Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
Why these ‘medieval merchant bankers’ don’t play in property
There are unquestionably more players in Australia’s “broad church” private debt space than ever before, according to Causeway Financial, with a new or established manager launching a strategy seemingly every other day.
But the ubiquity of property in Australia – and the fact that it’s well understood by both asset managers and their investors – means that a large number of new entrants to the local private debt market are choosing to operate in an increasingly crowded space.
“At a rough guess, if you look at the amount of private debt players that are out there now more than 90 per cent of them would be property based,” says Mike Davis, co-founder of Causeway. “And that’s fine. There’s a place for that, but we don’t play in it; that’s a crowded space, and in the GFC where we did have a bit of property exposure in our first fund, that was the nastiest asset we had to deal with.”
Causeway, which was founded in 2004, focusses on the small end of the market – businesses that have around $5 million in revenue that want to borrow somewhere between $2-25 million. That brings it in above “the proverbial payday lenders, the specialist plant and equipment lenders and the invoice discounters” and below corporate bond and leveraged loan territory.
“These people don’t have massive teams; their finance department might be the owner and an accountant and an external adviser, so going through a refinance for them is a major task,” Davis says. “If BHP gets knocked back by CBA they go and knock on NAB’s door and they just move forward. That doesn’t happen for these guys – if it doesn’t get executed on they’ve invested a lot of time and energy and not gotten anywhere.”
“What we do is medieval merchant banking; it’s what the Médicis did 400 years ago in Italy. We’re assessing four Cs: the character, the cashflow, the collateral and the applying covenants.”
Its investors run the gamut from financial advisers and private wealth management groups to family offices, where the ‘next generation’ has very different ideas about how they want to invest.
“There’s definitely a growing group of investors who are focused on what we’d call ‘do no harm’; you’re not trying to solve the sins of the past and throw everything out,” says Causeway co-founder Tim Martin. “But the next generation is stepping into family offices and sometimes female members of those families are taking a much bigger role, and they’re often interested in different areas – childcare, healthcare and positive outcomes, as well as filling gaps where the older generation might have been more interested in buildings and mines and factories.”
But while the growth and consolidation of Australia’s superannuation funds means they’ve largely blown past the ability to write smaller tickets, that doesn’t mean there’s not opportunities to create bespoke solutions for institutions interested in fulfilling specific investment goals.
“That kind of thing is doable but you have to be patient about the growth,” Martin says. “I think there’s significant opportunities now for what I’d call specialty finance funds, which might be focussed on a sector or a geographical region; it might be a litigation or yellow goods or education. Maybe they want a northern Australian development, or a Tasmanian fund – it’s about finding sectors where people have specific interests.”
