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Private credit - How bad is this going to get? · The Money Puzzle

0:10
Speaker 1: Hello, Welcome to The Australian's Money Puzzle podcast. I'm James Kirkby.
0:14
Speaker 1: Welcome aboard everybody. This is a show I've been looking
0:17
Speaker 1: forward to. I'll tell you why.
0:20
Speaker 2: I am as curious as you.
0:22
Speaker 1: Are, I imagine about what is happening around the world
0:26
Speaker 1: and in Australia in relation to private credit. Okay, private credit.
0:30
Speaker 1: This is this business which has been promising investors it
0:33
Speaker 1: would replace banks, that it would give us an alternative
0:36
Speaker 1: stream of income, that it would be a useful, alternative,
0:40
Speaker 1: lucrative for years, and advisors of course telling us that
0:43
Speaker 1: you know, if you're not on board, you're going to
0:45
Speaker 1: miss out.
0:45
Speaker 2: Well, you may have already heard.
0:47
Speaker 1: There's quite dramatic issues problems emerging with private credit. It's
0:53
Speaker 1: captured most perfectly in the fifty percent share price slide
0:57
Speaker 1: of a group called blue Out, the GI and US
1:01
Speaker 1: Private Wealth Empire. Now we are reporting in The Australian
1:07
Speaker 1: that some groups, Code Capital, one of the top private
1:10
Speaker 1: wealth managers, has two hundred and twenty million dollars linked
1:14
Speaker 1: with Blue Out. One of the super funds mngs super
1:17
Speaker 1: sort of a midsize industry super fund, has another two
1:21
Speaker 1: hundred million in interests connected with the fund.
1:25
Speaker 2: Now.
1:25
Speaker 1: Look, I'm an active investor, folks, so no way do
1:28
Speaker 1: I wish to close you off from private credit. But
1:31
Speaker 1: equally I don't want you to be led astray. My
1:34
Speaker 1: guest today is Andy Dark of Independent Wealth Advice. He's
1:39
Speaker 1: been on the show before. He's particularly across and articulate
1:42
Speaker 1: on the issue of private credit, something perhaps of an
1:45
Speaker 1: orn in their side sometimes.
1:47
Speaker 2: How are you Andy?
1:49
Speaker 3: Very well, thanks James lovely to be here.
1:51
Speaker 2: Good to have you on the show again.
1:52
Speaker 1: I think most of our listeners will probably have some
1:57
Speaker 1: idea and probably have aspired to get involved to private credit,
2:01
Speaker 1: if they haven't already.
2:02
Speaker 2: We know there.
2:04
Speaker 1: We're just starting to realize basically that a lot of
2:06
Speaker 1: the wealth managers and big names in Australia in wealth managers,
2:11
Speaker 1: including people in the very top ranks of the Baron's
2:14
Speaker 1: Advisor list, have met arrangements and have basically been putting
2:19
Speaker 1: clients or suggesting to them or recommending to them in
2:23
Speaker 1: various ways that they go into private credit. This was
2:25
Speaker 1: largely because so much money had seemed to be made
2:29
Speaker 1: by the big super funds of future fund in private
2:31
Speaker 1: credit in recent times. But the problem perhaps and we'll
2:35
Speaker 1: explore this in the show. Is the old adage, if
2:37
Speaker 1: you can see the bandwagon might be too late, but
2:42
Speaker 1: just explain maybe it isn't too late. Tell us about
2:44
Speaker 1: private credit, like why did it certainly become so popular?
2:49
Speaker 4: So private credit was really borne out of filling a
2:53
Speaker 4: gap left.
2:53
Speaker 3: Posts the GFC.
2:55
Speaker 4: So what you saw was banks retraded from certain kinds
2:58
Speaker 4: of lending posts the GFC. And this has led to,
3:01
Speaker 4: I suppose, what you call an explosion in private credit.
3:04
Speaker 4: So broadly speaking, it's about three trillion dollars give or
3:08
Speaker 4: take globally, and in Australia it's two hundred billion dollars alone.
3:12
Speaker 3: So again, another thing.
3:14
Speaker 4: That really fueled its rise, I think is three major factors.
3:18
Speaker 4: First of all, it's got a very symbiotic relationship with
3:21
Speaker 4: private equity. Secondly, as well, I think it coincided with
3:26
Speaker 4: a period of low rates, So you had a lot
3:28
Speaker 4: of investors on their fixed income side of the portfolio
3:31
Speaker 4: not getting returns that they had hoped for, and private
3:35
Speaker 4: credits seem to offer an ability to get a high
3:38
Speaker 4: rate of return on what was broadly classed as fixed income.
3:42
Speaker 4: The last thing I've just quickly mentioned is these firms
3:45
Speaker 4: are extremely profitable, and so there's been an intense desire
3:50
Speaker 4: from the firms that manage these kinds of assets to
3:53
Speaker 4: get as widely distributed as possible.
3:56
Speaker 1: And these gigantic names, with black Rock, Blackstone, Apollo, and
4:01
Speaker 1: of course Blue Owl being this sort of well, perhaps
4:05
Speaker 1: for a while, the sort of golden child of private equity.
4:08
Speaker 1: It now has all sorts of problems, and I suppose
4:12
Speaker 1: it encapsulates their problems of the sector. But fifty fifty
4:16
Speaker 1: percent folks share price slide in the US. I just
4:19
Speaker 1: want to ask you, Andy, what, broadly to the every
4:23
Speaker 1: day investor, not completely across, how all this works. What
4:29
Speaker 1: is wrong at blue Out and why do you think
4:32
Speaker 1: it's shares have halved?
4:35
Speaker 4: So Blue Hour is kind of the poster bird for
4:39
Speaker 4: things that aren't going perfectly in private credit. So there's
4:43
Speaker 4: been a couple of things that have happened, and there's
4:45
Speaker 4: been murmurs in this field for coming up on two years.
4:48
Speaker 4: I think it's fair to say, but what's really hit
4:51
Speaker 4: home for blue Out is they have a large contingent
4:55
Speaker 4: of individual or what's termed retail investors. So historically this
5:00
Speaker 4: stuff was used by big super funds, sovereign wealth funds
5:03
Speaker 4: and the like. So blue our well one of the
5:05
Speaker 4: first to really get a big book of you know.
5:09
Speaker 3: Retailing mom and dad as we call them, individuals.
5:12
Speaker 4: And you know, some of these moms and dads are
5:14
Speaker 4: extremely wealthy, but they are individuals. And so another problem
5:18
Speaker 4: that has arisen for blue Out is what's been termed
5:22
Speaker 4: the sas pocalypse, and essentially this is the base the
5:26
Speaker 4: case that you know, AI may indeed render a lot
5:29
Speaker 4: of software businesses either a lot less valuable than they
5:33
Speaker 4: were twelve.
5:34
Speaker 3: Months ago, or even know, not worth much if anything.
5:37
Speaker 4: And so blue Out has a lot of exposure to
5:41
Speaker 4: tech businesses which are very much radioactive to a lot
5:44
Speaker 4: of people at the minute, specifically software businesses. And secondly
5:48
Speaker 4: they've got a lot of individual investors. So that's basically
5:52
Speaker 4: led to a bit of a you know, not ideal
5:54
Speaker 4: mix of two things coming at once whereby a lot
5:57
Speaker 4: of people are trying to get their money out. And
6:00
Speaker 4: then secondly it's quite hard to determine what their money
6:03
Speaker 4: is worth because again it's tied to businesses which it's
6:07
Speaker 4: hard to say what they're going to look like twelve, eighteen,
6:10
Speaker 4: twenty four months from now.
6:11
Speaker 1: I suppose it's what again explaining folks, if you aren't
6:15
Speaker 1: familiar with this area, but you're probably familiar with the
6:18
Speaker 1: notion of unlisted funds, and this is what it is
6:22
Speaker 1: really so it can be listed on the share market,
6:25
Speaker 1: but in essence, at core this is where organizations finance business.
6:32
Speaker 1: But the funds that you and I invest in are
6:36
Speaker 1: unlisted and the business is private. To that degree, it
6:41
Speaker 1: is not as transparent as say, come well Bank, right,
6:43
Speaker 1: So if you want to find out what Commond Bank
6:45
Speaker 1: are doing, well, you can take a deep dive into
6:48
Speaker 1: their anual accounts and you can find out a hell
6:50
Speaker 1: of a lot.
6:51
Speaker 2: But you can't find out.
6:52
Speaker 1: The same level of information in the private credit space.
6:57
Speaker 1: And the issue is if you want to sell your
6:59
Speaker 1: Commonwealth Bank shares, they just sell them, right, you just
7:02
Speaker 1: go on your broker and you sell them. Because if
7:04
Speaker 1: there are shares and they're in liquid Now, Andy, could
7:07
Speaker 1: you explain there was what we call the liquidity crunch.
7:11
Speaker 1: The issue the really worry I spills for investors here
7:16
Speaker 1: in relation to how private credit has liquidity constraints as
7:22
Speaker 1: they see and the rather gentlemen be language of finance exactly.
7:25
Speaker 4: So this is something that's not unique to private credit. Right,
7:29
Speaker 4: So property funds, like if I've got a fund full
7:31
Speaker 4: of shopping centers and someone wants ten percent of their
7:34
Speaker 4: money back, why may not have that in cash? And
7:37
Speaker 4: like you say, I can sell a Commonwealth Bank share
7:39
Speaker 4: in two seconds flat, takes longer to sell a shopping center.
7:42
Speaker 4: And so private credit is direct lending, right, So a
7:45
Speaker 4: lot of these funds will go out director businesses and
7:48
Speaker 4: then directly to them. And you can't just buy or sell,
7:53
Speaker 4: you know, a loan for Bob's Fish and chip shop
7:56
Speaker 4: the same way that you can other assets. And so
7:59
Speaker 4: it's all always written in the fine print, and no
8:01
Speaker 4: one minds the fine print until they mind, and then
8:04
Speaker 4: they mind a lot that generally, these kinds of funds
8:08
Speaker 4: cannot tolerate more than five percent of investors, you know,
8:11
Speaker 4: requesting their cash at any one point in time. And
8:13
Speaker 4: so with a lot of these things, if it's a
8:17
Speaker 4: psychology type thing, you see you know, other people going
8:20
Speaker 4: to redeem, and it kind of fuels other redemptions. And
8:23
Speaker 4: so we have seen quite a few funds in the
8:26
Speaker 4: US term what's called gating or locking, or I suppose
8:30
Speaker 4: another term would be freezing their funds where they say, look,
8:33
Speaker 4: you know your money's still here, it's just we can't
8:36
Speaker 4: cash it out right now because again it's tied to
8:39
Speaker 4: a loan and that loan has terms. And again this
8:43
Speaker 4: we saw last year in Australian fund froze redemptions and again.
8:47
Speaker 4: But it's really quite prominent in the US where you're
8:50
Speaker 4: seeing all of the big names so blue out areas Apollo, Blackstone,
8:56
Speaker 4: Blackrock via their acquisition of HPS. They're all based sickly
9:00
Speaker 4: experiencing the same problems. And I suppose this is most
9:03
Speaker 4: pronounced where if you're a big institutional investor, so sovereign
9:08
Speaker 4: wealth fund, big super fund or something like that, it's
9:11
Speaker 4: quite unlikely that you desperately need your money. But this
9:14
Speaker 4: is where these kinds of investments aren't as well suited
9:17
Speaker 4: to individual mum and dads because they may need that
9:21
Speaker 4: money and they may not have the ability to write
9:23
Speaker 4: it out for five years, two years, six years, one year,
9:26
Speaker 4: however long it takes for these loans to roll off.
9:28
Speaker 4: And so this is where you're seeing, you know, things
9:33
Speaker 4: that were marketed perhaps to investors as being a lot
9:35
Speaker 4: more liquid than they actually are in reality. And with
9:39
Speaker 4: all these kinds of things. In good times, it's a
9:41
Speaker 4: lot easier to sell. But when the opinions change, when
9:45
Speaker 4: you know, the mood around the asset class changes, suddenly
9:48
Speaker 4: liquidity or ie buyers completely dry up. And then it
9:52
Speaker 4: becomes the discussion, Well, you've got two choices. You can
9:56
Speaker 4: either write it out and you can hold those assets,
9:58
Speaker 4: or you may have some enterprising person who's willing to
10:02
Speaker 4: buy your share off, but for less than you might want.
10:05
Speaker 4: So we've seen, you know, reports of people taking or
10:09
Speaker 4: people offering, say twenty thirty percent discounts to what XYZ's
10:13
Speaker 4: fund might be worth, you know, on their balance sheet.
10:16
Speaker 4: But they say, look, I'll give you seven seventy dollars
10:19
Speaker 4: for one hundred dollars if your share kind of thing.
10:21
Speaker 2: The sharks are circling, they are.
10:24
Speaker 1: Yes, any seasoned listeners will be familiar with the term
10:27
Speaker 1: credit default swap, which generally sends a tremor through any investor,
10:33
Speaker 1: anyone whoever.
10:33
Speaker 2: Hears that word.
10:34
Speaker 1: So credit default swaps were where they were the instrument
10:38
Speaker 1: of choice during the GFC. And when all these investment
10:41
Speaker 1: banks around the world, and I add, by the way,
10:43
Speaker 1: Mcquarie Bank here, people start playing credit default swaps and
10:48
Speaker 1: what they were doing was they were basically betting on
10:50
Speaker 1: whether financial organizations.
10:53
Speaker 2: How they would survive.
10:54
Speaker 1: It was like a distressed desk game, and it is
10:57
Speaker 1: starting now in the US with the private credit people.
11:01
Speaker 1: Before this sounds like too severe, I just want to
11:04
Speaker 1: make a point that, as I said at the start,
11:06
Speaker 1: we are not suggesting I'm not suggesting for one moment
11:10
Speaker 1: you keep away from private credit. What I'm trying to
11:12
Speaker 1: do is protect and inform all investors here about something
11:17
Speaker 1: that we have warned about consistently through the show, but
11:19
Speaker 1: also we have highlighted it at its best. And if
11:22
Speaker 1: you want to listen to Charlie Viola on the show
11:26
Speaker 1: a few months ago supporting private credit and supporting what
11:29
Speaker 1: he thought was the best of private credit, then that
11:32
Speaker 1: show is.
11:33
Speaker 2: For you to hear. All Right, we'll be back at
11:35
Speaker 2: one moment.
11:47
Speaker 1: Hello, Welcome back to the Australian's Money Puzzlive podcast. James
11:50
Speaker 1: Kirby here with Andy Dorock of Independent Financial Advice. Andy
11:53
Speaker 1: is a financial advisor. Of course he's been on the
11:56
Speaker 1: show before. We're talking about private credit and trying I
11:59
Speaker 1: think to translate for you basically what is happening, and
12:03
Speaker 1: I suppose one of the things Andy, we haven't quite
12:05
Speaker 1: done is connect what's going on in Australia, what might
12:08
Speaker 1: go on, what might happen next with these issues in
12:10
Speaker 1: the US. Except to say, folks, there's sort of two
12:12
Speaker 1: lines of private credit, Andy, isn't there. There's like Austrians
12:16
Speaker 1: who got invested in the global scene through big funds,
12:20
Speaker 1: and then there's also locally private credit which has always
12:24
Speaker 1: been there. It just happens to be booming at the moment.
12:27
Speaker 1: Backing you know, property developers nine times out of ten.
12:30
Speaker 1: Let's just talk about the global stuff that we know
12:32
Speaker 1: of so far in terms of exposures to it and
12:37
Speaker 1: links with the Coder Capital, Koda Capital.
12:40
Speaker 2: I dealt with that.
12:40
Speaker 1: I talked to them during the week. They have about
12:43
Speaker 1: two hundred million linked with Blue Owl and they well,
12:49
Speaker 1: they would be watching it very carefully. In particular, they
12:52
Speaker 1: have a thing called the Blue Owl Credit Income Fund,
12:55
Speaker 1: which is a fund which is linked with the fund
12:57
Speaker 1: in the US. Crucially, folks make the point that though
13:00
Speaker 1: it's geated in the US, and it was explaining what
13:03
Speaker 1: geated is, only five percent of units can be withdraw
13:07
Speaker 1: on at any given time, which is kind of partially freezing.
13:10
Speaker 1: The Australian fund is not geated the Blue Credit Income
13:16
Speaker 1: Fund and also Andy one of the big super funds,
13:19
Speaker 1: NNGS superfund is also has about two hundred million other
13:23
Speaker 1: books releasing to Blue Oil. It's one of their investment managers.
13:27
Speaker 1: Is this just the tip of the iceberg?
13:30
Speaker 3: Yeah, definitely.
13:31
Speaker 4: So with Blue Out, those were two quite public affiliated
13:37
Speaker 4: investors in them. But broadly speaking, a lot of super
13:41
Speaker 4: funds have exposure to private credit and I would say
13:45
Speaker 4: a lot of the boutique manager wealth managers in Australia
13:50
Speaker 4: have pretty for a long time been big fans of it.
13:54
Speaker 4: The Future Fund is one of the larger investors in
13:58
Speaker 4: private credit. When you look at their last financial year reports,
14:02
Speaker 4: they've collectively got ten billion dollars in the and again
14:07
Speaker 4: that they're an investor that you would argue is very well.
14:09
Speaker 3: Suited to it.
14:10
Speaker 4: They don't need to withdraw their funds and they've got
14:13
Speaker 4: a long term horizon and they've got a lot of
14:15
Speaker 4: smart people who read the fine print and.
14:17
Speaker 3: Get the best deal.
14:18
Speaker 4: Other super funds as well, so NNGS is one that
14:21
Speaker 4: has exposure to Blue Out. There was reports from appro
14:24
Speaker 4: Data basically listing which funds have higher exposures. AMS super
14:29
Speaker 4: an industry fund, has quite a significant exposure to private credit.
14:33
Speaker 4: Some other retail funds MLC, for instance, has a comparatively
14:38
Speaker 4: smaller exposure, but quite a decent exposure to private credit
14:41
Speaker 4: as well. So this is very much across all of
14:44
Speaker 4: the big super funds.
14:46
Speaker 3: I'd say, and.
14:46
Speaker 2: Can I ask you which would you prefer?
14:48
Speaker 1: Which would you prefer to be in a big super
14:51
Speaker 1: fund knowing that they have exposure to private credit, or
14:56
Speaker 1: to be an investor SEF matters super fund, an active
14:59
Speaker 1: investor who went through the wealth manager and has taken
15:02
Speaker 1: a you know it, has taken an investment in a
15:04
Speaker 1: private credit fund.
15:05
Speaker 2: Which would you prefer to be?
15:08
Speaker 3: Every single time?
15:09
Speaker 4: I would rather be a big super fund. When you
15:11
Speaker 4: hear institutional investors talk about private credit, the first and
15:16
Speaker 4: most focused thing they talk about is risk. And when
15:20
Speaker 4: you hear wealth managers or the individual end of town
15:24
Speaker 4: talk about private credit, the first thing they talk about
15:27
Speaker 4: is return. So individual investors bring a much higher level
15:32
Speaker 4: of rigor to the field.
15:34
Speaker 3: They're much better.
15:36
Speaker 2: So institutional investors, is it?
15:38
Speaker 4: Yes, yeah, yeah, it's a part of me. Institutional investors.
15:41
Speaker 4: So big super funds and sovereign wealth funds.
15:43
Speaker 1: Their poules, right, they've got teams of people borrow through
15:47
Speaker 1: these documents.
15:48
Speaker 4: Yeah, often they employ diversification better as well. Like generally speaking,
15:53
Speaker 4: you'd rarely see big, hefty allocations to single strategies, single
15:57
Speaker 4: managers type things, so that they tend to spread, you know,
16:00
Speaker 4: eggs in more baskets kind of thing. And then fundamentally,
16:04
Speaker 4: if I'm going and buying this was when we spoke
16:07
Speaker 4: about private equity. If I think about private credit like
16:11
Speaker 4: a pizza, my kind of take on it would be,
16:15
Speaker 4: if you're an individual investor, you're probably getting the crust
16:19
Speaker 4: that a lot of the best stuff has been gobbled up,
16:21
Speaker 4: because once you have to make this kind of investing
16:25
Speaker 4: appropriate for individual investors, it comes with more layers, and
16:28
Speaker 4: with increased layers invariably comes increased fees, and invariably becomes
16:34
Speaker 4: more opaque. So something that's already not one hundred percent transparent,
16:37
Speaker 4: and I don't mean that in a derogatory way, it's
16:39
Speaker 4: just the nature of the type of loans that are
16:42
Speaker 4: in there, it becomes often more byzantine, more opaque, less
16:48
Speaker 4: transparent what you're invested in. And again, when returns are good,
16:52
Speaker 4: no one cares. But when returns aren't, people care a lot.
16:56
Speaker 2: What's the buffet thing? When the tad goes out.
17:00
Speaker 4: Yeah, when the tie goes out, you see who's been
17:02
Speaker 4: swimming naked?
17:03
Speaker 3: Is It's got to be one of the most used
17:05
Speaker 3: terms in the world.
17:06
Speaker 4: I think there might be some high net worth investors
17:08
Speaker 4: that will get a pretty good view of some say
17:10
Speaker 4: cucumbers over the next couple of years.
17:12
Speaker 1: After you yes, well, I mean to be fair to
17:15
Speaker 1: the wealth boutiques out there, and we all know who
17:19
Speaker 1: the big names are. They would have felt they must
17:24
Speaker 1: provide this. People would have been sitting opposite saying, hey,
17:27
Speaker 1: the Future Fund is making you know, marked out of
17:29
Speaker 1: private credit.
17:30
Speaker 2: I want in.
17:31
Speaker 1: And so they went off and metal arrangements with what
17:33
Speaker 1: they thought were the best players. And it now turns
17:35
Speaker 1: out their best players are in trouble. And I want
17:39
Speaker 1: to say one thing, folks about this thing about being gated.
17:42
Speaker 1: You will find and perhaps after this show, let me
17:45
Speaker 1: tell you, I'll get calls and they will say, listen, James,
17:48
Speaker 1: you know it's geated.
17:49
Speaker 2: We're doing the right thing. This is good, this is
17:52
Speaker 2: good for the industry that we can do this. But
17:54
Speaker 2: I don't know.
17:54
Speaker 1: I don't think it's good that you can't get your
17:56
Speaker 1: money out of something clean and simple.
17:58
Speaker 3: Doesn't convince me on that as well.
18:01
Speaker 4: Like these are loans, right, so so ideally they're rolling over.
18:05
Speaker 4: So in a perfect world, you know, you might not
18:08
Speaker 4: be able to sell all these things instantly, but you know,
18:11
Speaker 4: it depends on the manager. They might have one hundred,
18:13
Speaker 4: they might have more, they might have less loans, and
18:16
Speaker 4: every quarter a certain degree of those should be rolling over.
18:19
Speaker 4: So it's not that you'll never get your money back,
18:22
Speaker 4: even in you know, worst case scenario x y Z,
18:24
Speaker 4: fun freezer's gates, whatever, it's just when you will get
18:27
Speaker 4: it back. That's the key thing here.
18:29
Speaker 1: Yeah, because to as you say, they are acid backs, right,
18:32
Speaker 1: so they didn't sign up these loans they're paying mostly generally,
18:35
Speaker 1: they're not paying the sky and they're acid.
18:37
Speaker 2: Yeah.
18:38
Speaker 4: Just on that though, Like if you are you know,
18:41
Speaker 4: getting credit from or a loan or debt or whatever
18:44
Speaker 4: from a private credit firm, it generally means that you're
18:48
Speaker 4: probably not able to get it from a bank or
18:51
Speaker 4: the bond market. So one of the one of the
18:54
Speaker 4: issues people have with the space at the moment, and
18:57
Speaker 4: particularly on this sas bocolypse type thing is that a
19:01
Speaker 4: lot of these businesses aren't as backed by you know,
19:04
Speaker 4: hard assets as you would like as a creditor. So
19:07
Speaker 4: you know, you might have written a piece of code
19:10
Speaker 4: that's the you know, the tinder for dogs or something,
19:13
Speaker 4: and then if Claudin Ai is going to take the
19:15
Speaker 4: value of that down, well, there might be some Kombucher
19:19
Speaker 4: and MacBooks in the place, but there's not you know,
19:21
Speaker 4: a pipe factory or something like this. Yes, On the
19:24
Speaker 4: private equity side of things, again you'll find that private
19:27
Speaker 4: equity and private credit are very symbiotic relationship that are
19:31
Speaker 4: not uncommon. Strategy of private credit apart me private equity
19:35
Speaker 4: is to sell hard assets when acquiring a business, so
19:39
Speaker 4: it's not to And again these are cover all manner
19:42
Speaker 4: of industries. Thes a huge dispersion of managers, as a
19:45
Speaker 4: huge dispersion of geographies underlying businesses of all manners. But
19:50
Speaker 4: it does pay to remember, Hey, if you're getting a
19:52
Speaker 4: loan as a business from a private credit firm, it
19:56
Speaker 4: might in some circumstances mean that you can't get it
19:59
Speaker 4: from a bank. I'm sure there are in many cases
20:00
Speaker 4: they can, but in some it might not.
20:03
Speaker 1: I noticed on the ESX. Of course, anything linked with
20:05
Speaker 1: this area of private credit. It's down against a broader
20:07
Speaker 1: market that's metrics, et cetera. There down KK or the
20:10
Speaker 1: big private credit fund is down. But I want to
20:14
Speaker 1: ask you, is it wish for thinking? Some people say
20:19
Speaker 1: the Australian private credit market is better than the US
20:23
Speaker 1: one or the global one because it is not so
20:25
Speaker 1: evolved and so it's more linked with traditional property assets.
20:30
Speaker 3: Well it isn't. It isn't.
20:32
Speaker 4: So you know, twelve months ago people thought international was
20:36
Speaker 4: better because it was tied to software businesses. And so
20:39
Speaker 4: I suppose in the context that Australia is It depends
20:43
Speaker 4: who you ask. Ask estimated that real estate is around
20:46
Speaker 4: forty to sixty percent. Again, you can only do guesstimates
20:50
Speaker 4: our private credit in Australia. Correct and bear in mind
20:55
Speaker 4: this is very commonly not borrowing necessarily against completed assets.
21:00
Speaker 4: I'm sure in a lot of cases it is, but
21:02
Speaker 4: not infrequently. This will be things like mezzanine finance or
21:06
Speaker 4: developer finance.
21:07
Speaker 1: So I'm sorry to interrupt you, but it's for property development, right,
21:11
Speaker 1: that's yeah, incorrect, It's for risk it's for risky development exactly.
21:17
Speaker 4: It's not necessarily Hey I've got this wonderful you know
21:20
Speaker 4: toll road, do you want to buy some debt against it.
21:22
Speaker 4: It's as you say, it's very entwined with property development,
21:26
Speaker 4: and it is high risk. And one of the things
21:28
Speaker 4: with property is it can fall prey to exogenous shocks, right,
21:33
Speaker 4: so there are potentially external factors that could impact you know,
21:39
Speaker 4: the property market. And I'm talking mostly for again developer
21:43
Speaker 4: and commercial property here, but I suppose the other consideration
21:46
Speaker 4: is the thing that everyone with the benefit of hindsight
21:49
Speaker 4: is now talking about, is that Blue Out particularly is
21:52
Speaker 4: an investor that had a lot of tech exposure. And
21:54
Speaker 4: the golden rule with you know, credit investing is do
21:58
Speaker 4: not have too many eggs in one basket. And so
22:01
Speaker 4: you look at the Australian you know context, and you say, well,
22:05
Speaker 4: inherently it's just got a lot in property, and you know,
22:07
Speaker 4: perhaps that's a good thing right now. But as you know,
22:11
Speaker 4: as a seizing credit manager, I would think that they
22:13
Speaker 4: might look at that and say, we'd rather a more
22:15
Speaker 4: diverse book of borrowings. And again this will depend on
22:19
Speaker 4: what fund you're in, what manager you're in, and all
22:21
Speaker 4: manner of things, but generally speaking, we are in Australia
22:25
Speaker 4: much more exposed to property in the private credit space.
22:28
Speaker 1: Okay, that's very clear. Okay, thank you Andy. Look before
22:31
Speaker 1: we go to questions, where do you think this girl's
22:34
Speaker 1: from here.
22:36
Speaker 3: Well, it's hard to say.
22:37
Speaker 4: I think one of the probably the greatest credit investor
22:41
Speaker 4: of all time, Howard Marks of Oak Tree, did a
22:43
Speaker 4: really illuminating memo on this recently and his take was, look,
22:48
Speaker 4: it's probably not as bad as people think. Again, it
22:51
Speaker 4: pays to remember it's a big it's a big space.
22:54
Speaker 4: This is trillions of dollars. There's insurance companies, sovereign wealth companies,
22:59
Speaker 4: all the rest. So I don't think it will erupt.
23:02
Speaker 4: I don't think it will cause major issues. I think
23:04
Speaker 4: the thing that people will remember, hopefully, is that liquidity
23:08
Speaker 4: isn't guaranteed. That you may have to wait a amount
23:11
Speaker 4: of time to get your investment back. But these are loans,
23:15
Speaker 4: you know, the leverage isn't as extreme as other things
23:18
Speaker 4: in the past that have blown up. These are funds
23:20
Speaker 4: that are lending. You know. It's not a bank situation
23:23
Speaker 4: where you might have you know, ten to eleven times
23:26
Speaker 4: you know, lending These aren't prudential instruments.
23:28
Speaker 3: So I think everything will be fine.
23:30
Speaker 4: It'll just be hopefully everyone gets their funds back when
23:35
Speaker 4: they want them. And you know the natural experiences when
23:39
Speaker 4: you're lending to high risk companies that some of those
23:41
Speaker 4: will go bust, and that's normal. What should happen is
23:44
Speaker 4: that the interest from the other loans that do perform
23:47
Speaker 4: more than outweigh that. So I'd say I don't think
23:50
Speaker 4: anyone needs to stay awake at night being fearful. It's
23:55
Speaker 4: just hopefully a reminder that you know, sometimes products are
23:59
Speaker 4: marketed as been higher return, but that return has to
24:02
Speaker 4: come from somewhere.
24:03
Speaker 1: Right, Yeah, and you have to read the fine print
24:05
Speaker 1: and if you don't find someone who understands it, because
24:08
Speaker 1: as you say, it's all fine saying you can't get
24:11
Speaker 1: your money out and it's gated and you'll get it
24:13
Speaker 1: in the end, but hey, that doesn't really if you're
24:16
Speaker 1: sitting there wondering if you're ever going to get your
24:18
Speaker 1: hundred ground back, because often it was a hundred grand
24:20
Speaker 1: to go into these dronts and they say, well, you know,
24:22
Speaker 1: and you get it back in three years time, Well
24:25
Speaker 1: you're not winning, Okay, we'll take we will take a
24:29
Speaker 1: short break.
24:29
Speaker 2: You can digest all that at your leisure, folks.
24:31
Speaker 1: I have some very good questions for Andy. Hello, welcome
24:39
Speaker 1: back to The Australian's Money Puzzle, James Kirby with Andy
24:43
Speaker 1: Daruck of Independent Wealth Advice, which who is as you
24:49
Speaker 1: can gather an independent wealth advisor.
24:52
Speaker 2: That's why he's able to talk so freely on this show.
24:55
Speaker 1: And that's the advantage of independent advisors of course, which
24:58
Speaker 1: as you know, I like, I prefer all right, Mark says,
25:04
Speaker 1: Mark asks, there is a lot of noise regarding the
25:07
Speaker 1: current fifty percent discount our capital against tax for assets
25:11
Speaker 1: sold after twelve months. Prior to this, the cost base
25:15
Speaker 1: was index to CPI. Now it looks like it's going
25:18
Speaker 1: to be reduced. That's the discount is going to be
25:20
Speaker 1: reduced from fifty perhaps to thirty three. Has anyone giving
25:24
Speaker 1: thought to how that capital should be assisted or should
25:29
Speaker 1: it be averaged over the life of the gain. Mark
25:32
Speaker 1: the room was swirl and swirl. They're going to do
25:34
Speaker 1: something with CGT. I was pretty convinced they were going
25:38
Speaker 1: to cut it from fifty to thirty three percent.
25:41
Speaker 2: That's the discount. Perhaps they'll go back to the old
25:44
Speaker 2: way back to the future.
25:47
Speaker 4: What do you think, Andy, I like, you don't know,
25:51
Speaker 4: And I really enjoyed when you had a question similar
25:54
Speaker 4: to this recently, saying if you do one thing, do
25:56
Speaker 4: not make big investment decisions based on hearsay, room and fact,
26:01
Speaker 4: and especially with things like property that have high transaction
26:04
Speaker 4: costs and taxes and all the rest. So I think, like,
26:07
Speaker 4: based on all the smart people I listened to yourself
26:10
Speaker 4: concluded that the amount of you know, tacit leaking that's
26:15
Speaker 4: gone on with this pretty much guarantees that there's going
26:18
Speaker 4: to be some changes to CEGT.
26:19
Speaker 1: They're obviously you know what, as a journalist, I'm disappointed
26:22
Speaker 1: with the amount of tacit linking.
26:24
Speaker 2: Oh there's not an expecting more.
26:26
Speaker 1: Yeah, normally we'd have one or two a week by
26:29
Speaker 1: now we've only had a two.
26:32
Speaker 4: Well, I tell you what, if I was a real
26:33
Speaker 4: estate agent, I'd have my phone switched on at four
26:36
Speaker 4: pm on the on budget night on May twelve, because
26:39
Speaker 4: I reckon, you'll have some panicked people. But generally, look,
26:43
Speaker 4: there's too much that's still unknown. So will it be grandfathered,
26:48
Speaker 4: will it be you know, siloed and quarantine? Just to
26:51
Speaker 4: residential investment properties. My guess is that it will only
26:56
Speaker 4: be restricted to REZI investment property. I have no you know, nothing,
27:01
Speaker 4: but just reading the news and my personal opinion to
27:03
Speaker 4: form that. And then it seems to be that the
27:06
Speaker 4: thirty percent or thirty three percent figure seems to be
27:09
Speaker 4: what most people agree on. How they get to that,
27:12
Speaker 4: I don't know. I don't know what the actuary that
27:15
Speaker 4: came up with that. I think it's this. It's a
27:17
Speaker 4: nice easy to pitch a number in your mind. And
27:20
Speaker 4: then yeah, I would be surprised if it includes assets
27:24
Speaker 4: like shares. Personally, I haven't seen anything to that, you
27:29
Speaker 4: know degree. I think the government's acutely aware. They don't
27:32
Speaker 4: want to come out with two big a surprise, So
27:34
Speaker 4: that would be my opinion. But this will be this
27:37
Speaker 4: will be something that will dominate headlines for the next
27:39
Speaker 4: three to four weeks.
27:41
Speaker 1: As I say, bring on the leaks. Okay, yes, we're
27:45
Speaker 1: not the game. I'm familiar with the game. It's a game.
27:46
Speaker 1: We'll gaite familiar with the game. In fact, it's a
27:48
Speaker 1: game to lock us up for six hours. That's another game.
27:51
Speaker 1: But I did with that another time. Oh Keith, thank
27:54
Speaker 1: you Mark Information only in most of course, Lily, Is
27:57
Speaker 1: it true that people will be paying Division two nine
28:01
Speaker 1: and six supertax on assets they never receive if the
28:04
Speaker 1: super goes straight through to a surviving spouse.
28:09
Speaker 2: Okay, so hmm.
28:11
Speaker 1: That's a tricky that is a So somebody has enough
28:16
Speaker 1: super that they're exposed division two nine six, they have
28:19
Speaker 1: more than three million, they die, that money goes their
28:24
Speaker 1: Division two nine and six tax bill goes to the stage.
28:28
Speaker 1: Is it possible that the surviving spouse doesn't pay it?
28:31
Speaker 1: Under the state people do?
28:33
Speaker 4: So this is one that I did read somewhat recently,
28:37
Speaker 4: and so I'd say that this is a highly esoteric
28:40
Speaker 4: field like niche if you will.
28:43
Speaker 3: And then the.
28:44
Speaker 4: Only other thing I'd say is at a headline figure,
28:48
Speaker 4: the actual taxes that would be liable, my guess, would
28:51
Speaker 4: be in the low single digit thousands kind of thing.
28:54
Speaker 4: If unless you're you've got you know, north to ten
28:56
Speaker 4: million dollars in your super accounted as I understand that
28:59
Speaker 4: this iss at the super fundmt of profit during that year.
29:02
Speaker 4: So again, this would be unique to an SMSF where
29:05
Speaker 4: they are responsible for their own So if this were
29:09
Speaker 4: if someone does have more than three million dollars in
29:12
Speaker 4: their superannuation account and it's you know, they're doing their
29:16
Speaker 4: estate planning. They can make arrangements to pre empt this,
29:21
Speaker 4: so you could have conditions or clauses or something to
29:24
Speaker 4: that effect that the executives or the legal personal representative
29:28
Speaker 4: of the estate itself wouldn't be liable for a bill
29:31
Speaker 4: if indeed their persons superbalance went to say a spouse
29:35
Speaker 4: or something like that, but they opted to install their
29:39
Speaker 4: children or something similar as the benefits. So the short
29:42
Speaker 4: answer is, as I understand it, it's theoretically possible. I'd
29:46
Speaker 4: say you've probably got a higher chance of playing in
29:49
Speaker 4: the Australian cricket team than it actually happening to you.
29:52
Speaker 4: I hope it happens to all of us because it
29:54
Speaker 4: means we've got magnificent superbalancers. But I'd also say it's
29:57
Speaker 4: one of these things that it is like a if,
29:59
Speaker 4: but maybe oh my goodness. But you can also make
30:02
Speaker 4: arrangements that would prevent something like this happening, and that
30:05
Speaker 4: would involve specialist legal advice on your estate planning, which,
30:09
Speaker 4: to be honest, if you've got that much in an
30:11
Speaker 4: SMSF is money well spent. And then outside of that
30:15
Speaker 4: as well, making sure that your nominations, meaning if something
30:19
Speaker 4: were to happen to me, I'd like my super to
30:21
Speaker 4: go to this person. That Again, you're conscious of the
30:25
Speaker 4: tax implications of that, because hypothetically the DIV two nine
30:28
Speaker 4: six arrangements coming to affect one July, so you know
30:34
Speaker 4: that's when these kinds of things will come. So yeah, again,
30:38
Speaker 4: as I understand it, theoretically possible, but.
30:41
Speaker 2: Yeah, improbable in reality.
30:43
Speaker 4: Yeah, and it also depends on you know, you super
30:47
Speaker 4: going to someone else as opposed to you know, the
30:50
Speaker 4: actual nomination and this kind of thing. So it's a
30:52
Speaker 4: very it's very unlikely, but like a lot of these things,
30:56
Speaker 4: it's solvable with the right advice.
30:58
Speaker 1: Now you go and way on the probabilities of paying
31:01
Speaker 1: for the Australian cricket team. Used to be a CEE eleven,
31:04
Speaker 1: but now there's three teams. You see, there's the twenty twenty,
31:07
Speaker 1: there's the fifty to fifty, there's the Chay. So the
31:09
Speaker 1: probability Andy has improved slightly. But that's heaso charity as well.
31:13
Speaker 1: All right, folks, that was Andy Darrek. Thanks for coming
31:16
Speaker 1: on the show.
31:16
Speaker 3: Andy, thanks for having me. It's Ascribe podcast, love to
31:19
Speaker 3: be here.
31:20
Speaker 1: Well, we'd love to have you, and you're a regular
31:22
Speaker 1: guest and we'll hear from him again. Folks, keep the
31:25
Speaker 1: emails rolling enough to have some correspondents the money Puzzle
31:29
Speaker 1: at the Australian dot com dot au.
31:31
Speaker 2: Talk to you soon.