How this investor lent $5 billion - and did not lose a single cent of capital

While it is true that fundies tend to be very educated and very experienced people, not every fund manager in this business can say they went to two elite schools in their lifetime. But Nick Raphaely, co-CEO and co-founder at AltX, has studied at two of the world's most prestigious institutions - Cambridge University and the Wharton School of Business (the latter of which boasts Donald Trump and Elon Musk as alumni). 

But Raphaely is far from just a professional student. Following his university days and a stint at Merrill Lynch (now Bank of America), he became a serial entrepreneur and investor. AltX is the third company Raphaely has founded but it is the one that has had the most success and the longest track record of any of the firms he has set up.

In this edition of The Pitch, Raphaely shares some insights about what his time at Wharton and Cambridge taught him, the best and worst parts of being a founder in funds management, and one place where he is finding great opportunities today. 

Note: This interview was taped on Tuesday 11 June 2024.

Edited Transcript

Raphaely: When I reflect on my academic journey and how it's impacted my ability to be involved in starting and building a business, I think that what I learned at university gave me a very good base framework. I studied both finance and law and if you think about what we do in our business, we are in the lending business. So it's a combination of understanding the numbers, what rate are you lending at? How does the math of the various fees and interest rates work? And then there's a legal aspect. How are you contracting with your borrower? How are you funding yourselves with investors? What are the contracts that support the underlying loan transaction? So I think having studied both finance and law, that gave me a really good base to understand and I guess have a springboard into what I'm doing.

Raphaely: I actually began my business career after I finished university in corporate. So I joined a company called Merrill Lynch. They don't exist anymore, but they were one of the investment banks in the late 1990s/early 2000s, and it was subsequently taken over by Bank of America. I viewed that as a good opportunity to be in a training ground and to learn how business works and learn best practices in structuring, modelling, negotiation, and being part of a team. I think that gave me a really good foundation. 

But I think once I left there, I realised that the difference between big business and small business is huge. I'll give you an example. If you want to decide on a big company, what happens? Three or four people get in a room, you discuss it, everybody kind of gives their point of view, but everybody's a little bit guarded because nobody wants to stick their neck out. And then you probably try and reach an answer about consensus and emails may follow, and you broadly move in a direction, but if anything goes wrong, nobody wants their stamp on it because they have to own it. So decisions happen very collaboratively and very slowly. 

In small business, you'd be dead in the water if you had to take that long to make decisions. So you take your decisions instantaneously in real time as things are happening, and if they're wrong, you're going to fix them and change them. So I think that big business will give you a certain structure. But coming back to what I was saying at the beginning, once you're in business and you're in business for yourself, you've got to figure it out on the go.

How did you deal with the historic rate hiking cycle from 2021 to 2023 in your asset class?

Raphaely: It's a really good question. We've lent almost $5 billion, and we've done that without any loss of capital, and we've always paid 100% of interest owed to investors. So we're able to point to a very strong track record. 

Now, some of our detractors would've said in the early years up, but you guys lent into a very benign environment. You started the business, rates went down, and assets went up. Blind Freddy could have done this without losing money. There's nothing special about you guys. 

But then things change. We had a small market correction in 2018/2019, then came COVID where things jammed up altogether, and then came the rate rises where rates shot up, and asset values corrected. 

We've had to trade through different environments, and I think that's put the robustness of the model to the test. We've had to show that our underwriting, our credit, and our assessment of collateral have been able to weather different environments. And it's been difficult. It's been a much more tricky process to assess collateral values in a moving environment. But as I said, the business has been able to maintain the track record and I think has done very well.

Raphaely: I think construction funding is an area where we see massive opportunity because I think there's a bit of a disconnect there between the way that the investor capital season and what the actual risk is. 

So just to unpack that a bit, we do ground-up construction funding for first mortgages. So what that means is we'll provide loans from $3 million up to $40 million to developers for projects. The things we are building include small blocks of apartments, townhouses, luxury houses, and duplexes. So we're not doing part-pieces or part-builds, and we're not doing massive high rises either like 40-story buildings. We like that space in the middle because we feel that those are projects of a size and a scope where if anything went wrong, we'd be able to send our team in to finish them operationally. And also we'd be able to muster the financial resources to get the projects done.