Why this investor always assumes a "worst case scenario" for every potential position

And typically, those problems fall into one or three buckets in our experience. There's a timing issue, meaning they just need the money faster than a standard bank can actually provide it. Standard bank process might take three to six months, whereas we can move things along far more expediently than that. 

The second one is complexity. So there's a complexity to the business asset structure or the problem they're trying to solve. So it just takes more resource and more work to actually understand the commercial solution. 

And the third one is structuring. So being innovative about what other types of security you can take and thinking outside the box about not wanting to take more risk, but how you can use structural solutions to actually solve the counterparties' problems. 

And in all three instances, our counterparties are happy to pay a premium than they typically pay to a commercial bank to help them solve one of those problems. And that's why we call it opportunistic lending.

Hone: To describe what we do in terms of opportunistic lending, it's very similar to what the major investment banks, the Macquaries, the Goldman Sachs of the world historically have done on their own balance sheet, so with their own capital. And they typically focus on that $100-$150 million+ type of investment like minimum loan. For us, we focus on that $20-$100 million individual loan. So that's what we call mid-market investments.

And ultimately with that, the key thing we're always focused on is liquidity. The asset owners or the companies are slightly smaller than they are in that big end of town. We don't compete with those investment banks. Often we partner with them on certain investments. 

But ultimately, liquidity is your friend in this space. So one of the parts of our process is really focusing on the exit mechanism for our borrower to repay us. Is it the sale of an asset? Is it the completion of a project that then can be refinanced by a normal commercial bank, etc? So liquidity is a key focus for us always, as part of our investment due diligence process.

Now, our ESG framework is ultimately built in a manner that it protects us from going into companies that are under social change, under major environmental change, have governance issues, etc. 

Because in its most simplistic manner, that goes to defeating the quality and the consistency of cashflow streams or the inherent value of the assets they own, which means that there's a depreciating value there and they're the sorts of things that we typically want to avoid. So the quality bias and the sustainability is our simplest tool for ensuring that we have the asset protection and therefore the coverage of our capital and certainty of repayment of our capital.

Hone: Quite simply, when we go into an investment, we assume it's going to go bad. So whilst we're doing our due diligence, we assume as part of our investment underwriting, that the counterparties are going to get into a problem. You don't need to sit there and theorise why they've got a problem or what market events occurred. We ensure that we build in scenarios and do due diligence on what the process of taking from where we are to getting our capital and our return out.

And that typically means that we can appoint liquidators upfront to do part of the consultancy work to understand what the residual value in a stretch sale environment might be of inventory, or it might be of assets or PP&E. 

But that mentality that something's going to go wrong and then understanding how you're going to solve for that in the circumstance it does, we've found is a wonderfully beneficial way of looking at a problem from the other circumstance, because once you've entered into loan documentation, you're not going to get paid more. Your returns are capped and they're very attractive returns. They're typically in the mid to high teens in terms of loans. 

But ultimately, capital preservation and return of our coupon as well is key. So understanding if there's an issue, how we solve for that is a critical part of our investment due diligence and solves a lot of problems.