Private Credit — An emerging asset class

Next speaker is Mark Anion from Waratah Funds Management.

Mark has 20 years experience in finance as a specialist hotel financier for major banks.

Waratah Debt Capital is an early stage private credit fund available to wholesale investors.

The fund has been established to exclusively finance the hotel industry, both accommodation hotels and drinking hotels.

Waratah debt capital can provide finance on a stretch senior basis or second mortgage basis, working alongside our major banks.

Mark is going to talk about private credit as an emerging asset class.

Over to you, Mark.

Thank you very much, Angelina, and Investment Markets for the opportunity to present.

I want to, I guess, briefly have an overview of Warrattide Debt Capital, first of all, before getting into, I guess, the history of private credit in this country and just a take on where I think it's going to go next and finish lastly with a quick video.

So as you've highlighted, Angeline, Warrattide Debt Capital, it's an early stage non-bank lending fund.

And it's exclusively lending to one assay class, which is the hotel industry.

So drinking hotels and accommodation hotels.

So look, that's a very narrow mandate and quite on purpose.

First of all, due to effectively the stricter lending standards that hotels attract.

via our major banks and traditional financiers, where they'll typically be comfortable going up to about 55% gearing across most assets.

So relative to other asset classes, that's quite conservative.

So we've set the standards of our funds to lend to 70%.

So there's a nice

a healthy gap there where we still maintain really strong credit, but have that spread where we can provide strong risk adjusted returns to our investors.

And secondly, by focusing strictly on one industry, it means that you can hone in on your industry experience and knowledge of that industry.

And the hotel industries, it's got a lot of nuances between different sort of states and jurisdictions and legislation and so forth.

You know, it sort of does require a lot of attention and a lot of expert knowledge.

And that allows us to understand the risk more intimately and, of course, lend more liberal lending standards than what our traditional banks would and provide greater returns to investors along the way.

And just to substantiate that experience piece,

It's an emerging, sorry, it's an early stage credit fund having started in March of 2020, the very week all the pubs shut down due to the pandemic.

But we've set it up in an existing funds management business that it has traditional operations spanning over 15 years whereby they own and operate hotels.

So there's a breadth of knowledge and industry experience from the existing directors, Darren Baker and David Gorton

we can leverage in terms of assessing credit and ensuring we're maintaining an acceptable level of risk.

So I do just want to sit on this slide for quite some time.

It's probably going to take us the majority of the way to the end of the presentation but I feel as though it's quite telling in demonstrating the private credit industry and what the future looks like.

So this is a 20-year map of

cash rates, the relationship of cash rates to CPI to hotel yields.

So what we can see and a few highlights would be free GFC, the market, you can see with the red line being hotel yields is firming really strongly investment capital coming into buying hotels quite considerably at that point in time.

RBA gradually increasing rates nearly to a point where the two meet.

and RBA is trying to cool things off at that point, the GFC occurs and effectively you've got this blowout of cap rates on hotels.

Really, it becomes a bit of an inverse relationship to the cash rate at that point in time.

It's probably important to understand that's really at that point in time, a heavy driver of that is the fact that the banks at the time started really tightening up on

who they would borrow to and on what basis they would.

So there was a credit squeeze going on and the product credit space was pretty fledgling.

It was really kind of non-existent at that point in time.

So if you wanted your finance, you'd go to a major bank.

So if they actually pulled the handbrake on, well then of course there's a result whereby

you know, there's less credit in the economy, there's less transactions happening and yields end up going the wrong way.

And that has a fairly dire impact on hotel yields.

You can see on the right hand side, there's an indication there as to how much a hotel will swing in value over the course of that 20 year cycle, just by cap rate movement alone.

So this then took 10 years to correct.

Cap rates got back to roughly 7% by 2018, 2019 and then we had the pandemic and billions and billions of dollars in the economy got contributed to stimulate the economy and that's got to find a home and that found a home in the stock market, found a home in property and put hotels in that category as well.

cap rates firm to a lower low and got as low as 6% in some regions, which is incredibly sharp.

Now we don't have

We don't have a GFC style event now and hopefully that doesn't occur.

But what we do have is an out of control inflation number.

So you can see that stimulus has effectively caused inflation just to shoot through the roof.

And despite the RBA's endeavours to curve data with 10 rate hikes in recent times,

inflation is still sort of trending upwards.

So the end of April is when March quarter figures come out, so that will be really telling as to what happens at that point in time.

But that alone in itself will, I believe, make cap rates go the other way, naturally, because effectively if you purchase the hotel on a 6% yield in the recent couple of years and inflation's at 8%, you're negative too.

your hotel almost needs to be at sort of 14% yield for us to be earning a reasonable return if you adjust for CPI.

So we hope we can curve that quickly and I don't think it's going to be done from the RBA because the last time inflation was that high was in 1990 and the cash rate was in fact 12%.

So

there's light years between where it is now and where it's got to go.

So I think what will be the outcome there is the banks will probably carry some of the burden of slowing things down.

And there's already murmurings on this now whereby we'll effectively go into more or less another credit squeeze scenario, underwriting standards of the banks will tighten it again.

And that's going to,

basically try and bring inflation back down as well.

But again, credit squeeze results in cap rates going in that same path, I believe.

So if we roll back to 2007, the emergence of private credit really kicked off as a result of low capital in the economy at that point.

And I think we're going to go into that cycle again.

And private credit as an industry and an asset class

will become more and more relevant.

as the banks continue to tighten and people are in search of capital.

And investors, coincidentally, are in search of return.

A private credit fund can offer a greater prospect of capital preservation as you're effectively playing the role of a lender, but help circulate that capital through the economy and keep it going.

So I'll finish there, I'll play this video, but I just, I guess I want to say, if there's anyone who's at all interested in reaching out, please do.

If you've ever romanticised about buying a pub, which so many of us have, maybe it's a good time to invest in private credit and take that safer option.

But yeah, please reach out and thank you to Investment Markets and I will play this video.

Waratah Debt Capital is a private credit fund dedicated exclusively to the hotel industry.

The fund is an additional sleeve to the existing Waratah Funds management business, which for 15 years plus has been owners and operators of hotels.

So there's a massive amount of experience within the group.

We're currently offering 9.35% with the portfolio that we have.

Now we've got a pooled portfolio, so that'll vary based on the loans that do get originated.

We're in a market at the moment where equity investments have more downward pressure on them, whether it be ASX stocks or property investments.

So a private credit fund should certainly be a feature of most investors' portfolios.

If investors want to find out more information they can via our website, they can download the investment memorandum or get in touch with me directly.

We're taking expressions of interest now, it's a really good time to inquire.