Realside (now Keyview): "The worse things get, the better they get for us"

It's increasingly difficult. It's not impossible and by no stretch of the imagination, in the same way that equity markets companies are still raising capital, in debt markets, companies are still being able to source credit. 

But it's fair to say that as volatility in prices increase and liquidity pulls back, the increasing difficulty for companies and certainly various sectors are well and truly on the nose. 

Tech, for example, is finding after many, many years of it being halcyon days and having very, very cheap funding is an example of a sector that's finding things a lot more difficult to fund in the current market.

What does the Realside Capital Flagship Fund (the Fund) offer investors?

Let me step back and talk a little bit about Realside to set the context. So, as you mentioned, we manage unlisted property as well as private debt, and really the ethos or the philosophy of how we approach everything is opportunistic investment. And so the flagship fund is basically a diversified portfolio of senior secured loans against high quality assets or companies where we are able to provide bespoke structured finance to them to solve a growing need or a short term challenge and basically provide them a solution they can't typically get from a commercial bank and equity markets are going to be a lot more expensive for them. So it's a good balance between us providing a high level senior secured position, getting attractive economic terms on the base of that, and so the fund is a diversified portfolio that is giving investors low double digit consistent returns.

What does it mean to be "opportunistic" in the private debt market?

There's a generic term that people use in markets about buying beta, which basically means you're buying a spread of things, and so if things go up and things go down, you are inherently being exposed to that. 

Opportunistic investment is basically you are being far more concentrated, far more bespoke, and waiting for specific opportunities to come along that meet the right risk characteristics. 

And risk is the first thing we always focus on. And then once they meet those risk characteristics, we're able to achieve the sorts of return targets that we want to achieve for our investors.

What is "opportunistic" investing in the context of private debt?

Let me give an illustration that everyone will be able to get their head around. Australians love residential property. We don't invest in residential property, but just use it as an example. And imagine there's a best house on the street that comes available. Yesterday, it used to be worth a million bucks and today you can pick it up for $600,000. That's opportunistic. Now, the reason for that might be that they've suddenly had a divorce and they want to leave, et cetera. That would be an example in the real world of someone who pragmatically owns residential properly. It is what an opportunistic purchase might look like. For us, it might be that typically an investment falls into one of three buckets. An asset or a company has a very short term funding need because an opportunity has arisen for them, be it a take over.

Another funder has pulled out and they can be a commercial bank who just administratively don't get there in time, and we've had examples of that over years where a company, a good company and one going into listing last year, for example, they were four weeks out from their IPO and one of the major banks suddenly said, "Oh look, you credit approved, but we won't get there in the next six weeks because of these administrative problems." They were stuck. So timing issues is an example. The bespoke nature of the solutions, so I'll talk a little bit later about commercial banks and how they approach things. 

But, ultimately, if you want something that's slightly outside the box, then typically commercial banks don't know how to solve that. 

And the other one's just complexity, so it takes more work and due diligence to actually ascertain whether it's a valid investment or not.

And, again, a lot of funders in the market aren't structured and aren't placed to actually do that sort of work. So there are three examples of how opportunities come to us and we achieve the levels of return we do without taking more risk for our investors.

Do those idiosyncrasies present a risk challenge? And if so, how do you mitigate them?

We don't move the dial ever on risk. We know the amount of risk we're willing to take and we always want to have a very secure, typically senior position in the capital stack. So what that means is you're last dollar in, first dollar out. 

So it means a lot of other people can lose money, but we're basically protected being the most senior position. We're typically looking for asset backing. Be that commercial property, be that land, be it other elements, but because it's bespoke, because we are tailoring these things on an individual basis, we look for cross collateralization. What that means is we try and grab other bits of security that might be available. We also look for personal guarantees. There's a whole range of things we typically do to mitigate the risk and, ultimately, because it's bespoke, we're not out there just writing deals. So if the market changes the terms and you're a large lender and the market suddenly becomes a lot more what's called covenant light, we just stop participating. We have no interest. So a high return doesn't need to be correlated to high risk.

What makes a private debt deal attractive in your eyes? By the same token, what's a red flag of a deal you'd stay away from?

Look, there are deals we've done where we've lent someone money against 20% of their asset base and they have paid us returns that are in the 30s to 40s percent. Now, why would they do that? Because, ultimately, the commercial problem they're trying to solve and the speed and the flexibility they need to solve that is such that they're willing to pay to have that outcome. So that's like saying, "David, your house, it's worth $1 million. I'll give you $200,000, but I'll charge you a 30% interest rate." You might be incredibly happy for that because you need that $200,000 to go and buy an asset that's worth five million, but you've been able to secure it for $200,000. Now, that sounds a little abstract, but there's a whole range of complexities where people have got options to buy other businesses, settle on some land that's incredibly valuable for them, do a takeover that has strong strategic benefits where they're actually wanting to pay for that flexibility and that fluid in that movement.

And, ultimately, there's a lot of participants in the market that don't actually have that presence and they're not set up from a business perspective to achieve that. So you can imagine rolling into your local bank branch this afternoon wanting to borrow $25 million that you need to solve in a complex manner, and it's hard enough to find someone to talk to, let alone actually then have the business structure and set up to achieve that. And that's before we get to regulatory rules and regimes and boxes they need to tick, et cetera where we have the flexibility and fluidity not to take more risk, but actually to structure it in a way that we can get the outcome and then actually achieve a high rate of return for that level of risk we're happy to take.

How has the investment pipeline been affected since the onset of volatility this year?

Fantastic.

The worst things get, the better they get for us. 

I think there was a comment recently where someone said, "Look, it's always better to be investing in a market where things are going up," and that's like saying it's good to go and buy a residential property when there are 30 people turning up to the auction. We prefer to be the only person in the room and having a negotiated conversation with someone on the other side where they're actually needing to sell. The current market, the first question you ask is around the current market and that volatility, as I said. Rates have gone up. That's flowed through the credit markets. It means we can now achieve a much higher level of return. Again, we never want to go up the risk curve and it just is a very, very lucrative market to be investing in, and we expect 2023 to be much the same.

And traditional lenders have pulled out of the market, or at least their minimum benchmarks for lending have increased?

I'd say generally in these sorts of market environments, liquidity starts disappearing. Liquidity finds a whole range of other homes and there just becomes a higher bar that people need to meet for investment. 

One of the strange things about human nature is, the more attractive the market becomes, or it falls, a lot of people actually step back in those markets, where in actual fact they're the same assets, it's the same risks, especially when the instruments are structured and secured in the way that we go about it. 

Yes, those participants are there, but I think there's a huge amount more caution. We're certainly seeing that from the commercial banks as well. They're probably lifting their bar as to where they're happy to lend at. So it's just increasing the opportunity set across the board.

You typically invest in deals at around the $75 million mark and below. What is it about that corner of the market that's attractive?