaker 2: percent a year. It's about ensuring that you don't have
3:50
Speaker 2: all of your money is exposed to the exact same risks.
3:54
Speaker 2: It's about ensuring that you're generating your revenue flows in
3:57
Speaker 2: different ways. So in lots of ways, it's about reducing
4:01
Speaker 2: the risk in your portfolio. Some people think that when
4:03
Speaker 2: you go and invest in alternatives, and we hate the
4:06
Speaker 2: use of the word alternative, right, these are just normal
4:08
Speaker 2: assets packaged in a different way. But when you go
4:11
Speaker 2: and invest in private markets, you're taking more risk. In fact,
4:14
Speaker 2: you're reducing your risk profile because you're starting to allocate
4:18
Speaker 2: your moneys to different types of investments that perform differently
4:21
Speaker 2: at different times. So, you know, we talk to investors
4:24
Speaker 2: a lot about we will have normal public market exposures.
4:29
Speaker 2: You know, they're there to do a job in terms
4:31
Speaker 2: of producing earnings growth, producing us a bit of revenue
4:34
Speaker 2: over time, and giving us some growth. But we want
4:37
Speaker 2: other assets too. You know, we want infrastructure in our
4:39
Speaker 2: portfolio because it's a hedge to inflation. We want good
4:42
Speaker 2: quality private debt or private credit in the portfolio because
4:45
Speaker 2: it generates really good quality cash flow.
4:48
Speaker 1: I don't doubt you with your connections with your career
4:51
Speaker 1: in financial advice at the level you have been at.
4:54
Speaker 1: And folks, if you're not familiar with Charlie, he has
4:56
Speaker 1: been a long time a veteran at the operank so
4:59
Speaker 1: off the Barons Top one fifty advisors list the youngest
5:03
Speaker 1: veteran that that might actually be true. But what I
5:08
Speaker 1: want to ask you is, for most people, right this
5:11
Speaker 1: is all new and their financial advisor is flooding them
5:15
Speaker 1: with this stuff, and the market is flooding the advisors
5:18
Speaker 1: with this stuff, and I wonder, how does an advisor
5:21
Speaker 1: what are the dangers here? Like for instance, just let's
5:24
Speaker 1: just look locally. For instance, we're not most people wouldn't
5:27
Speaker 1: be used to even knowing what's going on in private equity.
5:31
Speaker 1: There was mezzanine finance and that was that kind of stuff,
5:33
Speaker 1: but it was marginal and it was, as you say,
5:34
Speaker 1: for very wealthy people. Now we have we're getting When
5:38
Speaker 1: a major private credit group like Metrics Credit Partners gets there,
5:43
Speaker 1: some of their products downgraded, it's front page news. This
5:47
Speaker 1: is because this is the early days in our market
5:51
Speaker 1: for private credit, and we're not used to seeing the
5:54
Speaker 1: ups and downs of private credit. How do you navigate
5:57
Speaker 1: that as as an investor when it's all new to you.
6:01
Speaker 2: So I think a couple of things are still really
6:03
Speaker 2: important in how you build out portfolios. Asset our location
6:07
Speaker 2: and diversity is really important. Yeah, So making sure that
6:10
Speaker 2: not all the eggs are in the same basket and
6:12
Speaker 2: making sure that you slice the pie up and you've
6:14
Speaker 2: built your portfolio out of different types of investments is
6:17
Speaker 2: really important. So the second piece is when you look
6:20
Speaker 2: at those individual sleeves that belong with your portfolios, and
6:24
Speaker 2: you have a sleeve for the private credit or private
6:27
Speaker 2: debt section, you have to understand that with that sleeve
6:30
Speaker 2: there are different types of things that make that up.
6:32
Speaker 2: So in the private credit space, it is an entire spectrum.
6:35
Speaker 2: Like it's an entire sphere of investments all the way
6:38
Speaker 2: from as you say, mezzanine secondary construction debt and then
6:43
Speaker 2: first more eage type stuff. We in our business very
6:46
Speaker 2: much use private debt private credit as a defensive end
6:49
Speaker 2: of the portfolio. We use it to producing comfort clients.
6:52
Speaker 2: So we use it. We only invest in the really
6:55
Speaker 2: defensive stuff. When you think about something like metrics, for instance,
6:59
Speaker 2: it's important you kind of look at the signals and
7:01
Speaker 2: not the noise. So the noise around it is that
7:04
Speaker 2: they that they've gone and taken over a business and
7:07
Speaker 2: suddenly they run restaurants.
7:09
Speaker 1: Yeah, they're stock with stuff, they're stop with stuff they
7:11
Speaker 1: didn't intend to hold it.
7:14
Speaker 2: And what they've done is they've had to have the
7:16
Speaker 2: debt step into the shoes at equity. But fundamentally, that
7:20
Speaker 2: process of debt becoming equity is how they actually protect
7:23
Speaker 2: their investor's capital. So Andrew Lockhart, the guy who runs Metrics,
7:29
Speaker 2: is probably one of the smartest guys in the market,
7:32
Speaker 2: does an incredibly good job in understanding how that credit
7:36
Speaker 2: actually gets put together and how he protects the investor capital.
7:40
Speaker 2: Every good private credit manager, every good private debt manager,
7:44
Speaker 2: over time we'll understand their equity, we'll understand what they're
7:47
Speaker 2: securing their debt against. It becomes incumbent upon the manager.
7:52
Speaker 2: And this is why we're big ones around manager selection.
7:54
Speaker 2: We're big ones around making sure you know who you're
7:57
Speaker 2: giving your clients money to or who you're giving you
7:59
Speaker 2: money to, because ultimately, the security that is provided becomes
8:04
Speaker 2: really important. There is this question out there that what's
8:07
Speaker 2: a higher risk investment, private credit or private equity. Private
8:11
Speaker 2: equity by nature is always going to be a higher
8:14
Speaker 2: risk investment than private credit because private credit is generally
8:18
Speaker 2: going to be asset backed. There is generally something behind
8:20
Speaker 2: it that can falled upon to actually get you your
8:25
Speaker 2: money back, or you will own something at the other
8:27
Speaker 2: end private equity again, and remember private equity is a
8:31
Speaker 2: whole other sleeve of the portfolio and it is broken
8:34
Speaker 2: up into different pieces. Is investing in something that you
8:37
Speaker 2: hope will do well over a period of time. So
8:40
Speaker 2: my message to investors and my message to advisors is
8:44
Speaker 2: make sure you are putting these in the right parts
8:46
Speaker 2: of your portfolio, and you're only holding the right amount
8:49
Speaker 2: of it, and you're asking that part of the portfolio
8:52
Speaker 2: to do a very specific job within the portfolio.
8:55
Speaker 1: Okay, Can I ask you what question with the Lemon's
8:58
Speaker 1: question really about private credit? But it comes up every time,
9:01
Speaker 1: It's very simple question. If it's so good, why does
9:05
Speaker 1: the banks do it?
9:06
Speaker 2: Do you mean, why are they non banked lenders?
9:09
Speaker 1: Why do the banks withdraw from certain businesses and private
9:12
Speaker 1: credit go in there and it's unlisted and this is
9:15
Speaker 1: a hot area now, But why do the banks retreat
9:17
Speaker 1: from this in the first piece if it's so good.
9:22
Speaker 2: Because of the regulations. So the capital required on the
9:26
Speaker 2: bank's balance sheet for the lending that they make is
9:28
Speaker 2: very different to the non bank lenders. So there isn't
9:31
Speaker 2: there isn't a space for the major banks to be investing.
9:35
Speaker 2: And what you tend to find is the non bank
9:37
Speaker 2: lenders will generally do the stuff at the beginning, and
9:40
Speaker 2: then the majors will come along afterwards when the capital
9:44
Speaker 2: requirement isn't as high. So remembering that lots of the
9:47
Speaker 2: projects that we see, you know, lots of the kind
9:50
Speaker 2: of land subdivision, is all done by non baked lending.
9:53
Speaker 2: Non bank lending is not something that's new. People have
9:56
Speaker 2: even lending other people money for you know, virtually effect
10:00
Speaker 2: hundreds of years. Right. The banks will only ever come
10:03
Speaker 2: along where their regulatory restraints and constraints are absolutely met.
10:09
Speaker 1: Okay. So it was the capital adequacy rules basically that
10:13
Speaker 1: titans what banks could do, which open this opportunity. Okay,
10:16
Speaker 1: I hear you. Now on the private equity here's the
10:18
Speaker 1: thing again. So someone saying, okay, I'm used to the
10:21
Speaker 1: share market. You know, I've always had shares. I see
10:24
Speaker 1: this area. It looks very interesting. But are you concerned?
10:28
Speaker 1: You must be, I imagine about what goes on. It's not
10:32
Speaker 1: as transparent, right, private equity as the share market. By definition,
10:35
Speaker 1: we can find out everything in the share market, we
10:37
Speaker 1: can find out the salaries of the executives. Everything in
10:40
Speaker 1: private equity we can't. And so there is this risk
10:42
Speaker 1: that they will play games behind the scenes. And I
10:45
Speaker 1: read reports all the time about what goes on and
10:47
Speaker 1: buyout funds and how buyout funds can can these days,
10:50
Speaker 1: for instance, go on forever without actually floating the asset
10:53
Speaker 1: off on the share market because they can't get them
10:56
Speaker 1: off so that they can come up with new tricks
10:58
Speaker 1: basically continuation vehicles and that sort of thing. I mean,
11:01
Speaker 1: you have to stay across all that. I'm sure what
11:03
Speaker 1: are the risks and the private equity space, which you
11:06
Speaker 1: have said in the first part of the show, is
11:09
Speaker 1: riskier anyway.
11:12
Speaker 2: Yeah, So remembering what you're wanting your private equity portion
11:15
Speaker 2: of your portfolio to do. It's your highest portion of
11:18
Speaker 2: the portfolio. You want it to generate the biggest outsized
11:20
Speaker 2: returns within the portfolio. My answer to all that is
11:23
Speaker 2: manager selection. So different managers do different things and different
11:27
Speaker 2: managers will live best money and by portfolio companies across
11:30
Speaker 2: different sectors. So we do you know, certainly in our
11:34
Speaker 2: business we have a reasonable sleeve. In the private equity sector,
11:38
Speaker 2: we work really hard around the due diligence on the managers,
11:41
Speaker 2: making sure we understand, you know, who's looking after our
11:44
Speaker 2: client money. So you are ultimately exactly right. You are
11:48
Speaker 2: backing the jockey. You're backing that manager to do a
11:51
Speaker 2: good job and make the right decisions with the capital
11:54
Speaker 2: that they've got. And remembering that private equity is kind
11:57
Speaker 2: of a homogeneous term that goes all the way from
12:00
Speaker 2: kind of seed VC, you know, buyout and pre IPO.
12:05
Speaker 2: You just need to and as you sort of go
12:07
Speaker 2: up that curve, you're effectively taking less risk. Right, So
12:11
Speaker 2: the closer you get to pro IPO, the less risk
12:13
Speaker 2: because the companies are more well known. Just make sure
12:15
Speaker 2: you understand what you're investing in, where you're investing, and
12:19
Speaker 2: generally speaking, what your line of sight to liquidity actually is,
12:24
Speaker 2: so you know, if you're investing in a VC fund
12:27
Speaker 2: that has a period like a fund where you make
12:30
Speaker 2: a capital commitment. They'll call it over three years, and
12:33
Speaker 2: they'll use it over five years, and you might not
12:35
Speaker 2: get your money back for ten or twelve. You have
12:38
Speaker 2: to be very comfortable with that. You've got to be
12:40
Speaker 2: really comfortable that your money is out being harvested for
12:43
Speaker 2: eight or ten years. If you want that capital back,
12:47
Speaker 2: you've made a bad decision in terms of the investment
12:49
Speaker 2: that you've made. Yeah, so you have to feel really
12:52
Speaker 2: comfortable with the risk that you're taking. So it's eyes
12:55
Speaker 2: wide open. But it's also about understanding, like try not
12:59
Speaker 2: to get intoxic by the returns that managers tell you
13:02
Speaker 2: they're going to produce, and understand what it is that
13:05
Speaker 2: they're investing in. We've met lots of private equity managers.
13:08
Speaker 2: In fact, we probably see a deck, you know, every
13:11
Speaker 2: other day. You've never met a dumb one. You've never
13:14
Speaker 2: met a dumb fund manager. They're all the smartest blokes
13:16
Speaker 2: of the room. So you know, understanding what you're investing,
13:20
Speaker 2: how long they're going to have your capital for, you
13:23
Speaker 2: know what sector of the market, what the risks are,
13:26
Speaker 2: and what the liquidity constraints will be is like so
13:29
Speaker 2: super important. And remember these these are intended to be
13:34
Speaker 2: Remember these are intended to be small parts of big portfolios.
13:39
Speaker 1: Okay, yeah, very good, put it in proportion. Folks. See
13:41
Speaker 1: you as part of diversification. I suppose it's a new
13:44
Speaker 1: charity to most people. Is it's a new diversification, it's
13:47
Speaker 1: a new avenue. And it's interesting that, of course your access,
13:50
Speaker 1: the access in your case at least, is strictly through
13:52
Speaker 1: managers rather than direct Okay, we'll take a short break.
13:55
Speaker 1: We'll be back in a moment. Hello, Welcome back to
14:10
Speaker 1: the Australians Money Puzzle podcast. James Kirby here with a guest,
14:14
Speaker 1: Charlie Viola, who has often been on the show. In fact,
14:16
Speaker 1: the last time he was on the show, he was
14:18
Speaker 1: so close to starting his new operation Viola Private Wealth,
14:23
Speaker 1: but he couldn't tell me. I remember, because it was
14:26
Speaker 1: literally I think it was weeks, wasn't it before you started?
14:29
Speaker 1: How long are you up and about now as a
14:31
Speaker 1: new entity? A year?
14:33
Speaker 2: Yes, yeah, so we completed on the management buyer about
14:37
Speaker 2: October last year, so we still getting you brand, you know,
14:40
Speaker 2: almost a year ago we did a management buyer though,
14:43
Speaker 2: so it was very much sort of same shop, new sign.
14:46
Speaker 2: But yeah, it's been sniting, it's been great. We're doing
14:48
Speaker 2: really well.
14:49
Speaker 1: So yes, well, of course you're unleashed. Tell me, speaking
14:53
Speaker 1: of unleashed, unleashing oneself into the world of new age investments,
14:59
Speaker 1: where do you stand on crypto?
15:01
Speaker 2: So you know, I'm probably quoted on this before that
15:05
Speaker 2: once upon a time, crypto was probably the place for
15:08
Speaker 2: you know, people that are lawned the money or it
15:10
Speaker 2: felt like a bit like a game, et cetera. The
15:12
Speaker 2: reality is that crypto probably carries a bunch of the
15:16
Speaker 2: underlying fundamentals that all currency carries. You know, it's separable,
15:19
Speaker 2: it's rare, you know, it can be used as an
15:22
Speaker 2: exchange for goods, et cetera. I think one of the
15:25
Speaker 2: I think one of the concerns with you know, crypto
15:28
Speaker 2: generally is that there's still no kind of logical use case,
15:33
Speaker 2: or at least we haven't kind of got to the
15:35
Speaker 2: answer in terms of it being a logical use case.
15:38
Speaker 2: So the thing that's driven its price over time has
15:42
Speaker 2: just been the demand, like the supply versus demand or
15:45
Speaker 2: the scarcity of it over time, so we kind of
15:48
Speaker 2: see it, you know, like I think over time it's
15:51
Speaker 2: probably started to act a bit more like a sort
15:53
Speaker 2: of digital gold proxy. You know, we still don't put
15:56
Speaker 2: it as a specific piece into client folios. We don't
16:01
Speaker 2: put gold in the client portfolios generally either unless they
16:04
Speaker 2: ask for it. You know, we're big ones for hold
16:06
Speaker 2: really good, normal traditional assets that generate revenue. And you
16:10
Speaker 2: know I said before about diversity, but you know, what
16:14
Speaker 2: we've seen is that you know, probably for the first
16:17
Speaker 2: time in the last four or five years, bitcoin and
16:19
Speaker 2: gold probably traded in lockstep over the past sort of
16:23
Speaker 2: few years, over the fast past few months. But remember
16:27
Speaker 2: that big cooin was meant to be the kind of
16:30
Speaker 2: ultimate kind of decorrelation from markets. Bgcoin really has just
16:35
Speaker 2: correlated itself to the NASDAK over the last number of years.
16:39
Speaker 2: So you know, when risk assets have gone up, it's
16:41
Speaker 2: gone up. When risk assets have gone down, it's gone down.
16:45
Speaker 1: So in your reviewer doesn't have what gould has, which
16:48
Speaker 1: is the ability to be non correlated to go up
16:50
Speaker 1: when basically when everything goes after eels God will go up.
16:55
Speaker 1: Do you think bitgoin will go down with the market basically.
16:58
Speaker 2: Yeah, correct, because it still feels like a scas set
17:00
Speaker 2: in our view. So do I think that crypto like
17:04
Speaker 2: and you know, I'm going to preserve my comments to bitcoin.
17:07
Speaker 2: Do I think bitcoin is going to disappear? No, I don't. Like.
17:10
Speaker 2: I think that it's been around for long enough. Now
17:13
Speaker 2: there's enough investors, there's enough institutional support for it. You know,
17:18
Speaker 2: we've obviously seen a bunch of these kind of exchange
17:21
Speaker 2: traded funds and kind of access vehicles created, especially in
17:25
Speaker 2: the US. The inflows into those vehicles have been just
17:29
Speaker 2: you know, off the planet over a period of time.
17:32
Speaker 2: So I don't think it'll disappear. Do I think it
17:35
Speaker 2: is what people say it is, where it is this
17:37
Speaker 2: kind of protection mechanism of your capital. I don't think
17:41
Speaker 2: that at all. Are we putting it into client portfolios
17:44
Speaker 2: as you know, the same way we would with you know,
17:47
Speaker 2: private debt or private equity or you know, public market equities,
17:51
Speaker 2: where they absolutely have to have that as part of
17:53
Speaker 2: a good diverse portfolio. We're not because we can't track
17:57
Speaker 2: the fundamentals of that class, so we don't want to
18:02
Speaker 2: expose client moneys to it.
18:04
Speaker 1: Just one nase thing which I'm deeply intrigued by. At
18:06
Speaker 1: least there is now crypto going back into gold. There is,
18:13
Speaker 1: for instance, gold backed crypto there is deeply intriguing Teather,
18:19
Speaker 1: which is one of the very biggest so stable coin
18:21
Speaker 1: groups buying gold miners. So it's like they are, well,
18:26
Speaker 1: what do you think they're doing?
18:30
Speaker 2: Yeah, I don't know. I mean, I think in reality
18:33
Speaker 2: what you're seeing is just sort of an increase in
18:35
Speaker 2: relevance because of the size of the crypto market. So
18:38
Speaker 2: I think I've read somewhere the other day that the
18:40
Speaker 2: crypto market and bitcoin alone is the eighth largest global
18:43
Speaker 2: asset by market cap. So now what you've got is
18:46
Speaker 2: you've got a number of really smart people, you know,
18:49
Speaker 2: these kind of beautiful mind type people who are putting
18:51
Speaker 2: together derivative style arrangements to try and back the underlying
18:55
Speaker 2: growth and bad asset class over time. And you know,
18:59
Speaker 2: whenever it it's momentum, you find that it continues to
19:02
Speaker 2: grow quite quickly. And you know, the bitcoin market cap
19:06
Speaker 2: is bigger than better right now, right, So there's obviously
19:09
Speaker 2: a level of relevance. There's a level of relevance there.
19:12
Speaker 2: So in terms of kind of you know, are we
19:15
Speaker 2: a picks and shovels or should we be buying the
19:18
Speaker 2: asset itself. Look, I think we've probably swayed over time
19:22
Speaker 2: on that. You know, we were at picks and shovels
19:24
Speaker 2: type business where we like those operating businesses that we're
19:27
Speaker 2: generating revenue as a result of going in mining the bitcoin.
19:31
Speaker 2: You now, I think if you want the exposure to it,
19:33
Speaker 2: because you believe it's going you know, if you believe
19:35
Speaker 2: the harving theory, you believe it's going to keep going up,
19:37
Speaker 2: they just go and buy it and you kind of
19:39
Speaker 2: hope for the best. But again, make sure it's very
19:41
Speaker 2: small parts of your overall wealth position. So and don't
19:45
Speaker 2: forget those people who got really rich off this stuff.
19:48
Speaker 2: They are the absolute exception. They're not the rule. Like,
19:52
Speaker 2: just because one blow boarded at four dollars and now
19:54
Speaker 2: it's one hundred and sixteen thousand or whatever the price is,
19:57
Speaker 2: that's not going to generally happen for most people. Right,
20:00
Speaker 2: You've got to get away from the noise associated with that.
20:04
Speaker 1: Okay, very interesting, Charlie, And there is that theory of
20:06
Speaker 1: course that the paradox for a lot of investors is
20:10
Speaker 1: that as it does become mainstream, its volatility lessons and
20:15
Speaker 1: the days of it doubling overnight are probably gone. Where
20:19
Speaker 1: that was happening, you know easily in the early days.
20:21
Speaker 1: All right, okay, terrific. Now I've got some great questions
20:23
Speaker 1: that kept for you. Stay with us. We'll be back
20:25
Speaker 1: in a second. Hello, Welcome back to The Australian's Money
20:37
Speaker 1: Puzzle podcast, James Kirkby with Charlie Viola. A couple of questions. Carl,
20:42
Speaker 1: I was watching the news. I noticed PHP shares fell
20:45
Speaker 1: after going ex dividend. It makes me wonder whether there's
20:48
Speaker 1: a broader pattern of shares losing value after going X dividends.
20:52
Speaker 1: Do you know if there's any research on this phenomenon, Carl,
20:56
Speaker 1: there's buckets of research on it.
20:57
Speaker 2: It's probably not a phenomenon. Cal Simply what's happening is,
21:01
Speaker 2: obviously all of the profits have been banked up in
21:03
Speaker 2: the company and then they've paid them out, so naturally
21:05
Speaker 2: it's going to go down in value when you obviously
21:07
Speaker 2: pay those out. So it's the theory of kind of
21:10
Speaker 2: you know, the company breathes in, it creates all the profit.
21:14
Speaker 2: It then has a dividend policy to pay that out
21:16
Speaker 2: to investors. It pays it out, and naturally the share
21:18
Speaker 2: price goes down as a result of the dividend being
21:20
Speaker 2: paid out. So and that's why you'll find that generally,
21:25
Speaker 2: you know, we talk about cumulative share price and then
21:28
Speaker 2: X ex dividend ex dividend price being the share price
21:32
Speaker 2: after the dividends being paid.
21:33
Speaker 1: So yes, so that's basically it's simple maths. And remember
21:37
Speaker 1: this is not advice information only, but if HP was
21:40
Speaker 1: worth X plus five and they had a dividend payout
21:43
Speaker 1: and it was five, well then they've dropped the five.
21:45
Speaker 1: So you can see that's how it goes. Do you
21:48
Speaker 1: have this team? Was it a common dividend ex dividend?
21:50
Speaker 1: Wasn't that it? You don't hear it very often anymore.
21:52
Speaker 1: But basically it's it's simple match. There's less money in
21:55
Speaker 1: the company than there was because they've paid out the dividends,
21:58
Speaker 1: so so the value drop. It's no mystery and no
22:02
Speaker 1: dok secots. Basically, it's entirely conventional but has been happening
22:06
Speaker 1: for a lot. A lot always happens. It's just worth
22:08
Speaker 1: knowing how it happens. Thank you, Carl. Very good question. Okay, Steve,
22:13
Speaker 1: I have a quick question. If you were aiming to
22:16
Speaker 1: buy the five best run, best value stocks across five industries,
22:21
Speaker 1: and you'd already identified them, would you also apply financially,
22:25
Speaker 1: What would you apply financial ratios to gain a deeper understanding,
22:29
Speaker 1: and if so, what are the key ratios you would
22:31
Speaker 1: want to apply. Well, it's interesting, we were talking most
22:34
Speaker 1: of the show about unlisted investments, but I imagine the
22:37
Speaker 1: key ratios are nearly they are universal really in some
22:42
Speaker 1: respects to all businesses.
22:44
Speaker 2: But generally speaking, the way that you value an unlisted
22:47
Speaker 2: investment or an unlisted company is the exact same way
22:50
Speaker 2: that you would value a listed company. To come up
22:53
Speaker 2: with what is kind of a fair valuation offered. Market sentiment,
22:57
Speaker 2: you know, drives the prices outside of those fair valuations,
23:00
Speaker 2: but you know, Steam's right. Ratio analysis in our should
23:04
Speaker 2: be part of any good company specific due diligence that
23:07
Speaker 2: you do, because it gives you that ability to sort
23:09
Speaker 2: of do the like for like. So I don't think
23:12
Speaker 2: any analyst in the market, and you know I'm not
23:14
Speaker 2: an analyst, but the way our CEO sort of talks
23:17
Speaker 2: all the time is, you know, looking at the EBADA
23:21
Speaker 2: margin or EBADA to revenue or the price to earnings ratio,
23:25
Speaker 2: et cetera. Is used in the valuation of every company,
23:28
Speaker 2: and really it's the only way that you can get
23:31
Speaker 2: a like for like if you're comparing I don't know,
23:34
Speaker 2: Woolworth's to d HP or Woolworths, BHP and CBA, three
23:38
Speaker 2: stocks that are probably in everybody's They've got different drivers
23:42
Speaker 2: of revenue, but the thing that's the same is what
23:45
Speaker 2: is their their revenue to their profit? What is their
23:48
Speaker 2: profit to their price? And that'll give you an indication
23:51
Speaker 2: as to how expensive that company is when you're going
23:54
Speaker 2: in and buying it.
23:55
Speaker 1: And the managers you use in the private equity space
23:59
Speaker 1: and the on list, can they get those numbers as
24:02
Speaker 1: easy as they can from a stock.
24:05
Speaker 2: You would think that, and certainly the private equity managers
24:07
Speaker 2: that we talk to, you know, obviously they're looking at
24:10
Speaker 2: they're looking at profit and loss statements, they're looking at
24:13
Speaker 2: balance sheets, they're having a look at earnings, they're normalizing
24:15
Speaker 2: those earnings over time, and therefore they're coming up with
24:18
Speaker 2: what the EBIDA numbers are and then they're applying a
24:21
Speaker 2: multiple to that. And generally speaking, the private market multiples
24:25
Speaker 2: are lower than the public market multiples will be. Which
24:28
Speaker 2: is why ultimately the theory is a value in going
24:31
Speaker 2: and being becoming a listed company because in the unlisted market.
24:35
Speaker 2: You know, depending upon what it is, it might have
24:37
Speaker 2: a eight to twelve times multiple where in the listed
24:40
Speaker 2: market because generally capital is there for a lot longer,
24:43
Speaker 2: it'll trade at you know, eighteen to twenty two times,
24:45
Speaker 2: for instance.
24:46
Speaker 1: So that's the ascendency basically into the blue sky of
24:50
Speaker 1: the wider public markets. And that's the game, really, isn't
24:53
Speaker 1: it to move them through.
24:54
Speaker 2: You make the point before about opacity or the opaque
24:57
Speaker 2: nature of private equity. It's the manager's job to understand
25:03
Speaker 2: the p and L and the balance sheet of the
25:04
Speaker 2: company that they're buying and making sure that everything there
25:07
Speaker 2: is real and true, because the regulatory and compliance overlay
25:12
Speaker 2: for a for a private company is not the same
25:15
Speaker 2: as it is for a public company. You lie with
25:18
Speaker 2: the you live with the p and L and the
25:19
Speaker 2: earnings numbers. On a public company, you go to jail,
25:22
Speaker 2: you lie on a private company, and you know the
25:24
Speaker 2: reality is that the outcomes probably aren't that bad. So
25:28
Speaker 2: you know, it is innate in the managers and the
25:31
Speaker 2: private equity guy's job to actually understand what they're looking
25:35
Speaker 2: at and really interrogate where those earnings are coming from
25:38
Speaker 2: and who the customer base is, and what the subscription
25:41
Speaker 2: numbers are and whatever else it is that sort of
25:43
Speaker 2: drives that company.
25:44
Speaker 1: Okay, very good, really interesting, deep down over there into
25:49
Speaker 1: the unlisted market space. Thanks very much Charlie Bila for
25:52
Speaker 1: coming on the show today.
25:54
Speaker 2: Always lovely to be here.
25:56
Speaker 1: Great to talk to you again, and we'll have you
25:58
Speaker 1: on again soon. That was Charlie Vierl of the Ola
26:00
Speaker 1: Private Wealth, who is of course a financial advisor, now
26:04
Speaker 1: leading a financial advice group of his own. Okay, folks,
26:07
Speaker 1: let's have some more emails the money puzzle at the
26:10
Speaker 1: Australian dot com dot au. Talk to you soon,