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Private credit's 'wake-up' call (with Charlie Viola) · The Money Puzzle

• 0:11
  Speaker 1: Hello, and welcome to the Australian's Money Puzzle podcast. I'm
• 0:14
  Speaker 1: James Kirby. Welcome aboard, everybody. Well, it's been a remarkable
• 0:18
  Speaker 1: period on investment markets, and I don't know about you,
• 0:22
  Speaker 1: but it seems to me this final quarter of calendar
• 0:25
  Speaker 1: 26 has many of the hallmarks of an investment market
• 0:29
  Speaker 1: showing serious signs of strain. Well, particularly, I think we
• 0:34
  Speaker 1: could mention the rush of investors into private credit, and
• 0:39
  Speaker 1: that asset class, private credit, highly developed asset class enjoyed
• 0:44
  Speaker 1: by super funds and wealthy investors for decades. But in
• 0:47
  Speaker 1: our market, I sense maybe that everyday investors have been
• 0:51
  Speaker 1: late to the party. I'm thinking of a famous line
• 0:54
  Speaker 1: from James Goldsmith, who said, if you can see the wagon,
• 0:59
  Speaker 1: it's already too late. My guest today is Charlie Viola.
• 1:03
  Speaker 1: How are you, Charlie? Hello, James.
• 1:05
  Speaker 2: I'm super good. Thank you for having me.
• 1:07
  Speaker 1: Have you heard that line before from Sir James Goldsmith?
• 1:09
  Speaker 1: Ronnie Barrick says they used to call him once upon
• 1:11
  Speaker 1: a time, Jemima Khan's dad. Have you heard that line?
• 1:14
  Speaker 2: I think I have heard that line. But what's it
• 1:16
  Speaker 2: meant to infer? If you see the wagons, it's too late.
• 1:19
  Speaker 2: You're about to be shot, I suppose.
• 1:21
  Speaker 1: Yeah, that by the time, you know, mom and dad
• 1:24
  Speaker 1: get in, James Gotsman and his friends have not just
• 1:27
  Speaker 1: been in, they've jumped off the wagon and met a fortune.
• 1:30
  Speaker 1: I just wonder, at late stages of any bull market,
• 1:33
  Speaker 1: I mean, actually, let's start at the start. Do you
• 1:35
  Speaker 1: think we're at the late stages of a bull market
• 1:38
  Speaker 1: very broadly for investors? No, not really.
• 1:40
  Speaker 2: I mean, I think we sort of talk a lot
• 1:43
  Speaker 2: to clients that diversity is really important. And ensuring kind
• 1:47
  Speaker 2: of you've got the right money in the right buckets
• 1:49
  Speaker 2: at the right time is important. I think anyone investing
• 1:52
  Speaker 2: in global markets will continue to see those markets remain
• 1:55
  Speaker 2: really robust. And we're seeing lots of CapEx and, you know,
• 1:58
  Speaker 2: debt levels are reasonably low. And we think global markets
• 2:00
  Speaker 2: will continue to sort of, you know, continue along on
• 2:03
  Speaker 2: their merry way. Domestically, we think markets are going to
• 2:06
  Speaker 2: be really subdued, right? So, you know, we're certainly not
• 2:08
  Speaker 2: piling monies to domestic markets, other asset classes, which don't
• 2:13
  Speaker 2: have as much sort of entry price risk attached to them. Ultimately,
• 2:16
  Speaker 2: you should be able to invest at all times, into
• 2:19
  Speaker 2: those markets, as long as you understand what you're investing
• 2:21
  Speaker 2: in and what your expected outcomes are. So no, I
• 2:25
  Speaker 2: think as long as people have got the right asset
• 2:28
  Speaker 2: allocation and the right time horizons, people should be happily
• 2:31
  Speaker 2: still making investment decisions. Don't put all the eggs in
• 2:35
  Speaker 2: one basket. And also, I think the argument around the
• 2:38
  Speaker 2: private credit stuff, if you're investing in debt or credit
• 2:42
  Speaker 2: and you're expecting equity-like returns, then you're expecting the wrong
• 2:46
  Speaker 2: thing or you're taking the wrong risk. So I think
• 2:49
  Speaker 2: that it's really important that people understand what it is
• 2:52
  Speaker 2: they're investing in.
• 2:54
  Speaker 1: Well, you're chiming to some degree with John Pearce, who's
• 2:57
  Speaker 1: the chief investment officer at UniSuper, who was on the
• 3:00
  Speaker 1: show recently. I was interested to hear he said something
• 3:06
  Speaker 1: broadly similar, that he was comfortable actually with the markets
• 3:10
  Speaker 1: very broadly. He was comfortable with the prices, particularly the PEs.
• 3:14
  Speaker 1: ratios that were in place, particularly in the US, because
• 3:19
  Speaker 1: the earnings are so strong. The PEs are actually not
• 3:24
  Speaker 1: wild by historical standards. But when we came to that
• 3:28
  Speaker 1: issue of private credit, I had seen reported that they,
• 3:33
  Speaker 1: Unisuper and other funds, were in a couple of funds
• 3:36
  Speaker 1: that had been frozen. That turned out to be not
• 3:38
  Speaker 1: the case. But in explaining his position on private credit,
• 3:42
  Speaker 1: he said, we're not in any Australian property-backed private credit funds.
• 3:48
  Speaker 1: I was puzzled by that because, to me, that's what
• 3:50
  Speaker 1: private credit is in our market, property-backed funds. I mean,
• 3:54
  Speaker 1: there has been some unease among investors with what's happened.
• 4:00
  Speaker 1: I'm thinking of one or two big outfits, particularly in Sydney,
• 4:04
  Speaker 1: the Bathla housing group, which has collapsed. investors are being
• 4:11
  Speaker 1: asked to, are being chased by the tax office for
• 4:13
  Speaker 1: the collapse of that group. Now, I know that's probably
• 4:16
  Speaker 1: nothing like the sort of stuff you're in, but did
• 4:20
  Speaker 1: you ever think you'd see the day that would happen
• 4:21
  Speaker 1: around these here parts? Yeah, we did.
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  Speaker 2: So really important to understand that there's private credit and
• 4:28
  Speaker 2: what we would probably prefer to sort of describe as
• 4:31
  Speaker 2: private debt, right? So private credit in the US is
• 4:34
  Speaker 2: mainly commercial lending. It's still asset backed, but it's mainly
• 4:37
  Speaker 2: commercial lending. domestically, we have a very well-established private debt market,
• 4:42
  Speaker 2: which is mainly property-backed lending. Again, I make the point,
• 4:46
  Speaker 2: I make the point to clients all the time, and
• 4:47
  Speaker 2: anytime I kind of talk publicly about this stuff, we
• 4:50
  Speaker 2: make the point that if you are seeing equity-like returns
• 4:53
  Speaker 2: out of credit or debt, then you are taking, you're
• 4:56
  Speaker 2: taking risk, and you're taking risk that the equity itself
• 4:59
  Speaker 2: in the Ultimately, when we use private debt investments, we're
• 5:06
  Speaker 2: always doing it at the low risk end. So we
• 5:09
  Speaker 2: had no exposure to any of the Bathless stuff. The
• 5:11
  Speaker 2: managers that we use are always going to have a
• 5:14
  Speaker 2: suite of products and a suite of offering because.
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  Speaker 1: They're not bank lenders, right?
• 5:17
  Speaker 2: They're lending money to all different types of groups. So ultimately,
• 5:23
  Speaker 2: it's our decision as an advisor and it's an investor's
• 5:26
  Speaker 2: decision as an investor where they're actually making the decision
• 5:30
  Speaker 2: around where they're actually investing their money. So You know, ultimately,
• 5:34
  Speaker 2: we want to be investing money in that private debt,
• 5:36
  Speaker 2: private credit space at the low risk end. We want
• 5:38
  Speaker 2: low LVRs, we want first loss provision, we want non-construction,
• 5:42
  Speaker 2: we want first registered only. We have to understand what
• 5:46
  Speaker 2: we're investing in, and investors have to understand what they're
• 5:48
  Speaker 2: investing in. If we're looking to generate 12% and 13%
• 5:52
  Speaker 2: and 14% returns, and we're doing that out of debt,
• 5:54
  Speaker 2: then ultimately you are taking equity risk, because you need
• 5:57
  Speaker 2: the equity to perform well.
• 5:59
  Speaker 1: And so.
• 6:00
  Speaker 2: If you have any downturn in markets, if you have
• 6:03
  Speaker 2: construction costs that go up, if you have sales that
• 6:06
  Speaker 2: don't occur, then naturally the train is on its way
• 6:11
  Speaker 2: in terms of the train wreck. It's on its way.
• 6:13
  Speaker 2: So you have to understand what you're investing in. So
• 6:16
  Speaker 2: we have often supplanted traditional fixed income for private debt
• 6:22
  Speaker 2: within some of our client portfolios. But ultimately, we have
• 6:25
  Speaker 2: only ever done that at the low risk end. So
• 6:28
  Speaker 2: we've not seen impairments. The issue around gating or redemption freezes,
• 6:33
  Speaker 2: ultimately you have to let the manager do the manager's job.
• 6:37
  Speaker 2: And I'm not defending the managers here, but ultimately most
• 6:39
  Speaker 2: of them tend to do a pretty good job. They
• 6:42
  Speaker 2: are at the end of the day loans, and they
• 6:44
  Speaker 2: are loans that will have six, 12, 18, 24, 36-month
• 6:48
  Speaker 2: repayment terms. If you offer liquidity 100% of the time
• 6:52
  Speaker 2: and people want their money back, then naturally that gating
• 6:57
  Speaker 2: provision has to come about because you have to wait
• 6:59
  Speaker 2: till the loans actually come back. So often the redemption
• 7:03
  Speaker 2: phases or the gating is not particularly about the fact
• 7:07
  Speaker 2: that there's a whole bunch of credit issues that are
• 7:09
  Speaker 2: going on in the background. It's just that loans actually
• 7:11
  Speaker 2: haven't matured or haven't been repaid.
• 7:14
  Speaker 1: It's timing.
• 7:14
  Speaker 2: It's timing.
• 7:15
  Speaker 1: It's interesting. And it seems to me that what you're
• 7:19
  Speaker 1: saying very broadly for listeners is private credit, private debt,
• 7:24
  Speaker 1: don't look at it as an alternative to shares. Well,
• 7:28
  Speaker 1: as an alternative to fixed income and bonds.
• 7:31
  Speaker 2: It's a whole other asset class. It's a whole other
• 7:33
  Speaker 2: asset class with its own risks.
• 7:35
  Speaker 1: Is it closer to bonds and fixed interest than it
• 7:37
  Speaker 1: is to equities and shares?
• 7:39
  Speaker 2: Yeah, well, it sits on the debt side of the ledger.
• 7:41
  Speaker 2: So if we think about debits and credits or debt
• 7:43
  Speaker 2: or equity, it sits on the debt side of the ledger.
• 7:46
  Speaker 2: So obviously, it sits more closely to fixed income. But again,
• 7:49
  Speaker 2: it depends on what you're lending against and what outcome
• 7:53
  Speaker 2: you need to actually receive your money back over a
• 7:56
  Speaker 2: period of time. And again, the regulator kind of being
• 8:00
  Speaker 2: all over these guys makes some sense. We need consumer protection.
• 8:04
  Speaker 2: But ultimately, what we need is we need investor education.
• 8:07
  Speaker 2: We need investors to understand that if they've got an
• 8:11
  Speaker 2: instrument or a facility that's generating a 13% or 14%
• 8:16
  Speaker 2: or 15% return, then you are taking equity risk in
• 8:19
  Speaker 2: your credit because you need the equity in the background
• 8:22
  Speaker 2: to perform well. You need the asset to get sold.
• 8:25
  Speaker 2: You need the property to get finished being developed and
• 8:27
  Speaker 2: then somebody to come along and buy it for a
• 8:30
  Speaker 2: reasonable price for that debt to get repaid. So you
• 8:32
  Speaker 2: need to understand what you're investing in before you just
• 8:36
  Speaker 2: go and eat up the return. The problem that we've
• 8:39
  Speaker 2: had is that you've had some investors who see this
• 8:42
  Speaker 2: private debt, private credit stuff as a big paying term deposit.
• 8:45
  Speaker 1: They're not.
• 8:46
  Speaker 2: Term deposits are cash. They sit on bank balance sheets, right?
• 8:48
  Speaker 2: These are real loans out to real people who need
• 8:51
  Speaker 2: to go and do real things. And to get that
• 8:53
  Speaker 2: money back, You need the asset to be sold.
• 8:56
  Speaker 1: Okay. All right. I think, yeah, I think the point
• 8:58
  Speaker 1: is quite clear. Very good.
• 8:59
  Speaker 2: All right.
• 8:59
  Speaker 1: What we'll do is we'll take a break and we're
• 9:00
  Speaker 1: going to come back in a moment. We're going to
• 9:01
  Speaker 1: look at some of the issues that have happened in
• 9:03
  Speaker 1: this area of metrics, for example, and some of the
• 9:06
  Speaker 1: other big names in the business. Electro, Balmain, we'll be
• 9:09
  Speaker 1: back in a moment. Hello, welcome back to the Australian's
• 9:26
  Speaker 1: Money Puzzle podcast. James Kirby talking to Charlie Viola of
• 9:30
  Speaker 1: Viola Private Wealth. Charlie's been a regular guest on the
• 9:35
  Speaker 1: show way back from when he had his last job,
• 9:38
  Speaker 1: which was some years ago. Now he started his own
• 9:40
  Speaker 1: operation a few years ago. He's a regular, a perennial actually,
• 9:44
  Speaker 1: on the upper reaches of the Barron's Top 150 Advisors list.
• 9:48
  Speaker 1: Great to have you on the show again, Charlie. We
• 9:49
  Speaker 1: haven't talked actually for a while. When you were on
• 9:52
  Speaker 1: the show the last time, we did talk specifically, and
• 9:54
  Speaker 1: we mentioned some names. metrics was one we i mean
• 9:57
  Speaker 1: there's no conversation around private credit and private debt in
• 10:00
  Speaker 1: australia without mentioning them because they're the biggest and on
• 10:03
  Speaker 1: top of that people listening to the show would be
• 10:06
  Speaker 1: familiar with the fact that in recent times they had
• 10:08
  Speaker 1: issues they had to freeze redemptions they had to cut
• 10:12
  Speaker 1: their valuations and maybe worst of all They had a
• 10:15
  Speaker 1: holdup with KPMG not signing off on their accounts until
• 10:19
  Speaker 1: a negotiation was complete. At the far side of this,
• 10:23
  Speaker 1: there's disappointment with that. There's also maybe, in another fashion,
• 10:30
  Speaker 1: among the media, maybe even myself, we look and we say, oh,
• 10:33
  Speaker 1: it wasn't that bad. I mean, they've marked down their portfolio,
• 10:36
  Speaker 1: but it wasn't like they were hiding a disaster or anything.
• 10:38
  Speaker 1: And they've since said that they may compensate their investors
• 10:43
  Speaker 1: in those particular funds, I suppose, just to rebuild their goodwill.
• 10:47
  Speaker 1: But it was something of a landmark for private credit.
• 10:49
  Speaker 1: How do you read it? I know that you were
• 10:51
  Speaker 1: on the show the last time. Anyone who listened to
• 10:53
  Speaker 1: that show will remember that you were fairly defensive of
• 10:57
  Speaker 1: metrics and did staff. Yeah.
• 11:00
  Speaker 2: Look, I'm not sure if we're particularly a defender. We're
• 11:02
  Speaker 2: just not a hater either. So metrics and some of
• 11:07
  Speaker 2: their products aren't on our high conviction list, which is
• 11:09
  Speaker 2: the list of assets that we like to kind of
• 11:10
  Speaker 2: tip clients into. We've spent considerable time with Andrew Lockhart
• 11:15
  Speaker 2: to understand their process, the same as what we do
• 11:17
  Speaker 2: with Palace and Qualitas and Zaga and all the other
• 11:19
  Speaker 2: kind of private debt, private credit providers. Andrew and his
• 11:23
  Speaker 2: investment team, along with Dan Gallen at Palace and Tom
• 11:26
  Speaker 2: at Zaga and all the other guys, they don't get
• 11:29
  Speaker 2: enough credit for how hard they work to protect their
• 11:31
  Speaker 2: investors and the depth of work that goes into every
• 11:34
  Speaker 2: term sheet that they actually put together. I get the
• 11:37
  Speaker 2: consumer protection stuff from the regulator, given what's happened with
• 11:40
  Speaker 2: Shield and whatever else. but not certain that we would
• 11:43
  Speaker 2: put metrics in that bucket. Andrew Lockhart is an example
• 11:47
  Speaker 2: of a guy who knows every term sheet that goes out.
• 11:51
  Speaker 2: My issue with this, or my frustration that comes with
• 11:53
  Speaker 2: the commentary around private debt, private credit, is people not
• 11:56
  Speaker 2: understanding what they're actually investing in.
• 11:59
  Speaker 1: At the end of the day, they couldn't get their
• 12:01
  Speaker 1: accounts qualified by KPNG, and they had to freeze their funds.
• 12:06
  Speaker 1: You might say it's good in a test of market,
• 12:07
  Speaker 1: but it's bad in terms of how it looks.
• 12:10
  Speaker 2: Yeah, I understand.
• 12:10
  Speaker 1: I understand.
• 12:11
  Speaker 2: So the redemption issue ultimately is actually about protecting the
• 12:15
  Speaker 2: underlying capital and ensuring the money can come back from
• 12:17
  Speaker 2: a timing point of view. Understand that from an optics
• 12:20
  Speaker 2: point of view, it's difficult. And it's difficult for the
• 12:22
  Speaker 2: manager as well, because ultimately the manager's lifeblood is continuing
• 12:26
  Speaker 2: to raise capital to be able to go and lend
• 12:28
  Speaker 2: it out. So it becomes difficult for businesses like that
• 12:31
  Speaker 2: to continue to go and grow their operations and kind
• 12:33
  Speaker 2: of win deals, et cetera, unless they've got capital that
• 12:36
  Speaker 2: continues to come in. So You can understand why there's
• 12:40
  Speaker 2: this kind of tension in that part of the market
• 12:43
  Speaker 2: between wanting to continue to be really good to underlying investors,
• 12:47
  Speaker 2: but also wanting to go out and continue to win deals,
• 12:49
  Speaker 2: et cetera, because you can't do it without the capital. Like,
• 12:51
  Speaker 2: you know, you lend money without the capital. And again,
• 12:54
  Speaker 2: I think that all of these groups work pretty hard
• 12:56
  Speaker 2: to protect investors, but ultimately they are non-bank lenders. So
• 13:01
  Speaker 2: they are, you know, the cost of capital is higher.
• 13:04
  Speaker 2: They are lending to people who can't go and get
• 13:06
  Speaker 2: traditional levels of debt. And as such, there is always
• 13:09
  Speaker 2: going to be some risk attached to some of the
• 13:11
  Speaker 2: underlying assets that they've got sitting on their books and
• 13:14
  Speaker 2: in their loan books. In terms of, again, the regulator
• 13:17
  Speaker 2: protecting consumers, it's absolutely the right thing to be doing.
• 13:20
  Speaker 2: And then you can sort of understand from the auditor's perspective,
• 13:23
  Speaker 2: not wanting to sign off on valuations, where there is,
• 13:26
  Speaker 2: where possible impairments are. I think what metrics were able
• 13:30
  Speaker 2: to show is that there is actually no impairment. There
• 13:33
  Speaker 2: is enough headroom in these loans to enable them to
• 13:35
  Speaker 2: actually give investors their money back.
• 13:38
  Speaker 1: Are you comfortable with the valuation process?
• 13:42
  Speaker 2: Whether we're comfortable or not, the reality is we've probably
• 13:45
  Speaker 2: got no reason to question it at this point in time. Ultimately,
• 13:48
  Speaker 2: what we want to know is that if the sponsor
• 13:50
  Speaker 2: is strong and there's sufficient headroom in the deal, if
• 13:55
  Speaker 2: a loan goes into arrears for a month or two,
• 13:59
  Speaker 2: it probably doesn't mean that the loan itself or the
• 14:01
  Speaker 2: asset itself is impaired. It just means that that if
• 14:04
  Speaker 2: the debt has to step into the shoes of equity,
• 14:07
  Speaker 2: you want to know that the manager is strong enough
• 14:08
  Speaker 2: and capable enough to actually go and do that. But
• 14:11
  Speaker 2: it's a space where investors have to beware. It's a
• 14:14
  Speaker 2: space where the regulator has to beware. And I think
• 14:17
  Speaker 2: what has to happen over time or what has to
• 14:19
  Speaker 2: happen out of this process is that we have to
• 14:22
  Speaker 2: educate people in terms of what they're investing in.
• 14:25
  Speaker 1: Okay. Just talking about that broad point, just to finish
• 14:28
  Speaker 1: off on this, so the big picture on private credit,
• 14:30
  Speaker 1: which has been really good, Charlie, thank you, is that
• 14:34
  Speaker 1: Standing back from it, it would seem to me that
• 14:36
  Speaker 1: private credit in Australia had a golden age, which basically
• 14:41
  Speaker 1: ran for five years from COVID till today, where they
• 14:45
  Speaker 1: had the gorgeous combination that the fixed interest markets at
• 14:49
  Speaker 1: the start of this trend were flat. I mean, they
• 14:51
  Speaker 1: were getting 1% rates, and that meant bonds were hopeless
• 14:54
  Speaker 1: in terms of yield. And separately, the banks had stepped
• 14:58
  Speaker 1: back from a lot of business. perhaps for regulatory reasons,
• 15:03
  Speaker 1: perhaps voluntarily, depending on the building or the operation at
• 15:06
  Speaker 1: the time. Now that we're in a situation where rates
• 15:09
  Speaker 1: have returned to something like normal and bond yields are
• 15:12
  Speaker 1: something like normal, 5%, 4% around the world, it's at
• 15:16
  Speaker 1: the end of that golden era for these guys.
• 15:19
  Speaker 2: I think you're exactly right. I think we had this
• 15:21
  Speaker 2: period where the return that you were getting was probably
• 15:24
  Speaker 2: a bit asymmetric to the risk that you were taking.
• 15:26
  Speaker 2: Because you had this kind of emergency low interest rates.
• 15:28
  Speaker 2: You had asset value blowing the, you know, sort of
• 15:30
  Speaker 2: blowing the doors off. You had, you know, cap rates
• 15:33
  Speaker 2: kind of falling to all-time lows. You had asset values
• 15:36
  Speaker 2: going up all of the time. And, you know, people
• 15:39
  Speaker 2: were happy to pay away cost of capital 6% or 7%
• 15:41
  Speaker 2: or 8% because they knew their asset values were going
• 15:44
  Speaker 2: up significantly. Because any refinance ended up being a kind
• 15:47
  Speaker 2: of 2% or 3%. So you're right. So there is
• 15:50
  Speaker 2: greater risk. And, you know, I think I said this
• 15:52
  Speaker 2: on your podcast about 18 months ago. that the risks
• 15:55
  Speaker 2: are greater now than what they were previously. And your
• 15:59
  Speaker 2: expectant return in terms of how much, you know, what you,
• 16:03
  Speaker 2: previously you were being rewarded for taking not as much risk.
• 16:08
  Speaker 2: Now you have to understand you are taking much more
• 16:11
  Speaker 2: risk to get the same return. And therefore you have
• 16:14
  Speaker 2: to think about whether, you know, what your allocation to
• 16:17
  Speaker 2: that asset class should be. Okay.
• 16:20
  Speaker 1: One thing, if you have a moment to our listeners,
• 16:22
  Speaker 1: could you briefly explain what secondaries are. As this market evolves,
• 16:29
  Speaker 1: and even this period of testing the private credit market
• 16:32
  Speaker 1: will have its uses. But as the market evolves and
• 16:36
  Speaker 1: everyday investors become more familiar with the realities, good and
• 16:40
  Speaker 1: bad of this area, the secondaries market has started to evolve.
• 16:44
  Speaker 1: Tell us just a little about that, would you? And
• 16:47
  Speaker 1: who's playing it? What sort of investors are in there
• 16:49
  Speaker 1: and why?
• 16:50
  Speaker 2: Yeah. So generally speaking, when we think about secondaries, we
• 16:53
  Speaker 2: think about private equity secondaries as opposed to private debt
• 16:56
  Speaker 2: or private credit, but fundamentally it's the same thing. It's
• 16:59
  Speaker 2: simply the secondary market with private equity or private debt
• 17:02
  Speaker 2: or private credit. So where managers have sought liquidity and
• 17:06
  Speaker 2: therefore where some of that liquidity premium has been given up,
• 17:09
  Speaker 2: it's often a bit past the end of the J curve.
• 17:12
  Speaker 2: So returns still should be higher, but perhaps not as
• 17:16
  Speaker 2: high where you've got primary markets. So It's basically a
• 17:19
  Speaker 2: sell-on of the risk, if that makes sense.
• 17:23
  Speaker 1: So there might be a private deal of an entity,
• 17:28
  Speaker 1: and it goes for three or four years, but it's
• 17:30
  Speaker 1: not ready to go on the share market. Yeah, correct.
• 17:33
  Speaker 1: People inside want to have a crystallization event, as they say.
• 17:36
  Speaker 1: Somebody else might be happy to pick that up and
• 17:38
  Speaker 1: run with it for the next few years. Is that
• 17:40
  Speaker 1: basically what it is?
• 17:41
  Speaker 2: That's exactly right.
• 17:42
  Speaker 1: Is it specialist stuff? Is it suitable for our listeners?
• 17:45
  Speaker 2: Generally speaking, yes. We are an investor in this space.
• 17:50
  Speaker 2: We use a fund called Collar Secondaries Fund. It is
• 17:54
  Speaker 2: really for sophisticated investors, and it tends to be small
• 17:58
  Speaker 2: parts of big portfolios. But you're exactly right. Ultimately, what
• 18:01
  Speaker 2: you should be doing in these secondary markets is taking
• 18:04
  Speaker 2: a little less risk than primary, because you should be
• 18:07
  Speaker 2: a little bit out of the J in the J
• 18:10
  Speaker 2: curve for private equity risk. Effectively, what you're doing, though,
• 18:14
  Speaker 2: is you're getting a little closer to the end. So,
• 18:17
  Speaker 2: you know, if you take on kind of normal VC,
• 18:20
  Speaker 2: you might have a whole period of seven or eight
• 18:22
  Speaker 2: or nine years before you actually see material outcomes. Ultimately,
• 18:27
  Speaker 2: if you're buying somebody else's risk off them at some
• 18:30
  Speaker 2: point in time, then generally speaking, you're buying it after
• 18:34
  Speaker 2: it's either gone up to a point where they want
• 18:37
  Speaker 2: that liquidity and then you're taking on the rest of it. So,
• 18:40
  Speaker 2: you know, again, You really need to pick your manager
• 18:44
  Speaker 2: really well that you're sort of doing this with, because
• 18:47
  Speaker 2: ultimately you don't want to be buying out other people's
• 18:49
  Speaker 2: liquidity where you've got things that have got even more
• 18:52
  Speaker 2: risk than what they started with.
• 18:54
  Speaker 1: Yeah. Okay. I can see it's a highly specialized, I imagine, market,
• 18:57
  Speaker 1: but interesting nonetheless, and always interesting to see new areas
• 19:01
  Speaker 1: of investment emerging in our market. Okay. We'll take a
• 19:04
  Speaker 1: short break. We have some great questions I've kept for you, Charlie,
• 19:06
  Speaker 1: back in a moment. Hello and welcome back to the
• 19:22
  Speaker 1: Australian's Money Puzzle Podcast. James Kirby here talking to Charlie Viola,
• 19:27
  Speaker 1: a regular on the show and someone who's always interesting,
• 19:31
  Speaker 1: I think, on all parts of the market. Today, we
• 19:33
  Speaker 1: really did take a deep dive into private credit, which
• 19:35
  Speaker 1: I thought was very good and I imagine is useful
• 19:39
  Speaker 1: to you because on the show, what we've said from
• 19:42
  Speaker 1: the start is that this is a perfectly good class.
• 19:45
  Speaker 1: And if you understand this or if you make the
• 19:48
  Speaker 1: time to understand this, then why wouldn't you invest in it?
• 19:53
  Speaker 1: But be very careful of what's out there. Because as
• 19:58
  Speaker 1: we mentioned at the start, the old joke about by
• 20:00
  Speaker 1: the time you can see the bandwagon, it's too late. Well,
• 20:02
  Speaker 1: you know, these jokes, there's truth behind them, like folk wisdom, Charlie,
• 20:06
  Speaker 1: I think.
• 20:07
  Speaker 2: I think, James, the old saying, if it's too good
• 20:09
  Speaker 2: to be true, it probably is. If somebody's giving you
• 20:12
  Speaker 2: a guaranteed fixed return of 15%, it's too good to
• 20:15
  Speaker 2: be true. So you're taking risks to get that outcome.
• 20:17
  Speaker 1: That's right. History will suggest. It's always too good to
• 20:22
  Speaker 1: be true. Okay, first question from Dusty. I'm amending this
• 20:25
  Speaker 1: question ever so slightly. But Dusty's question says, I hold
• 20:28
  Speaker 1: a broad ETF, the Vanguard Australian Shares Index, but I
• 20:33
  Speaker 1: don't like the way that major floats arrive straight onto
• 20:37
  Speaker 1: the ASX, and they basically go into the index. Why
• 20:41
  Speaker 1: does the ASX allow unprofitable, untested companies to list at
• 20:45
  Speaker 1: big valuations? More importantly, doesn't fast-track index exclusion expose a
• 20:52
  Speaker 1: major flaw in passive investing? Okay, two parts to that question.
• 20:56
  Speaker 1: By the way, I called the ASX on this one, Dusty,
• 21:01
  Speaker 1: and they said to me, you don't just float on
• 21:04
  Speaker 1: because of your size. you have to show they have
• 21:07
  Speaker 1: a liquidity test of eight weeks. So you have to
• 21:10
  Speaker 1: also run for eight weeks and pass a liquidity test
• 21:13
  Speaker 1: before you go into the index. But then you do,
• 21:15
  Speaker 1: whether you're the biggest, dumbest, hopeless company ever, you go
• 21:19
  Speaker 1: into the index, which brings us to the second part
• 21:21
  Speaker 1: of the question, which is that issue that index inclusion
• 21:26
  Speaker 1: expose a major flaw in passive investing. But that seems
• 21:30
  Speaker 1: to me the major flaw. You buy everything, take it
• 21:32
  Speaker 1: or leave it. What do you think, Charlie?
• 21:34
  Speaker 2: I mean, that's what index investing is. You know, you're
• 21:37
  Speaker 2: making exposure to the entirety of the market. Ultimately, markets
• 21:40
  Speaker 2: become reasonably efficient over time. So if you've got a
• 21:44
  Speaker 2: new float and it's priced above where it should, number one,
• 21:47
  Speaker 2: the market will work that out. And if the free
• 21:49
  Speaker 2: float is, you know, too low or too high, it'll
• 21:52
  Speaker 2: fall out of that index at a natural point. So, and,
• 21:55
  Speaker 2: you know, remembering that even the biggest positions in the
• 21:58
  Speaker 2: market are only sort of four or 5% of that. So,
• 22:00
  Speaker 2: you know, Ultimately, two things can be right at the
• 22:04
  Speaker 2: same time. This is what passive investing is. This is
• 22:07
  Speaker 2: the purpose of having an index. It's to give you
• 22:09
  Speaker 2: exposure to the entirety of the market. But efficient market
• 22:13
  Speaker 2: theory is going to, if you have a brand new
• 22:15
  Speaker 2: float that comes up and everyone thinks that it's overvalued
• 22:18
  Speaker 2: or it's in the middle of a bubble or people are,
• 22:22
  Speaker 2: it's not making enough money or it's a future promise
• 22:25
  Speaker 2: of earnings, which some of them obviously will be, especially
• 22:28
  Speaker 2: in the AI and AI infrastructure space. then market will
• 22:31
  Speaker 2: work that out pretty quickly and it'll float its way
• 22:34
  Speaker 2: either up the index or down the index as it
• 22:36
  Speaker 2: kind of needs to. So, you know, that's what you're buying.
• 22:40
  Speaker 1: Very good. That's what you're buying. Exactly. It's also worth knowing, Dusty,
• 22:45
  Speaker 1: and this is never advice, it's information only, that you
• 22:49
  Speaker 1: ask about whether the ASX should take on all these floats.
• 22:52
  Speaker 1: The ASX, that's its business. They want floats, you know.
• 22:56
  Speaker 1: I mean, They'll do anything to get new floats. The
• 22:59
  Speaker 1: ASX has been shrinking, remember. The number of stocks that
• 23:02
  Speaker 1: are actually on the ASX has shrunk consistently for a decade.
• 23:08
  Speaker 1: They had a brief period there, it improved a bit,
• 23:10
  Speaker 1: and now it's gone backwards again. So they want the business.
• 23:12
  Speaker 1: Is that fair, Charlie?
• 23:14
  Speaker 2: Yeah, well, it would be nice to actually see some
• 23:15
  Speaker 2: more activity. I mean, these companies are staying private for
• 23:19
  Speaker 2: much longer as a means of actually creating liquidity in
• 23:22
  Speaker 2: that private market. Ultimately, we need public markets to start
• 23:26
  Speaker 2: to hold their own. And I think it's actually important
• 23:29
  Speaker 2: so that normal retail investors can actually get access to
• 23:33
  Speaker 2: these really good companies once they're ready to actually go
• 23:36
  Speaker 2: into the public markets. The public markets are still very important.
• 23:40
  Speaker 1: The US has shown that.
• 23:41
  Speaker 2: The US markets and global share markets have shown how
• 23:44
  Speaker 2: important it is for public markets to be available to
• 23:48
  Speaker 2: everybody so that you can actually start to share in
• 23:50
  Speaker 2: the wealth and the wealth creation over time.
• 23:53
  Speaker 1: Yeah, exactly. I suppose we'd have people like Dusty corresponding
• 23:56
  Speaker 1: with us saying they can't get at certain companies if
• 24:00
  Speaker 1: they didn't float. So you see, there's the rope, Dusty. Okay,
• 24:04
  Speaker 1: Jack from the Sunshine Coast says, there is modeling suggesting
• 24:08
  Speaker 1: a one-point rise in super does roughly the same job
• 24:12
  Speaker 1: as a one-point rate rise. What if, when inflation runs hot,
• 24:16
  Speaker 1: we temporarily lift the compulsory super, say from 12% to 14%
• 24:20
  Speaker 1: with cool spending? same way a rate hike does, but
• 24:24
  Speaker 1: the money stays out, stays ours in our own retirement accounts.
• 24:29
  Speaker 1: What do you think? Jack, you're going against the trend there.
• 24:34
  Speaker 1: You're a contrarian. The pressure is very much down, not
• 24:40
  Speaker 1: up on the amount we compulsorily put into super. I
• 24:44
  Speaker 1: don't know what you think of the idea, Charlie. First
• 24:46
  Speaker 1: of all, economically, does that stack up? And then should
• 24:49
  Speaker 1: we do it?
• 24:50
  Speaker 2: Jack's probably misunderstood you've got to remember that doing this
• 24:54
  Speaker 2: would put a huge additional pressure on employers to fund
• 24:57
  Speaker 2: it to start with, or it creates a greater stress
• 25:00
  Speaker 2: on people getting paid less if packages are inclusive of
• 25:03
  Speaker 2: those superannuation amounts. So you can't ask employers who are
• 25:08
  Speaker 2: struggling because of all of this to put more in
• 25:10
  Speaker 2: people's super and or ask people to get less in
• 25:13
  Speaker 2: their pay packet to buy the $ 7 coffee or the
• 25:14
  Speaker 2: $ 23 Big Mac by putting more in super. So No,
• 25:20
  Speaker 2: that's going to have the absolute opposite impact than what
• 25:23
  Speaker 2: Jack's asking it to have.
• 25:24
  Speaker 1: They're asking them to take a pay cut and a
• 25:28
  Speaker 1: rate rise, I suppose. The thing is, Jack, not everyone
• 25:33
  Speaker 1: gets hurt with the rate rise. If you don't have
• 25:35
  Speaker 1: any loans, you don't really care. Or if you don't
• 25:38
  Speaker 1: have a mortgage, you don't really care. Okay, very good.
• 25:41
  Speaker 1: I think that would just about cover us off for
• 25:43
  Speaker 1: this afternoon. Great to talk to you again, Charlie.
• 25:46
  Speaker 2: Thank you, James. Much appreciated, mate.
• 25:48
  Speaker 1: Thank you very much for coming on the show. That
• 25:49
  Speaker 1: was Charlie Viola of Viola Private Wealth, a regular, as
• 25:53
  Speaker 1: I say, on the show and a regular on the
• 25:55
  Speaker 1: top of the Barron's list of the top 150 advisors.
• 25:59
  Speaker 1: Keep the emails. We're already happy to hear from you.
• 26:01
  Speaker 1: Today's show was produced by Leah Samuel-Glue. Talk to you soon.
• 26:15
  Speaker 2: Thank you.