Latest / The Money Puzzle / Private equity - Are you getting the crumbs from the table?

Transcript

Private equity - Are you getting the crumbs from the table? · The Money Puzzle

0:10
Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast.
0:13
Speaker 2: I'm James Kirby. Welcome aboard everybody.
0:15
Speaker 1: These are good times. You know them when you see them, right.
0:18
Speaker 1: We have red hot markets. We really do, share markets
0:21
Speaker 1: on listed markets, improving property markets even. But you really
0:25
Speaker 1: must be careful about what's put in front of you, okay,
0:29
Speaker 1: and what products are put in front of you, and
0:31
Speaker 1: what notions and schemes are put in front of you,
0:34
Speaker 1: because when you're at the top of a market, and
0:37
Speaker 1: we are at the top of a bull market. We
0:39
Speaker 1: don't know how long this will last. No one knows,
0:43
Speaker 1: but it is clear that we are in a distinct
0:47
Speaker 1: bull phase, a quality bull phase, I see they like
0:50
Speaker 1: to call it. At the moment, you can argue that
0:52
Speaker 1: one if you like. But my guest today is an
0:55
Speaker 1: independent financial advisor, Andy Daruk, and he had.
1:00
Speaker 2: Previously worked for Deloitte.
1:01
Speaker 1: He's worked from a quarry and then he struck out
1:03
Speaker 1: on his own with his own company, which whose name
1:06
Speaker 1: he will give us in a moment, because it's just
1:09
Speaker 1: passed me by and he is going to talk to us,
1:11
Speaker 1: I hope. With his trademark frankness and occasional streak of
1:15
Speaker 1: mischievous humor. Certainly that comes up on your social media activity.
1:19
Speaker 2: Andy, how are you very well?
1:21
Speaker 3: Thanks, James, glad to be here. And I run my
1:23
Speaker 3: own business called Independent Wealth of.
1:25
Speaker 2: Vice, Independent Wealth Advice.
1:28
Speaker 1: There is a very original, creative name, imaginative. So now
1:36
Speaker 1: one of the reasons I want to talk to you
1:38
Speaker 1: because it is difficult. Actually, you know the independent financial advisors.
1:43
Speaker 1: I can bring in top advisors. I can get any
1:45
Speaker 1: of them in here, and they'd have a house view. Okay,
1:48
Speaker 1: so they're in this big operation. It's a machine, and
1:51
Speaker 1: they've got billions under management and there's a house view, right,
1:55
Speaker 1: So they're really careful about what they say. And one
1:58
Speaker 1: of the reasons they have to be so careful is
1:59
Speaker 1: that they might contradict another partner perhaps etc. But what
2:04
Speaker 1: I like about the botterly independent advisor is they have
2:07
Speaker 1: that freedom to speak on any issue. Now, first of all, actually,
2:12
Speaker 1: even before we start, what did you think of what
2:15
Speaker 1: I said there about a board market? Maybe it's quality
2:18
Speaker 1: board market, I don't know. Do you think we're at
2:21
Speaker 1: the opper fees.
2:24
Speaker 2: Of a board market?
2:26
Speaker 3: Find me someone who knows, and I'll find someone over
2:29
Speaker 3: confident who doesn't know what they're talking about. I mean,
2:31
Speaker 3: like you say, everything is at all time highs and
2:34
Speaker 3: it doesn't matter where you look, listed, unlisted property, gold
2:38
Speaker 3: even so I don't know what else you could call
2:41
Speaker 3: it but an exuberant bullmarket. And whether it keeps going,
2:46
Speaker 3: no one knows, whether it plateaus, whether we get a correction,
2:49
Speaker 3: nobody knows. But one thing's for certain. There is a
2:53
Speaker 3: huge amount of money sloshing around in the world and
2:55
Speaker 3: it's finding its way into assets.
2:58
Speaker 1: Yes it is, and obviously risk acids being particularly popular.
3:02
Speaker 1: Though interestingly contradiction to that is the enthusiasm around gold.
3:07
Speaker 2: I want to talk to you.
3:08
Speaker 1: One of the things that floods my desk, and I
3:12
Speaker 1: imagine floods your desk is this theme of the unlisted right,
3:19
Speaker 1: unlisted funds, private equity, private credit. And yes, this has
3:26
Speaker 1: been very successful from major super funds and high network individuals.
3:31
Speaker 1: That success is now percolating through the system, not to
3:34
Speaker 1: success for mom and dad investors, but to access from
3:38
Speaker 1: mom and dad investors. I had Charlie Viola on the
3:43
Speaker 1: show and he was actively defending I don''t even say
3:48
Speaker 1: defending right, describing why he is enthusiastic for that area,
3:54
Speaker 1: defending metrics credit partners in particular, which was interesting because
3:58
Speaker 1: they are in a spot of trouble at the moment, and.
4:01
Speaker 2: So are other groups in this area.
4:03
Speaker 1: Latrobe for instances also, I think we could fairly see
4:06
Speaker 1: in the spot of trouble. But what I want to
4:08
Speaker 1: ask you is, so his point of view was this
4:11
Speaker 1: is a good area if you know what you're doing.
4:15
Speaker 2: What's your view on that.
4:17
Speaker 3: I'd probably take the other side of the equation, so
4:21
Speaker 3: I could accept the argument that, yeah, there are returns
4:25
Speaker 3: to be made, there's premiums to be harvested, in efficiencies
4:29
Speaker 3: to be capitalized, et cetera, et cetera. I'd say almost
4:33
Speaker 3: no one actually knows what they're doing in that space.
4:36
Speaker 3: There is just a chasm between what institutional investors get
4:42
Speaker 3: and what even ultra high net worth investors get. I'd
4:46
Speaker 3: also say that there is a huge difference between the
4:51
Speaker 3: incentives of the managers themselves in both of those individual classes,
4:56
Speaker 3: meaning private equity in private credit, and the investors. And
5:00
Speaker 3: then what just adds fuel to that already quite pretty
5:03
Speaker 3: big fire is the fact that liquidity is a major concern.
5:08
Speaker 3: Fees are a major concern. The opaqueness and byzantine structures
5:13
Speaker 3: and encountering chicanery are major concerns. And then you've also
5:18
Speaker 3: kind of got this situation. Where to put it crudely,
5:21
Speaker 3: I think often retail and even wholesale investors are used
5:25
Speaker 3: as exit liquidity. Probably the biggest, most talked about, most
5:29
Speaker 3: written about, most prevalent problem with private equity at the
5:32
Speaker 3: moment is getting these assets out of the funds. And
5:36
Speaker 3: you're just seeing that globally, so, whether it's continuation funds,
5:42
Speaker 3: the death of the IPO pipeline, just you know, inability
5:45
Speaker 3: to get assets off at the values that they're carried.
5:48
Speaker 3: All of this is very problematic when you bring it
5:51
Speaker 3: into individual investors and you try and slice and dice
5:54
Speaker 3: these things into very much more marketable parcels.
5:59
Speaker 2: I really don't.
6:01
Speaker 1: Like the sound of a continuity.
6:06
Speaker 3: Via continuation fund. Yeah, and again like these.
6:11
Speaker 1: You explain to the listeners what it is, and can
6:13
Speaker 1: you experience to the listeners why it's sort of almost
6:15
Speaker 1: anathema to a conservative investor because because probably undested, the
6:20
Speaker 1: whole thing was you fixed it up and then you
6:22
Speaker 1: fliltered it, and the floating on the stock market, if
6:25
Speaker 1: nothing else was the confirmation that the company.
6:28
Speaker 3: Had improved exactly right. So like you can argue what
6:32
Speaker 3: a house in Sydney or Melbourne is worth, but you
6:35
Speaker 3: can have a pretty good idea of it because there's
6:37
Speaker 3: hundreds or thousands being sold every day. You can't dispute
6:40
Speaker 3: what a single share in CBA is worth. With private equity,
6:44
Speaker 3: businesses are more esoteric. So I might have a you
6:48
Speaker 3: insert any kind of company, and I might say it's
6:50
Speaker 3: worth X million dollars, But unless someone's willing to pay
6:53
Speaker 3: for it, you know that there's an argument whether I'm
6:56
Speaker 3: over or undervaluing it. Now, this is where incentives come
7:00
Speaker 3: back into the piece as well. So private equity managers
7:03
Speaker 3: and there are thousands of them. They have varying fee structures,
7:08
Speaker 3: but they're incentivized to carry those assets at high values
7:11
Speaker 3: and that's all well and good unless they're not able
7:14
Speaker 3: to sell them at those values. So typically the way
7:17
Speaker 3: these things work is a private equity manager might raise
7:21
Speaker 3: X million or billion dollars for a fixed term, and
7:25
Speaker 3: so they'll typically have five, seven, ten year terms and
7:28
Speaker 3: the idea is they'll go out find a bunch of businesses,
7:31
Speaker 3: buy them, typically fill them up with debt fix them up,
7:35
Speaker 3: apply their razzle, dazzle, get some master of the Universe
7:38
Speaker 3: management consultant in and sell it at a profit. Now,
7:43
Speaker 3: since that has become in vogue, I think one argument
7:47
Speaker 3: is that there's a lot more people hunting these things,
7:51
Speaker 3: so there's a lot more but less bargains to be had.
7:54
Speaker 3: And then fundamentally as well, a continuation fund, which again
7:58
Speaker 3: we're seeing because at the end of this ten year period,
8:01
Speaker 3: many funds either aren't or won't sell the companies that
8:05
Speaker 3: they own, and that might be an inability to do so,
8:09
Speaker 3: or commonly, it might be the fact that they're waiting
8:12
Speaker 3: to get the full value realized from the business. I'm
8:15
Speaker 3: sure there's plenty of examples where it's completely bona fide,
8:18
Speaker 3: but more and more you're seeing fund AI that had
8:22
Speaker 3: a ten year time frame being squished into fun Bee
8:25
Speaker 3: that's got another ten year time horizon. And one of
8:29
Speaker 3: the problems here, one of the biggest problems is fees,
8:32
Speaker 3: because private equity managers really do layer on the fees
8:36
Speaker 3: or they have the ability to, and they come in
8:39
Speaker 3: amazing array of things, so consulting fees, they might have
8:42
Speaker 3: debt origination fees. You might also have funds that are
8:46
Speaker 3: kind of playing both sides because almost always these transactions
8:49
Speaker 3: involve debt, and commonly with some of the bigger houses,
8:53
Speaker 3: particularly out of the States, you've got them kind of
8:55
Speaker 3: operating on both sides of the ledger. So all of
8:58
Speaker 3: this kind of isn't ideal. But if it's making plenty
9:02
Speaker 3: of money for investors, it's fine. But now we're kind
9:05
Speaker 3: of saying that the liquidity paces really come to the
9:07
Speaker 3: fore and basically investors in some cases aren't getting their
9:11
Speaker 3: money back as quickly as I would like, and they
9:13
Speaker 3: don't have access to it, which is problematic for a
9:16
Speaker 3: number of reasons.
9:18
Speaker 1: So once upon a time, the deal was as private
9:21
Speaker 1: until it became public. So you put the money in
9:24
Speaker 1: for five years, and these funds they bought whatever, you know,
9:29
Speaker 1: the airline that had got into trouble, the department store
9:31
Speaker 1: that had got into trouble, and then five years later,
9:33
Speaker 1: guess what it floated on the stock market. And whether
9:36
Speaker 1: that was a dog of a stock or a great
9:38
Speaker 1: stock didn't really matter. The point was they got it
9:40
Speaker 1: away and that was the confirmation. The continuity vehicle disturbs
9:45
Speaker 1: that almost like extremely long running principle and says Actually,
9:53
Speaker 1: you know what, don't worry about it. We can trade,
9:56
Speaker 1: we can find you a buyer, and here's the here
10:00
Speaker 1: medical value, but it remains unlisted. I presume their defense, Andy,
10:04
Speaker 1: is it's a new liquidity, so don't worry about it.
10:09
Speaker 3: Yeah, I couldn't tell you what. And I'm sure there's
10:12
Speaker 3: a range of different arguments. And I suppose it pays
10:15
Speaker 3: to understand there's different investors, right, and also it pays
10:19
Speaker 3: to understand what's the smart money doing. So what's the
10:22
Speaker 3: top end of town doing. And I think something that
10:24
Speaker 3: caught a lot of headlines in the last twelve eighteen
10:28
Speaker 3: months is that US college endowments typically don't have a
10:32
Speaker 3: lot of liquidity needs. So they're really well suited to,
10:35
Speaker 3: you know, giving someone a big pot of money and
10:37
Speaker 3: letting it run for quite a while because they don't
10:39
Speaker 3: typically need access to it, and they're typically quite savvy investors.
10:44
Speaker 3: I mean a lot of people that manage these funds
10:45
Speaker 3: tend to come out of Ivy League schools, so you'd
10:48
Speaker 3: argue that they're quite clued in. So both Yale and
10:52
Speaker 3: Harvard made headlines when they opted to redeem. Depending on
10:56
Speaker 3: the reports you read in the time at which you
10:58
Speaker 3: read them, you know, at least half or up to
11:01
Speaker 3: the entire amount that they hold in private equity, which is,
11:04
Speaker 3: you know, in Yale's case, if I recall correctly, something
11:07
Speaker 3: like six billion dollars. And incidentally, Yale are regarded as
11:12
Speaker 3: the start of portfolio management, where you do put a
11:15
Speaker 3: chunk in you know, domestic shares and a chunk in
11:17
Speaker 3: international and so on and so forth. David Swenson, their
11:21
Speaker 3: CIO is kind of regarded as you know, coming up
11:23
Speaker 3: with what was called the Yale model. So just the
11:26
Speaker 3: fact that they're you know, one of the investors that's
11:29
Speaker 3: out there saying, hey, we want to get out of
11:31
Speaker 3: this asset class is quite interesting. And I suppose it
11:34
Speaker 3: doesn't have to be the end of the world kind
11:36
Speaker 3: of thing. It's more it more just might come back to, hey,
11:39
Speaker 3: if I'm giving someone, you know, all this money, I'm
11:42
Speaker 3: foregoing my liquidity, I'm paying sometimes quite egregious fees. And
11:46
Speaker 3: typically these companies are quite geared up too, so one
11:49
Speaker 3: could make the argument that they do carry slightly more
11:52
Speaker 3: risks than just the average stock market, and they're also
11:55
Speaker 3: more concentrated. You might say, well, hang on, I don't
11:57
Speaker 3: think I'm getting renumerated appropriate for the risks I'm taking.
12:01
Speaker 3: And I think that's the kind of jungle, the drum
12:04
Speaker 3: beat that we're seeing in private equity at the moment.
12:07
Speaker 1: So you're saying that the point you making, I suppose
12:09
Speaker 1: is that the endowment funds, by the time everyone found
12:12
Speaker 1: out just how successful they had been in private equity,
12:16
Speaker 1: they were getting outs just as mom and Dad are
12:18
Speaker 1: going in. And when I say just about that, I'm
12:21
Speaker 1: referring to a flood of retail products in this area
12:24
Speaker 1: and advertisements in this area that everybody would be seeing.
12:28
Speaker 1: So do you see any place for it at all
12:30
Speaker 1: in smsfs or in just at retail investment portfolios?
12:34
Speaker 3: Truthfully, I don't. I think it's one of those ones
12:38
Speaker 3: that twenty years ago there was probably a lot more
12:41
Speaker 3: low hanging fruit to be harvested. I think if you're
12:45
Speaker 3: a big institutional investor, you can seek out the top performers.
12:49
Speaker 3: A lot of people will say that private equity and
12:51
Speaker 3: private credit as well as one of these things that
12:54
Speaker 3: the very top performers really do leave their peers behind.
12:57
Speaker 3: The analogy that I usually give to people and some
13:00
Speaker 3: might say a hyperbolic and that's fine, but I'd say
13:03
Speaker 3: that if you know, private equity was the pizza by
13:07
Speaker 3: the time it makes it down to the individual investor,
13:10
Speaker 3: Mom and Dad, SMSFS, high net worth whatever, I'd argue
13:13
Speaker 3: that you're not only not just getting the crust, you're
13:16
Speaker 3: probably getting the cheese stuck to the top of the
13:19
Speaker 3: box because all that good stuff has just been nibbled
13:23
Speaker 3: because the amount of palms you know, that need to
13:25
Speaker 3: be greased between X y Z manager overseas and individual
13:30
Speaker 3: investors see down the bottom are a lot. And then
13:34
Speaker 3: fundamentally as well, these things are complicated. They're extremely complicated.
13:38
Speaker 3: They're often filled with debt, they're often cross border, all
13:41
Speaker 3: these kinds. They are more complicated than just in equity
13:43
Speaker 3: fund where I know I've got liquidity, I know I
13:46
Speaker 3: can see what the manager is doing, I know that
13:49
Speaker 3: they're very transparent about the fees that they charge in
13:52
Speaker 3: the conflicts of interest versus private equity is by definition
13:56
Speaker 3: and design a lot murkier, a lot more opaque. And
14:01
Speaker 3: you know where we are today, where there's a lot
14:04
Speaker 3: of dead there's been a lot of funds launch. I
14:07
Speaker 3: think it's fair to say that we're just over the
14:10
Speaker 3: tip of peak private equity, and I'd say that it's
14:13
Speaker 3: not something that the average investor can get a good
14:16
Speaker 3: deal out of, in my opinion.
14:17
Speaker 2: Okay, terrific.
14:20
Speaker 1: And on top of that, folks, just in case you
14:22
Speaker 1: weren't skeptical by now, and of course those good deals
14:25
Speaker 1: and of course those good funds, and of course those winners.
14:28
Speaker 1: I think Andy's point is that there's going to be
14:30
Speaker 1: a lot of losers. Not the point, of course, which
14:33
Speaker 1: is absolutely crucial, is that if we get a crash,
14:38
Speaker 1: private equity will crash. It will crash in its own way,
14:41
Speaker 1: in its own time. The difference is you can't get
14:44
Speaker 1: your money out or if you can get like, you know,
14:46
Speaker 1: ten cents in the dollar.
14:47
Speaker 2: We'll take a break, we'll be back in a moment.
14:57
Speaker 1: Hello, Welcome back to the Australians Money Puzzle podcast. I'm
15:01
Speaker 1: talking to Andy Dorock. He's been on the show before.
15:03
Speaker 1: It's been a while. Sorry I left it so long, Andy,
15:06
Speaker 1: but we've got a chance to get you on again today.
15:08
Speaker 1: We don't want to be utterly sort of one way
15:11
Speaker 1: negative here. So you're skeptical about these products. In fact,
15:15
Speaker 1: you're quite skeptical about money products funds in particular, fashionable
15:20
Speaker 1: funds that come out that might be one sort of
15:23
Speaker 1: another listed equities at least I should say licks, right, licks.
15:28
Speaker 1: But I want to ask you then, what are you
15:31
Speaker 1: enthusiastic about it? As an advise, I commend to you
15:33
Speaker 1: and I say, hey, you know, times are pretty good.
15:35
Speaker 1: I want in why would you god me?
15:39
Speaker 3: Well, I'm going to answer with the least sexy, most
15:43
Speaker 3: boring answer, and truthfully, I think we're kind of in
15:46
Speaker 3: the golden age of big super And I'm an ex stockbroker,
15:51
Speaker 3: so I'm programmed against this statement. But I think index
15:54
Speaker 3: ETFs I think if you look around, so going back
15:57
Speaker 3: to what we're discussing earlier, and you're right, I was
15:59
Speaker 3: a born cynic. I'm a very lucky person. But you know,
16:02
Speaker 3: whilst there is a lot of you know, these complicated
16:05
Speaker 3: products like private equity et cetera, I think it's hard
16:08
Speaker 3: to get a good deal. I think the big institutions
16:10
Speaker 3: in Australia probably do the best work of anyone globally
16:14
Speaker 3: at getting really good investments at really low prices and
16:19
Speaker 3: put lots of different eggs in lots of different baskets.
16:21
Speaker 3: So I'd honestly just add the industry funds I think
16:25
Speaker 3: have just pointed out how dominant they are at designing
16:29
Speaker 3: investment portfolios and delivering good returns. And then outside of
16:33
Speaker 3: that is again being a you know, someone who's spent
16:36
Speaker 3: more than a third of his life trying to work
16:39
Speaker 3: in active investment management in some way, shape or form.
16:42
Speaker 3: I think that we're kind of coming into a new
16:44
Speaker 3: paradigm where index investing is really going to show its stripes.
16:48
Speaker 3: And I just adore Victor Schwetz of Macquarie, and he
16:52
Speaker 3: recently did a speech where he was basically talking about, like,
16:55
Speaker 3: how do you invest in a market like today right
16:57
Speaker 3: where you've got something like planet here just taking a
17:00
Speaker 3: company complete random trading, it just imaginary multiples.
17:04
Speaker 1: Which which is currently been shortened by Michael Bury of
17:07
Speaker 1: oh short theme worth mentioning.
17:10
Speaker 3: One hundred percent, and you wouldn't want And now it's
17:12
Speaker 3: not a great time to be a shorter, like, for instance,
17:15
Speaker 3: we've got John Hampton here in Sydney, who's globally regarded
17:18
Speaker 3: as one of, if not the best, you know up
17:21
Speaker 3: there with the top short sellers, and you know, Jim
17:23
Speaker 3: Chainos and all the rest. It's a horrific time in
17:27
Speaker 3: society to be a short seller because again you've just
17:30
Speaker 3: got this wall of money, and you know, take Michael
17:33
Speaker 3: Bory for example, like Jim Chaine, it's a very famous
17:36
Speaker 3: short seller, has been sitting there agitating for the death
17:38
Speaker 3: of Tesla for years, and you could not come up
17:42
Speaker 3: with a company that's got uglier financial metrics or a
17:46
Speaker 3: more you know, more combative model at generating money. And
17:50
Speaker 3: yet here it is still persevering. It still I wouldn't
17:54
Speaker 3: accuse it of being a magnificent company, but it's included
17:56
Speaker 3: in the mag seven. So you kind of take that
17:59
Speaker 3: lens and you go, all right, what can I do?
18:01
Speaker 3: And fundamentally you want to diversify because again you are
18:06
Speaker 3: seeing returns spread out globally but really concentrated in the
18:11
Speaker 3: US at the moment, So you really want to diversify offshore.
18:15
Speaker 3: And then I think the best way to do that
18:17
Speaker 3: is just via index ETFs if we're talking outside of Super,
18:22
Speaker 3: inside of Super. I do think that the industry funds,
18:25
Speaker 3: with their kind of model of being able to access
18:28
Speaker 3: that top flight investments overseas, but also having the gift
18:31
Speaker 3: and somewhat curse of just ongoing contributions, allows them to
18:36
Speaker 3: play in these unlisted spaces, they can buy infrastructure assets.
18:40
Speaker 3: I'd say they're probably the best designed to whether the
18:43
Speaker 3: biggest threat we're all facing at the moment, which is inflation,
18:47
Speaker 3: you know, by virtue of real assets and inflation link
18:50
Speaker 3: leases and all these kinds of things, of all manner
18:52
Speaker 3: of properties underneath their bonnets. So those are two that
18:55
Speaker 3: I'm quite positive on. I would love to see a
18:58
Speaker 3: return of the short seller and market fundamentals. But if
19:03
Speaker 3: you're trying to pick stocks on fundamentals, good luck to here.
19:05
Speaker 3: I mean, look at the domestic market here.
19:08
Speaker 2: Yes, I see some value investors drifting. I put it
19:11
Speaker 2: that way.
19:11
Speaker 1: That's for sure after a many years. But tell me,
19:15
Speaker 1: apart from those, what else do you like.
19:17
Speaker 3: I'd invest in our therapists that caters exclusively to value managers.
19:21
Speaker 3: I think they'd be doing a good trade at the moment. Yeah,
19:24
Speaker 3: So outside of that, I think cash It really comes
19:27
Speaker 3: back to when you look at everything at the moment,
19:29
Speaker 3: everything's at all time highs, and so you know, all
19:32
Speaker 3: these acronyms get thrown around. I think one that came
19:35
Speaker 3: up years ago and it's really proof that it's not
19:38
Speaker 3: going anywhere is the TEENA trade. There is no alternative.
19:41
Speaker 3: So if we think about like what's gotten us to
19:43
Speaker 3: where we are, I mean, some people might argue its
19:47
Speaker 3: earnings growth. I'd probably dispute that. I think it's that
19:49
Speaker 3: we've just had a wall of money come at markets,
19:53
Speaker 3: particularly since COVID. You just look at you know, global
19:57
Speaker 3: money growth M two. However you want to measure it,
20:00
Speaker 3: it's enormous and it is flowing into financial assets of
20:03
Speaker 3: all regards. And so I would say that just diversification
20:07
Speaker 3: is your best friend in the context that you don't
20:09
Speaker 3: just want to bet on one single sector or geography
20:12
Speaker 3: or currency. You really want to spread it far and wide,
20:14
Speaker 3: because fundamentally as well, everything brings something to the table
20:18
Speaker 3: in one shape, one way, shape or form. So Europe's
20:21
Speaker 3: got its positives, it's got plenty of negatives as well,
20:23
Speaker 3: Japan the same, Australia the same, US, et cetera, et cetera.
20:28
Speaker 3: So I think it's one of these things that now
20:30
Speaker 3: more than ever, you really want to invest in a
20:32
Speaker 3: really cold shower and a bit of patience. You really
20:36
Speaker 3: want to make sure you're as well diversified as possible.
20:39
Speaker 3: And then the best way to play that is by
20:41
Speaker 3: making sure that you're invested in as many things that
20:43
Speaker 3: you can access at a fair value, and equities is
20:46
Speaker 3: one of those things, going back to, you know, private assets.
20:49
Speaker 3: In this kind of thing, it's hard to get a
20:50
Speaker 3: good deal. It's hard to get cutting edge. Any person
20:53
Speaker 3: off the street can get an A plus index fund
20:56
Speaker 3: of some variety. You need about fifty bucks to go
20:59
Speaker 3: and do it. So it is one of those things
21:02
Speaker 3: that anyone can access and counter injuritively. It really doesn't
21:05
Speaker 3: matter whether he got one hundred million dollars or even
21:09
Speaker 3: ten thousand dollars. It really does a fantastic job of
21:14
Speaker 3: both investors.
21:15
Speaker 2: Okay, very good.
21:16
Speaker 1: Interesting, and it's interesting to hear you say that it's
21:19
Speaker 1: easy to get an index fund manager to come on
21:22
Speaker 1: the show and say indexing is good. It's a different
21:24
Speaker 1: thing to get an independent advisor. Okay, we'll have a
21:27
Speaker 1: short break and we have some questions.
21:29
Speaker 2: We'll try and get through a few.
21:31
Speaker 1: One in particular, I want to go through to immediately
21:35
Speaker 1: which everyone's been waiting for, I think to some extent,
21:37
Speaker 1: on how the new supertax works.
21:39
Speaker 2: Okay, back in the moment.
21:47
Speaker 1: Hello, Welcome back to The Australian's Money Puzzle podcast. James
21:51
Speaker 1: Kirby with Andy Darroch, independent financial Advisor. Now, and you
21:55
Speaker 1: have a question from Thomas, and this came about in
21:59
Speaker 1: the exportation of how the new super tax Division two
22:03
Speaker 1: ninety six is going to work now okay now on
22:07
Speaker 1: actual earnings rather than on realized earnings, on the basis
22:10
Speaker 1: that it makes it through Parliament politically, which it probably
22:13
Speaker 1: will though the Coalition.
22:14
Speaker 2: I'm not going to vote for it. I see that now.
22:17
Speaker 1: Also, I'll just preface this by saying on the show,
22:19
Speaker 1: sometimes it's you know, in talking about these things, it's
22:22
Speaker 1: quite difficult because it's extraordinary complex and when you write
22:26
Speaker 1: them in print you very carefully get everything all your
22:28
Speaker 1: docs in a row. Sometimes we can oversimplify. And this
22:31
Speaker 1: is the background to this. Thomas says, I've been a
22:34
Speaker 1: long term listener. Thank you for your sessions. You've really
22:36
Speaker 1: confused me on the new division two ninety six super
22:39
Speaker 1: tax I spent I was googling this because you kept
22:41
Speaker 1: talking about fifteen percent on super above two million. Jim
22:46
Speaker 1: Chalmers on the new tax only talked about fifteen percent
22:51
Speaker 1: over three million. The situation is about the total superbalans
22:57
Speaker 1: cap and it seems to have been over interpreted by yourself.
23:03
Speaker 2: Here he says.
23:04
Speaker 1: This is what Thomas says. If I have two point
23:06
Speaker 1: four million and super accumulation phase, I transfer two million
23:10
Speaker 1: into account based pension at the age of sixty five,
23:14
Speaker 1: I will have four hundred thousand in accumulation. Okay, he's
23:17
Speaker 1: got four hundred thousand in accumulation because it's four hundred
23:20
Speaker 1: thousand over the two million. But my two million in
23:23
Speaker 1: retirement phase can grow organically higher. And the earnings it's
23:30
Speaker 1: tax free, not fifteen percent on the money inaccumulate only
23:34
Speaker 1: the money in accumulation is at fifteen percent. Okay, So
23:37
Speaker 1: what he's saying is the day you retire transfer a
23:41
Speaker 1: superbands cap, you can put in two million. That two
23:44
Speaker 1: million is tax free. Not only that, but it's tax
23:47
Speaker 1: free forever. And the amount over that over two million
23:54
Speaker 1: is what's tax which is just to clarify, Andy, is
23:58
Speaker 1: he correct and could you explain how all that works?
24:01
Speaker 3: Yes, yes, he is correct. So again let's use that
24:04
Speaker 3: exact example. So I've got two million, I've got two
24:07
Speaker 3: point four million dollars in super I'm sixty, I'm retired today. Excellent.
24:13
Speaker 3: Two million of my two point four goes into a pension.
24:16
Speaker 3: And this is where as I was joking to you
24:19
Speaker 3: a lot of acronyms, I'll be honest. It keeps me
24:21
Speaker 3: in a job. So we've got the TSB, which is
24:25
Speaker 3: your total superbalance, and then we've also got the imaginatively
24:28
Speaker 3: named Transfer balance cap. So the transfer balance cap is
24:32
Speaker 3: how much you can put into a tax free pension.
24:34
Speaker 3: It used to be as much as you wanted. Many
24:37
Speaker 3: years ago this cap was introduced. It started life at
24:40
Speaker 3: one point six it's index to CPI. Today it's two
24:44
Speaker 3: million bucks. So using Thomas's example, he's got two point
24:48
Speaker 3: four million dollars in super. Two million goes into the pension.
24:52
Speaker 3: Two million has completely tax free earnings. That could grow.
24:56
Speaker 3: So when you're in pension, you've got to withdraw some, right,
24:58
Speaker 3: But let's just for argument SA say that he's drawing
25:01
Speaker 3: out four percent and it's growing at ten and so
25:04
Speaker 3: five ten years down the path, that two million dollars
25:08
Speaker 3: that he put into pension after all these withdrawals has
25:11
Speaker 3: grown to two point five million dollars. That is still
25:15
Speaker 3: tax free, and in today's legislation, like right now in
25:19
Speaker 3: November twenty twenty five, that could grow quite seriously to
25:24
Speaker 3: a billion dollars and it would still be tax free.
25:27
Speaker 1: Wouldn't make it clear that, first of all, Thomas, you
25:30
Speaker 1: are correct, at the risk of simplification. The first tax
25:35
Speaker 1: that you hit on super is over two million when
25:42
Speaker 1: you transfer on the day of your retirement. If you
25:46
Speaker 1: put in whatever, you put in over two million, that
25:48
Speaker 1: bit hangs in there inside the system at fifteen percent.
25:53
Speaker 1: And if that bit swells to over three there's a
25:58
Speaker 1: new fifteen percent tax.
25:59
Speaker 2: So we've got that rate.
26:02
Speaker 3: More or less, and we don't quite know how that
26:04
Speaker 3: extra fifteen would work. And so a good way to
26:06
Speaker 3: think about it is you've got a two million dollar
26:09
Speaker 3: allowance for tax free that you can spend. So for
26:12
Speaker 3: some people they won't. They won't spend all of it. Right,
26:15
Speaker 3: So if someone's got one and a half million dollars
26:18
Speaker 3: and they turn sixty, kickoff a pension, and then five
26:22
Speaker 3: ten years down the path they get an inheritance or
26:24
Speaker 3: sell an asset or whatever and have more money come in,
26:27
Speaker 3: well they're allowed potentially another five hundred potentially more because
26:31
Speaker 3: this two million dollar figure is indexed to CPI. So
26:34
Speaker 3: going back to all the doom and gloom about you know,
26:37
Speaker 3: investments and bull markets and all the rest well, retirees
26:40
Speaker 3: who are on that cusp of the transfer balance cap
26:43
Speaker 3: can know that it's probably going to get indexed, you know,
26:46
Speaker 3: quite healthily over the next five to ten years. So
26:49
Speaker 3: and again, you could turn it off and turn it
26:51
Speaker 3: on and it doesn't matter. So let's go back to
26:53
Speaker 3: Thomas's example. He kicks off a pension with two million dollars.
26:58
Speaker 3: It grows over time to turn a half million dollars
27:01
Speaker 3: even after he's taken out his withdrawals. If for any
27:03
Speaker 3: reason he wanted to turn it off and turn it
27:05
Speaker 3: on again, he would still be able to take everything
27:08
Speaker 3: that he originally put into that pension in and out,
27:11
Speaker 3: whether it's two and a half, two point two or
27:13
Speaker 3: even two point eight. So it sounds more complicated than
27:17
Speaker 3: it is, and it sounds scarier than it is commonly.
27:21
Speaker 1: Yeah, very good, okay, And the as you say, the
27:24
Speaker 1: point is that it's indexed. As Andy was saying there,
27:27
Speaker 1: I think it started at one point six, that it
27:29
Speaker 1: was the first budget did Yeah, and it actually did
27:32
Speaker 1: in one hundred thousand dollars segments and it is now
27:36
Speaker 1: sitting at two million.
27:38
Speaker 2: Okay.
27:39
Speaker 3: It actually skipped too. It went straight from one point seven.
27:42
Speaker 3: That's about we had all the inflation, revenge flation out
27:46
Speaker 3: of that's right.
27:47
Speaker 1: I remember, yes, I remember reporting on that and nothing
27:50
Speaker 1: to say it will kick on again, all right. I
27:53
Speaker 1: think that's all we've time for. That was a question
27:55
Speaker 1: that needed to be answered in the context of the
27:57
Speaker 1: new supertext. A lot of the attention of the new
28:00
Speaker 1: super tax, by the way, folks, is for people with
28:01
Speaker 1: really big balances. And there's people, of course in this
28:04
Speaker 1: super system that have more than two million, and they're
28:06
Speaker 1: not even retired, right, so that they immediately find themselves
28:09
Speaker 1: hit by this tax. That's worth's knowing as well. Okay,
28:13
Speaker 1: thank you very much, Andy, great to have you on
28:15
Speaker 1: the show. We'll have you on again. Give us the
28:17
Speaker 1: name of your enterprise once more.
28:19
Speaker 3: Eddie Derek, Independent Wealth of.
28:21
Speaker 1: US, Independent Wealth Advice. Andy Direck there and he will
28:25
Speaker 1: be with us again. As I say, let's have some
28:29
Speaker 1: correspondence on any issue, including the supertax, because it's amazing,
28:34
Speaker 1: isn't it. I mean it's tortuous. Basically, it's a tortuously
28:38
Speaker 1: complex issue. It's extremely difficult to grab it. It's like
28:42
Speaker 1: learning a language, I think, and if you don't speak
28:44
Speaker 1: it every day it fades.
28:46
Speaker 2: All right, talk to you soon.