Income Investing - The Australian Private Corporate Debt Opportunity

Our next presenter is Michael Courland, Managing Director at Arrowpoint Capital.

Michael has over 20 years experience across debt and lending markets, both in Australia and abroad.

His presentation topic today is income investing, the Australian private corporate debt opportunity.

Welcome to the presentation, Michael.

Thanks, Angelina, and thanks for the opportunity to present today.

I'd like to talk about income investing and private debt and how Arrowpoint Capital fits into the arena.

The presentation today will be about us, about the private debt market, why Arrowpoint Capital and Open for Investments, how to get involved in Arrowpoint Capital going forward.

A quick note about Arrowpoint, we're a mid-market lender in the Australian landscape.

We provide flexible, purpose-driven,

corporate debt solutions to Australian and New Zealand businesses.

We have highly regarded shareholders in the Victor Smorgen Group, Sand by Investment, which is Darren and Barry Smorgen, and Stephen Cosseth, who's our chairman and head of our RC.

And his claim to fame was the global CEO of Investec for over 20 years.

Really, Arrow Point

doesn't aim for 5%, it doesn't aim for 20%.

We aim for cash return to investors in the early double digits with what we believe is low risk investment opportunities.

Quick one about our team, myself and Andrew started Arrow Point three years ago being backed by the three entities we spoke about earlier.

Tanya recently joined us as head of distribution, also many years of experience in her field, and Sean and Morgan are our analysts and associate directors, also many years of experience in credit.

Our board of shareholders, I mentioned most of them earlier, led by Stephen and Peter Edwards, who's a non-executive director, the head of the Victor Smorgan Group.

Our journey so far has been of relative success.

We started in 2021.

We did our first investment soon thereafter.

Owing to our progress in June 2022, we expedited the launch of our first debt fund.

We achieved our first milestone of 50 million of committed capital in March 2023.

Importantly, we got capital back of our first deal we did

in August 23, a terrific investment that was, which I'll talk about a bit later.

That is important because getting capital back is almost as important as lending capital in the debt world.

We recently reached our next milestone of 100 million of committed capital across 14 investments.

We're now about to launch our second debt fund off the back of our first.

just turn out quickly to private debt.

Effectively, private debt, as many of our viewers will know, is really non-bank debt.

They have the definitions, but effectively, that's what people mean by private debt, anything which is non-bank.

Really, since the JFC, this graph shows the explosion of private debt, both on the international markets, as well as in the Australian context.

Really, the growing gap between the demand for capital on the borrower side,

and the supply of capital by the banks, which just quite frankly, haven't been able to keep up and just general retreat and conservatism amongst the banking world globally and in Australia.

So Australia is no different.

Private debt is really burgeoning and blossoming.

And within the private debt world is, of course, private corporate debt, which is a subsector of private debt.

Private debt also includes things like property, et cetera.

Corporate debt is lending to corporates.

An interesting quote recently announced by PwC is 1.5 million business owners employing almost 8 million people in Australia, 500 billion in GDP, are going to retire in the next decade.

That's a great segue to the opportunity that private debt allows itself in the corporate space.

These baby boomers, terrific, lots of their value tied up in their personal wealth, tied up in those assets they've created and worked so hard to get, but then if they don't have a succession plan, what to do?

For investors in private debt, there are a couple of advantages to consider.

Unique access to a burgeoning asset class and quite frankly, investments that you would never otherwise see.

It's high yield, certainly in relation to just a bank deposit.

It thrives on capital preservation.

Certainly from our perspective, we are senior lenders, top of the chain in this capital stack, which is very important.

We believe attractive risk-adjusted returns, certainly low double digits for the risk we're taking, as you'll see in a little while, and probably most importantly, low correlation to other asset clusters and diversification within the portfolio.

The world's an interesting place at the moment, all sorts of different risks around, and putting all your eggs in one basket, whether it's equities, whether it's property,

To us, it doesn't make much sense.

There's always a space for private debt and then space for private corporate debt to help diversify the portfolio.

and creates a yield.

From a borrower's perspective, even more interesting, it's flexible in nature, speed of response and approval, limited banking appetite, and our hands-on approach.

Probably the top one flexibility is the biggest drawcard.

We're able to potentially give a little bit more cash, structure repayment profiles differently to banks.

Just all in all, you look at the opportunity and with your experience, you structure it so that the borrower likes you, even though they may be paying a little bit more than what they may be able to otherwise achieve if the banks were very efficient, which often they're not.

There are arrow points.

We think we've got six distinct features to consider.

Firstly, our strong track record of performance of cash return to investors since our funds started has been over 12% to date.

We'll show you in a slide straight after this.

We've got over 100 years of credit experience amongst our RC, led by Stephen.

We have a very strict and disciplined selection mandate.

We only senior secured.

We have very strict credit metrics, almost too strict.

That's probably evidenced by the fact that we've only done 14 deals of over 600 that we've actually viewed well into the billions of dollars.

What makes us very unique is point four, which is strong alignments.

Our shareholders have

committed over $50 million to our two funds, over 30 to fund one, and now 20 to fund two.

That is very special, because not only does it show alignment, but putting money where our mouth is skin in the game with our investors.

We have unique origination and exclusive access to deals.

Andrew and myself really mind the

investor network, the corporate advisory network, et cetera.

What is also we're particularly proud of, and excuse my South African accent, I did immigrate 10 years ago, is that we're proudly Australian.

There's a wealth of opportunity in Australia, and there are a lot of non-Australian international big funds trying to come into this market, but when we operate, it's quite special to be an Australian manager focusing on Australian-Asian businesses.

A quick record, quick slide, we're doing 12% since inception, over 14% for the last financial year.

We started slow because we have some fixed rate investments when interest rates were much lower.

We're ending on a high over the last couple of quarters, particularly driven by a once of equity gain we had in one of our deals.

We cleverly do structures on equity warrants or equity returns on some of our deals if we are able to negotiate it without compromising underlying credit.

And that did come into fruition at the back end of last year, which we were able to feed through to investors in this financial year.

The dotted line there is more showing what our average yield to maturity would be if we never had the equity gains around 11.5%.

Many people would have seen this sort of slide where we sit in the investment universe.

Top right is your riskier equity investments, think of shares, private equity, etc.

Bottom left is what you would call your senior debt, lower yielding, lower risk investments.

We are in that sort of buckets.

We believe we're between infrastructure debt and real estate debt.

So importantly, our deals are yielding to investors around 11%, 600, 700 points above term deposits, which we believe on a very low risk profile.

Quick one on our investment mandates.

We purpose-driven growth acquisitions buyouts.

We only do senior loans, term debt and committed facilities.

We focus on non-cyclical industries, you know, well-positioned businesses, good management teams, stable cash flows, you know, back to basics really in terms of lending.

Our geography is only Australia and New Zealand.

Our borrower size is typically 2 million plus EBITDA.

So it has to be profitable and able to serve us up the gates.

Our loan size is anywhere between two and 40 million, sweet spot's probably 10 to 15.

We have our usual protections for any lender and our tenants typically three to four years.

Importantly, where we don't invest and with a focus on ESG, your typical exclusions, tobacco, gambling, adult entertainments, armaments, et cetera, and we avoid sectors like property development, direct mining, early stage, turnaround, distressed, lending to lenders,

Effectively, we focus on what we believe we're good at.

So think of sectors like manufacturing, recycling, clean energy, swim schools, transportation, education, those sorts of sectors, which we can easily get a handle of.

Just to bring everything to life, I thought I'd cite a recent deal that we did.

It's to a business called Shops Australia.

A lovely husband and wife couple found this acquisition, again,

Baby Boomer generation selling.

We put in a $6 million senior secured facility for the buyout.

They put in a significant amount of equity to affect the buyout.

Sharps is a leading national vehicle hazard inspection business.

So lo and behold, I never knew that 60,000 cars on average are stolen in Australia per year.

Everyone that's stolen before they returned to either the owners or the smash repairers

have to be checked for all sorts of hazards, whether it's drugs, syringes, broken glass, you name it.

And in the weirdest and wonderful places in a car.

So they have a full suite of husband-suited guys or girls going into these vehicles and inspecting for a price before it goes to the next phase.

The reason we like that business, over 20 years of solid experience, blue-chip customers think of

insurance companies, strong alignment with equity, as I mentioned, strong historical performance.

Unfortunately, cars are continuing to be studied.

That's just the raw reality of the environment in which we live and few national competitors.

So a very strong cash flow business, very important in the whole ecosystem in which it lives.

And, you know, just a great all round deal from a particularly cash flow perspective for us.

Full circle, we opened for investment in a few weeks, targeting again 10% per annum cash return.

I invest our shell, those are putting in over $20 million, around $20 million into the fund.

It offers the same diversification that I mentioned earlier.

We believe we now have the track record, the performance, the experience, and importantly, a strict investment mandate.

Stick to your knitting is really an important mantra to live by.

And again, we're an Australian manager supporting Australian-Asian businesses, just looking to find good deals with good people.

If you are interested in investing or want to find out more, obviously through Investment Market's website or just directly with us, very happy to meet whoever wishes to understand a bit or to find out a bit more and take it from there.

Thank you, Michael.

Do you have time for two questions?

Yeah, sure.

Can you share any positive or negative experiences you've had with any investments?

Yeah, so on the negative side, last year we did have one unfortunate investment.

We backed a leading manufacturing business to make an acquisition.

Soon after that acquisition, 12 interest rates tax meant that the acquisition that they made was floundering.

We worked

tirelessly with the management team to try and get it right, to try and get their business right.

But unfortunately, with six months of working tirelessly with them, we had to take action as senior lender, bring in the receiver who then worked with us and sold all the assets of the business.

Pleasingly, we got all our money back to senior lender with interest and even penalty interest.

But it was a difficult process, not something I wish upon anyone.

We got out well because we were the senior lender, but again, not a process we would like to repeat, but a testament, I guess, of our experience getting out.

On the positive side, that investment which yielded terrific returns, that particular investment was in the telco space, the leading supplier to Telstra.

Within a year, they had a great acquisition themselves to make.

They needed to raise equity, and one of the major banks wanted to take us out because it was doing very well.

We fortunately did negotiate some equity warrants in that particular deal, given the speed at which we're able to execute it when we did the deal.

Pleasingly, that equity warrants turned into terrific one-off gains, cash gains, which the fund as a circuit

60-65% investor of that deal was able to then, you know, pass on to its investors, thereby, I guess, really accelerating and boosting our returns for this year.

So I guess a good example of one deal that didn't go according to plan and how we handled that, and one which easily went way more than planned, which helped boost returns.

What do you suggest are the key considerations in assessing an investment in private corporate debt?

I think the most important thing when we look for in our borrowers is probably what investors should look for in us is the who before the what.

Relationships are everything, trust is everything.

An investor probably has to want to believe or feel that private debt should be in their portfolio away from, let's say, property or equities, and their private corporate debt as part of the subset, whether it's 1%, 5%, 10% of their portfolio, that's for them to decide.

Once they get to that stage of wanting to invest in private corporate debt, then decide whether you want a local international manager or a mix of each, some big names that people would know, some smaller names.

Then once you go local, it's really, there aren't that many of us, each of us in the local space have our own nuances and no strategies.

At the end of the day, it's the people.

You have to like who you're dealing with and trust who you're dealing with.

And we hopefully have the mixture of all between experience, alignments, good pedigree, etc.

That's for everyone to decide.

But that's the most important thing.

Relationships.

Invest with who you trust and who you like is probably the biggest message I can have before you get into the credit of underlying deals and structure and all that sort of stuff.

Thank you, Michael.

Thanks, Angelina.

I appreciate the opportunity to present.