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Alternative Investment Opportunities In 2023

Posted on
15th December 2022
Author
By Shannon Turnbull

Alternative Investment Opportunities In 2023

Private Market Investment Opportunities in 2023 (By Shannon Turnbull, 15th December 2022)

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Transcript

Well, let's get to discussion about the alternative investment universe next year to do that. Mark Sherwood is standing by via Skype. Mark, welcome back. Our previous guest wrapping up his answers to what the investment environment looks like when it comes to unlisted assets. Next year was certainly a word of caution about how things are looking out there.

What's your take on how things are looking in 2023? 

Yeah. Good morning, David. Nice to see you again. I'll look, I think the comment is valid in terms of we are now in an environment where private companies are going to be borrowing at much higher rates already seeing that in the deals that we're looking at at the moment.

And we're in an environment where consumer spending no doubt in the first half of 2023 is going to slow and could slow quite rapidly in my eyes. So to your comment, I think from a private investment point of view or private markets point of view, it does mean you've got to have a really clear understanding of  where you sit in the capital structure. How senior you are as a creditor to any private organization and particularly what what see through towards the assets or security your particular position has.

And that's really where the time has to be spent. The time has to be spent having a deep understanding of the balance sheet of the private companies you're looking to potentially provide a debt funding opportunity to and with a very sound understanding of how they are going to manage higher repayments given you, I'm sure you'll be negotiating at higher terms given where the current yields have moved out to.

And then also whether that business is very susceptible to a change in their earnings profile if  consumer spending really slows. So that's really where we're spending a lot of our time.

Mark, you've got a lovely back there behind you and a streetscape and of course, lots of big, probably expensive real estate out there at the moment.  That's an area where a lot of people are concerned about this environment, where we're seeing so much front loading of interest rate tightening coming through, renegotiation of debt rollover as well. The risks associated with that, as you see things right now. How does real estate look as an investment class in the next year? 

Yes we have been quite underweight real estate, David in the last couple of years, particularly, I would say, real estate debt where we saw a lot of transactions that we're getting funded at what we thought were quite tight yields.  I think that's really changing as we speak and we're definitely seeing some more interesting opportunities that are worthy of us spending our due diligence time having a deep look at. So I think on the debt side of real estate funding, the terms are moving to a more tractable investment opportunity, particularly where you've got projects that might have been COVID delayed or supply chain delayed and simply they need a refinancing to get completed.

These kind of opportunities are very interesting ones, too, to have a look at, particularly where, you know, you've got a strong security LVR type position \ as a fallback. And then secondly, on the  equity side of real estate, there's no doubt the price adjustment that we've seen in the second half of 2022 is still playing out.

It's going to continue to play out in the first half of 2023 particularly if we get another rate rise and up. And that just makes for more favorable entry opportunities into real estate. If you're looking for real estate at the equity side. So I think from a real estate point of view, definitely it's more on our radar now than what it was two, two and a half years ago when it comes to the risks.

One thing that comes across the other really clearly when you talk to a lot of people understanding the capital structure, where you rank as a creditor in these and these deals, how important is that to have a recent cross-sell before you start to go and look and invest in these particular areas? 

Absolutely. I mean,  the objective is always to be as senior as you can possibly get as a creditor in private markets.

And if you're not senior, if you're subordinated to another creditor, it's really about having a deep understanding of who that creditor is and what is the underlying security position to make sure that the risk reward is in your favour. For us, it's also about having a deep understanding of the pool of assets that sit underneath our exposure.

So our preferred exposures tend to be for senior exposure where we've got straight recourse to a pool of assets that we know is a high quality pool of assets. So even if something went slightly wrong with the company that we're funding, we could still potentially take control of that asset pool and know that we're still going to get a strong investor outcome, even though the company might have seen some headwinds through that journey.

So that's really for us what it's about. It's about having the most senior position you can, particularly in an environment where companies are having to fund their debt at higher costs. And then secondly, having a strong security pool as a see through recourse should you need to take any type of action. 

You've got a really vast variety of different choices where you can go and invest in.

When you look to next year, what are some of the areas that you can point to and say this is where there's likely to be a real lot of excitement, a lot of deal making taking place. 

I think private product markets have expanded enormously this year David. And in answer to your question, I think it'll be a combination of private credit.

We've seen a lot of talk about the expansion of private credit in Australia throughout this year. I think that's going to continue in 2023. One of the factors that's helping that is that we're seeing a lot of very high quality companies stay private for longer. You know, volatility in equity markets and a slowdown in our peers in equity markets that we saw this year has definitely contributed to that.

So as we're seeing, you know,  some very, very strong growing businesses are choosing to stay private for longer. They continue to tap into private credit debt as they continue to grow their business. 

On the private equity side, I think it's going to be really interesting as well. There's a lot happening. There's a lot of opportunities to look at.

There's a lot of unique growing businesses in Australia that is trying to solve for real world problems or tap into parts of the market, perhaps where the banking sector has been a little bit slow or has tended to stay away from some of these opportunities, can be there to take private equity positions. And so I think it's going to be a combination of the two of those.