This private debt fund is plugging the gap left by the Big 4

The overall market state is at infancy, so the Australian market is developing at the moment. We are probably 10 to 15 years behind the US, behind Europe. I think the market shifted dramatically towards private debt in Australia in the last five years. Pre-COVID, it was quite a unique market, not many players were in the market. That has changed after COVID. It has changed in the private debt space as well, the focus has shifted to Australia. People have set up new businesses, new fund managers, new funding sources. The banks, at the same time, over the last five years have further retreated in that space. The business banks have been further reduced. Securitisation teams have been removed in various banks, on the smaller size. The banks just shifted the focus away from the small, low and middle market.

Most products offered are standardised so the services are not there anymore. Traditional banking service, credit structuring, understanding a business, you rarely find. It's often, 'here's our standard procedure and where's your property security standard, and if you can't match what's asked, you can't get the funds.' 

Even if you do match the requirements, it takes three, six, maybe nine months to actually get the new facility or the new limit approved. That's where we have done a lot of work over the last five years to educate the market, educate players in the market, educate borrowers in the market, potentially even connect existing borrowers with potentially new borrowers to give them some feedback in terms of how we operate in the market and how do we engage with people. 

We are quite upfront when we engage with our potential borrowers in the market, so very different to how the banks are now operating, and the worth, which is now increasing in the Australian market, needs to be filled in. We're trying to fill it as best as we can and there's some smaller banks there which are also stepping in. I think some of them have demonstrated they've filled part of the world and they've written three billion dollars every year of business, which is tremendous. 

We don't write three billion, we know we are playing in a different risk category, but even our pipeline of two billion is quite unique, so the market is developing. 

The borrower base, I think I would say, is still at the point in time where the educational piece has to continue. At the moment, investors are educated. They're looking at vehicles in the investment grade space, understanding PE sponsors and non-sponsors along with small and middle market lending. The borrowers in Australia need to get used to that and need to be educated to understand now, "Well where's the capital coming from? What's the capital costing? What's the capital supposed to do?" 

So we're not a house bank, we're not providing a credit card. We can provide an overdraft if needed. But our capital has a certain purpose, and I think the education has to continue and the banks probably left us a very good playing field.

We still see the banks in the market retreating, meaning the capital available is too small and low or even the middle market businesses is just not there. The leverage levels are often non-existent. It's different if you get to the upper middle markets or the investment grade market, or you look at the PE space. But in our space, the banks are not very supportive anymore. Businesses can't get hold of anybody. There's no personal service anymore, nobody who helps structuring transaction, who helps understanding what business often have. So that vacuum in terms of the traditional banking services for businesses, which are just being reduced to templates and formats, you can look up online, is filled by us essentially. 

It's often a hard step to make for somebody to come to us and go like, "Now, who are you? What's your capital look like?" And then we basically go and dive into what is your business about? Tell us about your business, how does it work? 

The first question is not what are your financials? It's like how does your business work? And what are you looking for in terms of capital? And you're looking for a partner, essentially. And that's where we then start thinking how we can provide potential capital, but also how can we provide it in the way that we are fulfilling a void? But ideally, we want to have a borrower, a capital partner, which at some stage outgrows us. So where's the exit? 

In this world left by the banks, we bring in this traditional banking services knowledge and the service levels, plus the capital to our borrowers. They say, "you're more expensive than the banks." Yes we are. But you get the service, you can pick up the phone and call us.

Whereas you pick up a hotline and you may get somebody who knows your name if you get lucky, but doesn't know your position. There's a big void there. 

Volume-wise, we are seeing two billion dollars of opportunities per annum, constantly growing, focused on what we have right now and what we can deploy. I believe that can be probably doubled in a heartbeat. 

Not necessarily on the risk level we like to digest, but looking at other players in the market, which are not necessarily traditional banks, the smaller banks are doing fantastic amounts of business like three billion dollars a year in the segment, which the big four left behind. That's the opportunity and we are at the starting point at the moment. 

LW: Why do your deals focus on senior secured loans?

Senior secured debt for us is as our main focus, I would define it as being the first ranking credit in your business.

Basically, if you compare to a mortgage, it would be the bank who provides the mortgage to you. That's where we are senior secured in the business. So you would usually take all encumbered security or the business assets depending on the business structure and the ownership structure. We also take personal guarantees as part of all lends, just to basically align the interest of owners who have developed their companies and have grown their companies, and aligned their interest with ours. 

We also focus on mezzanine debt. 

Mezzanine debt usually sits behind senior. Arranging the relationship between the mezzanine part and the senior part is often the trickiest bit you have. So let's say you have the house bank, which you don't want to lose and if I give you ten million bucks and you come to us and say, "Hey, I've got a good asset base. I've got not much security left because the bank took it all. Can you give me five million dollars?" We say, "Usually we could do that, but can we come to an arrangement with the house bank?" And that's usually where the process breaks down. We sit here for weeks, and weeks, and months, to get something arranged. Where it gets tricky, the returns and the costs for borrowers on the mezzanine side are very high. So we're talking north of the teens. 

Whereas the senior element has more attractive terms for borrowers, which are also attractive, not just for us but also for our investors. So to focus the capital, we have no books and marry up with the right borrowers. We promote essentially the senior secured direct lends. That's what we focus on because, A, they're mostly easier to execute, but also to arrange, rather than go onto a convoluted capital structure where we're sitting as mezzanine providers behind the banks. And the execution process, which usually is six to eight weeks, becomes three months. Often opportunities business owners have will fall away in this timeframe.