A mid-market opportunity in Australian Private Credit - Asset Backed Finance Fund

Our next presenter is Stephen Scher, co-founder and managing director at GCI.

Stephen is an experienced investor and executive with approximately 20 years of private equity and private debt investing at Goldman Sachs in both London and Sydney.

His presentation topic today is a mid-market opportunity in Australian private credit, asset-backed finance fund.

Welcome to the presentation, Stephen.

Thanks, Angelina.

I appreciate the opportunity to present.

We started GCI nearly 10 years ago.

As you have mentioned, my career was in Goldman Sachs, where I was investing in large private equity, private debt and mezzanine opportunities.

My partner, Gavin, was an entrepreneur who sold his business at about the same time that I resigned from Goldman Sachs.

We started GCI to invest our own capital.

The idea was that we would bring along other investors alongside us in order for us to do more interesting deals.

To date, our family has over $20 million invested in the various strategies and have probably invested over time over $50 million.

In our 10th year of operation now, we've put out nearly over a billion dollars of capital and have returned over $500 million to our investors.

We have 500 different investors.

Those can comprise of individuals, family offices, multifamily offices, private wealth businesses.

To date, we have zero losses and tend to continue in that way.

We've very much focused on the five to $50 million strategy.

This is on purpose.

And the reason we do this is we felt it's the least competitive and in credit that to us is very important.

Because at the end of the day, the only way you compete is to give more leverage, less terms or less rate.

So the competitive dynamics in credit are very important.

That $5 to $50 million space, we avoid all family offices and we avoid all institutions.

That's the reason we spend our time in that space.

Find places that are underbanked, probably complex and back ourselves to work it out.

The key goal of getting overpaid for the risks we're taking.

We have three different strategies that we do at GCI.

Number one, the asset-backed finance strategy, which as Angelina mentioned, we're discussing today.

We have a real estate strategy and a strategic capital strategy.

We just look at the asset-backed strategy and where we are and where we've come from.

This actual fund has been investing since 2017.

There are currently 18 businesses in the portfolio.

The net returns for the last 12 months have been at nearly 11 and a half percent.

In fact, the last few months have actually been, you know, 1% a month.

We funded 34 borrowers to date.

You go to the right hand of the slide, you can see the fund is quite diversified between equipment and property, i.e.

hard assets, financial assets.

These are the financial assets of corporates, such as a purchase debt ledger.

non-bank lenders, i.e.

these are businesses that are lending to other people and we lend to them.

It could be an SME lender, a lease portfolio, a consumer lender, etc.

We focus on the middle column.

What's very important to us is asset backing in everything we do at GCSE.

It goes a little bit to the way we think about the world, always thinking about downside.

So it's not that we don't like cash flow lending, we think that's a nice to have.

We always want to know what happens when it goes wrong, what can we sell, and selling assets rather than a business is significantly less difficult.

The other thing we're very focused on is structural protection.

We always want to know that somebody loses money first, that there's an excess spread, that there's a corporate residual value, corporate guarantee.

On the asset side of it, we're also very focused on trying to offload some of that risk with residual value guarantee.

Diversification is important to us, and it's not just important to us in the, as in this case, 18 borrowers that we have.

We want our non-bank lender portfolios for our assets to have significant diversification as well.

But if you actually look at the portfolio of loans or assets underneath our capital, there could be tens to hundreds of thousands of loans sitting underneath.

But the most important thing, which I find in credit after doing this for nearly 30 years,

is the monitoring.

What's as vital as doing the deal is doing the work after the deal.

So if you came to our investment committee, I think most people would be surprised.

90% of our time is actually on the portfolio.

We do monthly monitoring, we do audits, we do bank control accounts, we trace cash, and we don't outsource this.

We do this ourselves.

Because at the end of the day, we fill in credit for fraud.

If there's a problem and you're aware of it early, you can work it out.

That's why the deal begins when the deal is done and it doesn't end once we've signed the document and sent over the money.

Our track record is quite good.

As you can see in this graph over here, it has been increasing as you would expect because of the rising rates.

We've noticed a few things over the last few years.

One, rates are rising and 85% of our portfolio is variable, but also,

With a dearth of capital, we're actually getting better terms, be that on LVRs, be that on rates, be that on conditions that we put up.

We pay our cash every single month.

And what you can see at the bottom is the net cash payments made to investors on a monthly basis.

We think this is important.

We think that our investors like receiving a monthly cash amount.

We have very, very few redemptions.

Most of our investors generally just sit and forget, receive their monthly check and continue to be happy with us.

In our real estate strategy, which is our newest strategy, we actually stayed out of this market for quite a while.

We just didn't feel the risk return made sense.

It's only been in the last probably 18 months to two years that we felt it was time to enter the market.

We've done over $130 million of deals.

We've given our investors a net return of over 13% and we've funded six borrowers.

We don't do construction.

We don't like construction risk.

We think there's risks there that are not property related.

We also don't like multiple of money on them.

So we're very focused on residential loans or stock land, et cetera.

The interesting thing that we're finding here is again, our strategy of sort of focusing here, sort of 10 to $40 million is really paying off.

It's too small for the big guys, too small, too large for the families.

And we find that those competitors that we have here

either have issues from their past or are not able to raise the capital in the way we're doing it.

And so we've seen a lot of good opportunities.

But to give you a sense of how fussy we are, since we started this strategy in a sort of directed way in August last year, we've seen one and a half billion dollars of deals.

We've probably only signed term sheets for about $80 million.

Strategic capital, it's probably our most racy

investment opportunity, we don't call it special ops.

And the reason we don't call it special ops is our goal is not to own anything.

So we don't do anything with a loan to own.

We really are trying to help good businesses with a bad balance sheet.

Good businesses need acquisition financing.

And what we do here is again, focus on asset backing.

The reason we focus on asset backing is we want asymmetric returns.

We want to know if everything goes wrong, our downside is very small compared to the potential upside.

Reasons our returns are so good, and we've done over $200 million in this, our net returns are over 20%, is we often have upside sharing, be it for sale of a property, be it warrants, et cetera.

And so it's a strategy that we continue to like, continue to be fussy in, but it's definitely a much more hands-on strategy as we continue to progress into this market.

That's all for me for now.

Over to you, Angelina.

Stephen, thank you for your presentation.

Do you have time for two questions?

Sure.

The first question for you, Stephen, is in a world of private credit, investors have many managers to choose from.

Do you believe size matters?

You know, the way my career was going, I should have gone into the large end, if you think about it.

I was doing significantly much larger deals when I was at Goldman Sachs for my career.

I specifically chose not to go in that area because I think the strategy needs to match the market.

We live in Australia where there are not that many big deals and you need diversification in the fund.

And so I believe for Australia, doing a strategy that gets you the best risk return is in the mid-market.

And therefore we focused on this.

I also think when you look at the larger funds, you have to consider, is there an alignment of interest and how much capital there, how much

income they're making as it goes to the management fee rather than to the performance fee.

And so at some point in Australia, I don't believe that a large fund makes a lot of sense, because it actually incentivises you to take on additional risks to get the returns you need.

And so that's why I don't, I do think science matters.

And it depends on the market you're operating in.

For the Australian market, I believe the mid market is the best risk return there is.

Therefore, that's what we focus

Second question is why should investors invest with GCI?

I'm going to sound a bit like a broken record, but there's a few things that really matter.

As we like to say here at the team, it's easy to give away money.

It's the getting a back part that's the hard part.

And so I think while there has been an increase in competitors, any investor who is choosing a fund to invest with needs to consider a few.

One, is there an alignment of interest?

Are the principals who are making the decision investing alongside the investor?

Two, do they have the experience?

Have they had bad deals?

Because it's easy when things go well, but what happens when things go bad?

Have they performed?

Have they got money back?

Have they operated in a transparent way?

And I think when you start to put things like that together, the GCI has been going down 10 years.

We've definitely had our issues, but we've never lost capital.

We've recovered.

We've worked hard to get it.

They've seen this market change from the very infancy of private credit

to where it lies today and as I stated earlier in the presentation my sole purpose and Gavin's sole purpose of starting this business was to invest in the funds and deals alongside other investors so that I think that is a vital aspect of why people should invest in GCI and it's probably the same reason we grow to 500 investors just to do word of mouth and never actually talking to someone like you before and that's why I believe you should you know work with us and invest with us and

be alongside us as our partners and investors.

Thank you, Stephen.

Thank you.