This episode was recorded on the land of the Wurundjeri people of the Kulin nation. We pay our respects to their elders past, present and future.
Richard: Hello, and welcome to another episode of Precisely Property. I’m your host, Richard Temlett, I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property, with a focus on dynamic discussions with industry leaders. In this episode, we’ll be talking about private credit in Australia with Chris Moyle of Argyle Square. So, sit back, relax, and let’s get started.
Chris is Joint Managing Director of Argyle Square, a property investment manager and private lender based in Melbourne. Chris has over 20 years of property lending experience in Australia and the United Kingdom in both private and listed lenders. Chris was previously Chief Investment Officer at a Buxton family-backed investment manager, Head of Property Finance for Westpac, and held various senior roles with NAB. He has delivered finance for some of the country’s largest developments and has extensive experience in transaction origination and execution. Chris founded Argyle Square in 2022 in partnership with Rob Altson and Costa Asset Management, the investment vehicle of the Costa family. Welcome, Chris.
Chris: Thanks, Rich. Good to be here.
Richard: Chris in today’s episode, we’re going to talk about private credit in Australia. It’s very topical given the dramatic growth in the sector and space over the last couple of years and also the media headlines that it’s garnering more recently. We’re going to talk about what private credit is, its emergence in Australia, as well as the various risks and opportunities associated with it. Before we get into the episode, I was keen to ask you an icebreaker question and to bring our listeners up to speed. Chris and I have known each other for a number of years. We play golf together. We always are catching up and sharing ideas, particularly as it applies to the housing market and how to solve the housing crisis. I was hoping that you could explain to our guests your science experiment analogy in terms of the factors impacting the housing market. Because as I was speaking to you about it offline, I use this type of analogy in the research that I do. I always credit it back to you, but I think it is a very clever analogy that right now with the dislocation in the market that our listeners need to be aware of.
Chris: Yeah, thanks, Rich. I don’t want to overplay my science background by any way, shape, or form. My degree was in science, but I think what it taught me is just really good methods for understanding what is driving an outcome. It’s a pretty simple basis of science that you start with a control and what is happening right now. So, you take the housing market as an example. What’s happening right now? What outcome are we trying to achieve? In a perfect world, you’re changing one variable at a time and seeing what impact that it has. It is somewhat of an experiment, but you’re at least running it for a reasonable period to see did this change that I make have an impact?
What we’ve tended to see by Government and industry over time is rather than changing one thing, we’ve seen four and five, for example, taxes along with stimulus. And there have been outcomes, some of which have been net positive, some of which have been net negative. Unfortunately, it’s very hard to know what has caused what, because there’s been so many variables changed at once. So, I think as a practice, changing as little as possible and trimming the sales rather than wholesale change, hitting and hoping, revisiting in two years’ time is a great start point for Government and industry when you’re trying to do something like we are at the moment, which is stimulate an enormous supply of housing to meet demand and keep housing affordable.
Richard: Thank you for that. I must admit why it was a bit of a loaded question from my end because I am doing a lot of work for various Government departments, whether it’s the Federal, State, or Local Government, and some of the questions that I have been asked do relate to the impact of a particular policy change. And I must admit, I do steal the idea of yours and do credit back to you. We’re basically going well, it’s very hard to often quantify the impact of a particular change when you’ve got a change on top of another change on top of another change. Anyway, thank you for that.
Before we get into the main part of the show, I am keen to bring our listeners up to speed with what your background is, your experience in the industry, and then also who Argyle Square is.
Chris: Sure. I’m Melbourne born and bred. As I alluded to, my educational interest and study were in science, I tacked a commerce degree onto it, figuring that majors in pharmacology and finance, so drugs and money, I was always going to be in a job in one way, shape, or form. From going on to the Westpac grad program, I fell into and fell for property. I was hired by National Australia Bank into their institutional banking team. I probably didn’t realise at the time that I was joining somewhat of a super team. That team has gone on to become the founders of some of the big private lenders in the market. One’s the head of Westpac Property Finance nationally. One runs development finance at NAB. This was where my learning accelerated really quickly.
The team at the time was funding, this is beginning to show my age perhaps, but we were funding things like Eureka Tower. We were funding the Queen Victoria Market development, so an entire city block, Soul and Oracle on the Gold Coast. That’s another story. 50 Lonsdale Street. We were funding the largest construction deals in Melbourne and Queensland in particular, and so learned a lot about both finance and structuring large transactions, but also construction. What it’s like on-site, some of the pressures the builders were facing, curious time for a lot of them, but really great experience. Out of that, I went across to London and ran transactions for a German bank that was in a rapid growth phase pre GFC. Pleasingly I didn’t see the outcomes, jumped on a plane, spent four months traveling, and came back and joined NAB in Melbourne again. I came back and joined some of my former colleagues and spent the next 10 years at NAB in various origination and delivery roles. I really loved that time. Again, huge learning curve going through GFC, post GFC, and working everything from business bank through to corporate and institutional. And so, yeah, great learning curve.
From NAB I went across to Westpac and headed up the institutional property team and really enjoyed that. Out of Westpac, I went and joined an investment management business with the person that would become my business partner. And after a few years there we started Argyle Square.
Richard: Absolutely brilliant. First, before we get into Argyle Square, I hope the listeners can understand or hear about the background that you have. I’m a big fan of getting people on that have lived and breathed through various market cycles because, certainly, the property and housing market is very cyclical, and I think that’s how we can identify and mitigate risks by looking to understand where in the market cycle we are and then taking a position on where we are. Could you please give our listeners a little bit more insight into who Argyle Square is?
Chris: Sure. Argyle Square is an investment management business. You could call us a private lender. It was started by myself and a guy called Rob Altson. Rob and I met at Westpac. First of all, bonding over a very poor AFL football team. And then in a business sense, my background being in origination and delivery of transactions and structuring, his background being in property acquisitions and valuation, and he was my adviser in terms of the property specific stuff when it came to doing a transaction. Rob and I forged a relationship that survived him leaving Westpac, joining the Buxton family. I came across and joined him when that became an investment management business. And then Rob and I decided that we would start Argyle Square, so an investment management business/private lender, a business that we were founding. We wanted some strong high-integrity partners, and at this point, we’d met the Costa family, so Rob Costa and Costa Asset Management, and they were a great fit for us to partner with. In 2022, Rob and I joined with the Costa family and started the Argyle Square business, very much focused on connecting private investors, high net worth, sophisticated family offices, and taking their investments and lending out to people that we have relationship with.
Our borrowers are people that Rob and I know or have known over the years either through banking or through our networks, people that we trust, people we’ve lent to. High-quality borrowers that we’ve known for a long time.
Richard: Great. Before we get into the education piece, is there anything else you wanted to talk about with Argyle Square in terms of the ethos, or are there any particular niches that you’re looking at in the market right now?
Chris: Sure. So, we take a pretty simple approach. Rob and I are great people, great real estate. That comes to great borrowers and great real estate, and it starts with the people. The relationship piece is crucial to us, people that we know and trust, people that we’ve seen behave in good times and bad and stayed honest and stayed true. That’s crucial. Good real estate tends to follow the good people and their ability to work for what is an incredibly challenging market. That’s what we’re focused on.
On the other side of that is finding investors who understand the risk profile that we’re lending to, our understanding and interpretation of that, and therefore want to invest with us. That’s very simply our ethos. In terms of the niche that we’re trying to fill, the pleasing part of our market is that it is a bespoke market. It’s not a one size fits all. I don’t have a policy that I have to adhere religiously to, so, therefore, I can tailor solutions for borrowers and have a lot of flexibility in how I do that.
Likewise, on the investor side, we see the private high net worth families as underserved now. They were the engine room of what are now the large private lenders around the country, but a lot of those private lenders have moved into institutional backing, institutional funding. What that’s left the private families with is some good transactions, some okay bits of transactions, but they’re a afterthought now for a lot of the bigger lenders. For us, they’re not the afterthought, they’re the central focus and we like to work with them. Again, back to relationships, we’re keen to build those relationships, build that trust, and build that profile. So, three and a half odd years in, that’s been going well and vindicated in terms of where we set out to take the business.
Richard: Incredible story. I do remember when you told me in 2022 that you were starting this venture. It’s inspirational to see where you guys have got to right now. Our listeners can jump into the media, and you’ll see some of the transactions that you’ve been involved in with some of the biggest and best names, certainly, that I’ve seen in the business. I’m not surprised that you’ve been involved with them, but it’s fantastic to see.
Let’s jump into the session today, which is an education piece about private credit in Australia. I suppose to set the background, I’m convinced that people fear what they don’t understand, and this industry is quite opaque right now. It’s not very well understood. I’m sure we’ll get on to what level of regulation it needs, but I’ve, on the one hand, had the privilege of doing a lot of work for the different private credit providers in Australia as well as for the big four banks. I think private credit right now is some of the smartest money and some of the smartest people that I’ve come across. Solutions that I’ve seen on projects have been absolutely brilliant. In my mind, they’ve reflected the proper risk profile of some of these developments.
I also think that right now, private credit has saved a number of projects in Australia and particularly Melbourne from the dire consequences of the impact of the pandemic. It’s sad that the headlines seem to always point to the negative of private credit rather than the positive. I think history will tell and perhaps when we reflect back over these last couple of years, the essential role private credit played. So, I suppose that’s part of the scene.
But for those listeners who are not as close to it as you are, what is private credit?
Chris: Thanks, Richard. It’s an interesting question, and it’s a term that is so commonly used now by us in the private credit industry, but also in media, not always with positive connotations. It’s very difficult to define, which when we get to regulation and we get to rogue elements and we get to positive and negative elements in the industry, it’s because it is so broad. So, private credit at its essence, someone can give me a technical answer, I’m sure, but it’s basically not public credit. It’s not publicly traded. It’s not things like banks.
It’s not government bonds. There’s not an open transparent market in which it can be traded.
Sometimes some of the entities are listed, but the underlying credit isn’t. That can be anything from Chris lent to Rich, that’s private credit. It can be an enormous Dutch pension fund putting money into a fund in Melbourne that then lent to a $500 million development in Queensland. There’s all sorts and there’s a range in between of where the money has come from and where it goes, but it’s really just saying there isn’t a transparency and it’s not openly traded. So, to your point on opaqueness, it is by its nature, doesn’t need to be sophisticated and doesn’t need to be transparent necessarily.
Richard: Gotcha. Again, for our listeners, can you explain with private credit, does that include both equity investment as well as debt investment? How does that all fit together?
Chris: It’s interesting, it’s private capital. So, what people refer to as private credit should refer to debt. It tends to be blended in also with equity. I’m talking specifically, obviously, being on a property podcast, being real estate private credit or private capital, is that it’s funds that might go in at various levels of the capital stack, but could also be capitalising the developer themselves in an equity sense.
Richard: Right, okay. I’m sure we’ll pull that apart a little bit more. Let’s do a bit of history in terms of how it’s emerged. I’ve started to learn about it overseas, and it does seem to be a much more mature market overseas. It’s much more well understood, although it’s still not fully understood certainly in my mind. But, again, I welcome your views there. How has it emerged in Australia? How old is it and where do you think it’s going?
Chris: Yes, that’s a really good point is that it is quite a mature industry in Europe and in the US in particular and has been. When I was in London 20 years ago, we would compete against bank A, bank B, fund A, fund B. It was absolutely part of the competition mix 20 years ago in London, but it wasn’t in Melbourne. So, what proliferated as opposed to what started this, because private lending is as old as time itself, what proliferated and helped build the sophistication in the industry, the catalyst for it was the Global Financial Crisis. Up until the Global Financial Crisis (GFC), the vast majority of property was funded by the banks. Coming into the GFC, that was the big four, but it was also some offshore banks that had come in with higher risk capital. The GFC washed the higher risk capital banks out, and they all retreated back mostly to Europe. What that left was the big four banks.
Now what happened when the GFC hit was there was some actions that needed to be taken by the Commonwealth Government and by APRA, so the Australian Prudential Regulatory Authority. APRA is tasked with managing the financial stability of the financial system. The banks at that time, and still are, the bedrock of that system. APRA came in and with other global regulators said, “look, guys, we need to manage capital better,” and required the banks to more stringently put capital aside before they lend. Now what they did say was some of that capital needs to go into… the amount of capital that you need to hold will depend on what you’re lending to. For example, you lend to Rich on his residential mortgage. That’s really low risk. Most people don’t default on their mortgages, and so it’s really low risk. Maybe you’ve got to keep $3 for every $100 that you lend to Rich.
At the absolute opposite end was property. If you go back through the history of bank failures, almost all of them were due to non-income producing commercial property. So, APRA said commercial property, that definitely needs more capital. It might not be $3 like a home. It could be $15 or $20. So, what that did for banks is it meant they needed to keep more capital. It also meant all of a sudden they had a shortage of capital, and in other words, they had too much property on their books relative to the scale of their books. So, the banks were looking at a threefold issue.
One was having enough capital and having too much property, so needing to trim their books at a time when the rest of their books weren’t growing and also trying to drive returns from the commercial property book they had. A very long story short, what it meant was that they pulled back their appetite. It was a risky period, it was costing them more, and they pulled back their appetite. Unfortunately, for the property market, coming out of the GFC was strengthening. It was quite a strong market. What was left was effectively a funding gap. That funding gap was taken up by private lenders who had started to emerge out of the GFC seeing the opportunity. Ironically, a number of those private lenders were actually seeded from businesses that had gone under during the GFC, particularly equity businesses that the banks had funded and lost money on, and now a lot of those executives came and started new organisations, great governance, and actually proliferated coming out of the GFC. The funding gap there was what proliferated the opportunity for private lending.
What private lending did, though, was fill the void and around the same appetite as the banks were lending at coming into the GFC. It wasn’t crazy cowboy lending. It was actually really sensible lending, at extraordinary returns. And then with the tailwind of the property market, the privates in particular started to pile into the sector saying great risk adjusted returns in an industry that had a tailwind, but which the banks had to vacate the risk profile. It was the perfect storm for the proliferation of private credit, and that’s exactly what we saw some parties take real advantage of.
Richard: Great. That’s a fantastic history lesson. And I suppose to build on that a little bit more, that seems to be a bit of an explanation for why there’s been a much greater increase in private credit over the last couple of years coming out of the pandemic because, certainly, my observation is that the big banks have also stopped lending in certain areas, and they’re perfectly entitled to do that. But there seems to be that funding gap that you’ve spoken about. Is that what you’re seeing on the ground, and is that a part of the explanation for why, I suppose, you could almost describe it as an explosion in different private credit coming into the market?
Chris: I think there’s a couple of things. One was there was the need in the early days for developers because they didn’t have the capital to put another $10, $20, $30 million in. There was the need, hence, the private lenders filled what was a need. Now I think it’s morphed into something more, which is the relationships that began, let’s say, 10-15 years ago are now rusted on relationships. These are developers who have great relationships with the executives in the business that have a real trust with the private lenders. It’s gone beyond purely need, and there is also a return equation for taking more leverage, which is generally available now with private lending. So, it’s probably both of those things. I think the important element is, I was in the banks during this period. We could see what was happening, and it was fine. And actually, the private lenders proliferated with the banks. These private lenders, by and large, were not doing the entire capital in a transaction. They were doing, for example, second ranking mortgages, so mezzanine finance with the bank. The bank was really comfortable with that. The important thing to remember is what banks fulfill in industry. They are a uber high volume, low returning business, low risk, and that is crucial to the stability of the financial system. I got bashed plenty on sitting on property panels during this period, and it was really hard to take because that was actually as a bank, what we were paid to do. Our shareholders buy shares in the banks to hold uber low risk. When risk comes on, it’s important that the banks do retreat.
Now industry would say, oh, you can be a little entrepreneurial and charge a lot. That’s not what banks are for. The great thing is that’s what private capital’s for, the opportunity that presented and really turbocharged the industry.
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Richard: Talk to me about the capital stack. I suppose, first of all, what is it? Some of our listeners may not be fully aware of what the capital stack is. Where is private credit? What space is it playing in the capital stack?
Chris: Sure. The answer to the second question reminds me of the film Everything Everywhere All At Once. So private credit can play anywhere, which is one of the great advantages for it. The capital stack is a pretty crude term, but it refers to low risk lending up to high-risk lending.
At the lowest risk, you have a first mortgage senior debt. People would be most familiar if they have a home loan. That’s a first mortgage, that is senior debt. I referred earlier to mezzanine finance, that would be where you need a little more leverage. You would have a first senior, and you would also have some additional lending through a mezzanine facility. They would have security, but they would be second ranking if things all went wrong.
You then go up to preferred equity, which is sitting between debt and the equity space, generally still just with a fixed return, and then into the equity space, which is what you own in your home, for example. So, your home goes up, you make more money. Your home goes down in value, you lose money in a very simplistic term.
Each of those have a different risk profile and a different return profile. Also different private lenders will lend exclusively or differently between those different elements of the capital stack.
Richard: Very interesting. Could you talk in general terms about some of the indicative returns in some of the parts of the capital stack? Again, to explain to the listeners who might not be as close to it as you are what those typical returns may be.
Chris: Sure. So, that low risk end, the senior debt will typically be in the high single digit returns, so 10% and under. For a mezzanine, so a second ranking, you’re probably looking into the teens percents, let’s say, 15% plus or minus. For preferred equity, you’re into the high teens. And then for an equity return, most investors would expect in excess of 20%.
I should stress, obviously, there’s a lot of variables in what those return expectations are of the control that you have over it and also of what the sophistication of the underlying investor and what they could invest in alternatively. So, generally, private credit will still be viewed in terms of return relative to what else you can put your money into sensibly.
Richard: To wrap up all these definitions, let’s use a case study. So right now, 2025, say, an apartment development. Can you give examples of an apartment development; you don’t need to name what it is, but just a typical development now, say, 100 apartments. What type of funding or why would the developer not quite simply go to the bank right now and get funding? Why would they come to private credits? What type of branches of funding might they need?
Chris: Sure. The thing to say is if you can make it fit the bank’s appetite, that’s often the best option because it is still the lowest cost of capital that you’ll find. The reasoning behind not going to a bank and going to a private lender would be either you’re unable to meet the conditions that the bank is going to impose on you or you don’t want to meet the conditions, and that would be conditions like a certain level of presales. You might need to have sold, say, 50% of the development or 70% of the development in order to be able to unlock the bank funding. That might be only 20% or 30% of the development, or if it’s small, it might be you don’t have to sell any.
Obviously in the current cost environment, there’s a number of developers who would say, I don’t want to sell until the last possible minute because the cost of my development isn’t yet known, and I’d like to sell later. Most banks would say, that’s great that you want to take that risk. I’m not here to take that kind of risk with you, whereas a private lender might do that.
The second element is leverage. Private lenders will be able to generally lend in excess of what a bank is able to lend. So, if you require leverage or you desire leverage from a return perspective, then it is easier to achieve.
In terms of a typical leverage deal, it’s probably looking at a loan to value ratio. So, if you’ve got 100 apartments, let’s make it simple, it’s worth $100 million. You’re probably borrowing $65-70 million. You might do that through a combination of $50 million from the bank and $15 million from mezzanine, from a private lender, or you might just borrow all $65 million from the private lender.
The other element is we’re now talking into development. At some point, you acquired that site. The banks have a real aversion to funding non-income producing development sites. They do it. They absolutely do it for great borrowers with a proven track record, but it’s not a desired part of the sector. Whereas non-banks or a private lender will be able to fund you into the land. They’re then in the box seat for the development. So, a lot of the time, the development is more a roll on from the site, and the banks don’t get a look at it as opposed to coming back to market, finding the best capital solution.
Richard: Great. Okay, let’s jump into the different asset classes. It’s a bit of a wide question, an open-ended question, but I’m keen to ask it anyway. Right now in 2025, what are some of the asset classes that are most attractive to private credit?
Chris: It tends to be the asset classes that are talked about the most. So, at the moment, that’s the living sector and the industrial sectors. There certainly are, private credit can move and does move into all sorts of different asset classes, but it does also tend to move in herds and in understandable investment thesis. So, for example, in the living sector, you’ll find private credit very heavily in on particularly Built to Sell, really tricky for banks to fund at the moment because of the presales that I alluded to earlier, whereas the private credit might be able to take a view on it. Build to Rent has pockets for it, but because of the cost of capital of private lenders, it can be tricky. And the institutional investors that are backing the Build to Rent development might be quite comfortable putting more equity in and doing it with a bank at a lower leverage.
There’s also student accommodation, co-living and these sorts of things, which depending on the fund, have a lot of flavour. At an industrial level, if you go to institutional backed private lenders, they’ll be keen to be in development of the huge logistic sheds, those sorts of things. At the lower end, private credit will be interested in the smaller industrial subdivisions, little units that small and medium enterprises are involved in. They’re the ones where investors understand they’re in the media as having tailwinds. If you’ve got offshore capital, they do read the AFR. They do read the Australian media, and they do blow a little bit with the wind in terms of what the media is saying and what the market’s saying. So, they’re the easiest ones.
At Argyle Square, our thesis is somewhat different. We really like those sectors, and we look for opportunities in those sectors, but the ability to get really strong risk adjusted returns in over loved, over capitalised sectors is really difficult. What we prefer is to try and pick the eyes out of maybe that sector, but maybe the alternative sectors that are a little less loved, but maybe not well understood because we can spend the time to understand it. We can get through the complexity, and that’s where you uncover some good risk. When we say good risk, it’s not as high risk as you thought it was. And the returns, because there’s not a whole lot of capital flocking to it, can look strong, and the opportunity is great. We have been in residential development in blue chip suburbs. We’re in industrial subdivision at the moment where we’re providing senior debt. We have and we can prevail, but it is a tougher sector to compete in because there’s so much capital for it.
Richard: Let’s talk about competition, and I’ve got a question/observation for you. I read all the media headlines as I know you do, and, certainly, I’d encourage our listeners to jump into some of the publications to keep their fingers on the pulse. There does seem to be an enormous amount of private credit floating around compared to perhaps the opportunities that are available. I wonder, though, and why I asked you about the debt versus equity equation. I think that there’s an oversupply of private credit perhaps in the debt segment of the market, but not in the equity segment of the market. I’ve been debating this with a few people, and they’ve said to me, they are, like you, much closer to it than me. They’ve gone, perhaps that’s the market speaking as to why there’s not a lot in the equity space. But I’m wondering, my question to you goes to what’s the competition out there, and what are you seeing in that equity or the debt space?
Chris: Sure. It’s a really good observation that you make. There absolutely is a plethora of capital for debt, and in particular, senior debt and stretched senior debt, and equity has been far harder to come by. That has its roots in very recent history. We talked about coming out of the GFC (Global Financial Crisis) and there being a whole lot of tailwinds, and then you think about the five or six years, there’s been a whole lot of headwinds. The investors who have been invested in equity, by and large, have done terribly. Forecast returns of 20-25% are coming in at 2%. The money they were meant to get back in 2021 is still at the door, whereas they’ve got their debt investments back and recycled it and recycled it. It’s forced the focus of investors on the risk in equity and in particular outside of construction cost and what everyone talks about. Time. Time doesn’t hurt credit, which keeps accumulating its interest rate in the way that it hurts equity, where you might get the same return or a lower return, but you get it three years late. That really hurts your return. There’s a real challenge to raise equity capital both from the developments that have come back returning lower, or they haven’t got their money back yet. These are on developments that they were meant to get their money back two or three years ago. So, understandably, there’s been a bit of a flight to a purer credit play.
That said, when we then talk about competition, there’s times at which Rob and I and Argyle Square have discussed the level of competition is driving leverage and pricing at times to a point that begins to make equity look attractive. Why would we compete against such cheap capital when I can borrow it and make a return? I definitely think we’re reaching an inflection point, albeit very carefully at the moment, certainly at Argyle Square we’re looking at a number of equity transactions and have terms out, and we’re really keen to participate with developers, very specific developments in very specific locations with very strong relationships that we hold.
But there is opportunity coming out, and in part, it is due to the competition. The competition’s most keenly felt in the asset classes I mentioned, in particular living, and particularly large. It’s almost the larger the lend, the cheaper it is. And north of $100-150 million you’re into a fierce competition between half a dozen players who love volume and love residential. At the very low end, you’ll have a pretty conforming loan, and that’s always competitive from the retail funds. What Argyle Square is interested in is that quite sizable middle, which is not quite into the institutional capital where pricing is being driven or not quite at the bottom level where it’s cheap but standard. We like to tailor our loans, tailor solutions, and in return, there needs to be reasonable return. But we’re working with the developer to enhance their result as well.
Richard: Thank you for that explanation. I hope all our listeners can hear how intelligent private credit is in terms of having those customisable solutions. Before we jump onto the final theme today, I wanted to close out that point. I’m convinced we’re hitting an inflection point with the discussions that I’m having, and there’s an opportunity for equity. I think also perhaps it’s being driven by the decrease in the cash rate. I’ve certainly seen it, it happened in February where rates started to be cut. Before that, a lot of money was going into debt. There seems to have been a change in sentiment and more is attracted to equity. I’m not yet seeing it play out quite yet, but it’s interesting to hear what you said. And, obviously, you’re closer to it than I am. It’s good to know that I’ve got my finger on the pulse to an extent. It comes off the back of, as you said, the pricing in the debt space, the decrease in cash rates, and I’m convinced that there is an opportunity in that equity space.
I know we’ve got through a lot today, Chris. The final theme is talking about regulation and what the regulators need to know in Australia. As I said to you offline, I’m convinced that the analogy I can use for this is basically if we look at the Navy SEALs, and I do love my Navy SEALs, not that I want to be a Navy SEAL, but I love and I find them absolutely fascinating with their training, their mental resilience, and some of the missions that they go on. I will read a book on a mission, and I’ll go, that is absolutely crazy that these people did it. When you read what they did in terms of planning their missions and their regulations that they have and their risk mitigation and the fact that they’ve set themselves up for the most part to succeed, suddenly it becomes much clearer that it is less risky. I draw a similar analogy to private credits in the sense that people fear what they don’t understand. A regular person on the street might read a newspaper and they’ll go, private credit, it’s not regulated. That seems like there’s Cowboys and Indians out there. Perhaps there are a few bad apples out there that might impact the overall lending landscape. But my experience is that it has very good governance structures. It is incredibly educated. The risk assessments that I have to do for private credits or our QS team has to do for private credit are absolutely insane, in a good way insane.
I’m keen to get inside your head a little bit and as an education piece, explain to whether it’s ASIC (Australian Securities and Investments Commission) or APRA (Australian Prudential Regulation Authority) or the government more broadly, what do they need to know about this segment of the market?
Chris: Sure. I think exactly what you pointed out, it’s often referred to as unregulated, which is just not true. For example, as a lender, I’m required to hold a financial services license. We are registered with ASIC. We have compliance requirements. We have anti money laundering, know your customer requirements, but we’re also required to hold a certain governance and stay true to that. That said, because of the enormous range that we have in private lending as well as I was defining earlier, there’s definitely some rogue elements. Some that are getting away with lending perhaps without the requisite licensing or actually meeting their compliance requirements. There is a concern on that front. Where APRA is at, as I said, they tend to regulate the banks, super funds, insurance companies, etc. They’re in data collection mode, which I actually think is a great place to start rather than regulation.
So first of all, you need to understand the scale of the industry, and you only need to Google “how big is private credit in Australia?” You’ll get made up numbers mostly not from private credit providers, but people trying to reach a headline, and they’re big numbers. APRA has its own reporting, but it only reports above a threshold. I think in order to understand, if you think what APRA’s role is, which I said was financial stability or the stability of the financial system, it needs to understand, is it of a scale, and is it in parts of the market that can affect the stability of the system? So, the stance, I guess, from an Argyle Square perspective is that anything that gives confidence and gives integrity to the industry that is reasonable in terms of being able to comply with is a really good thing.
I do think that there is an ASIC angle and an APRA angle, which sounds like a lot of acronyms, but it’s really, who are we seeking to protect here? The role of regulators I see is to protect something or someone. If you think protecting borrowers is one important thing, there is the National Credit Code, which requires that consumers are protected in their lending. That tends to fall away when you get into sophisticated borrowers. That makes sense, that’s pretty good regulation that’s already in place.
Investors is an interesting one because I do think we’re everywhere from very unsophisticated to extremely sophisticated. The less sophisticated the investor, the more they need to be protected, and the more regulation should be in place. That’s already the case with the financial services licenses, but I could see that requiring some tightening up. And the things that I really focus on, governance of the funds, the communication of the funds to those investors in a way that the investors understand both the risk upfront before they invest, but also the risk profile as it changes. That’s something we’re really focused on. We deal with sophisticated investors, so we can deal with the language in a sophisticated way. But making sure that they’re continually informed of what they’ve invested in and how that profile changes over time is really a crucial element of any investment, I think.
And then the final thing is the financial system. What we don’t know is with the proliferation of private credit. Is there contagion risk? That will be, I think, what APRA is primarily focused on. Could the behaviours or challenges in private credit cause an issue for the financial system? At a very simplistic level, Rich Temlett has borrowed $1billion dollars. He borrowed $500 million from private credit and $500 million from the banks. The $500 million to the banks is uber low risk and high quality. But could the $500 million that’s been lent through private lenders, if things hit the rocks, cause the $500 million to the banks to also go under, the banks to have issues? And so, as a system could that impact?
The first bit’s data collection, they’re well into that, but I can see that regulation will increase. But what’s crucial, and I think the message for regulators is governance is really important. Transparency and information collecting and communication is absolutely crucial. However, the industry is crucial to the ongoing functioning of the property market. That includes building homes for people who don’t have homes. It involves building homes for businesses to go to. It keeps the manufacturing sector going through industrial. There’s a whole lot of functioning that’s going on in the market and good that’s being done by private lenders. If we hamper that or we choke it through regulation and through onerous reporting, then we’re going to cause market issues on its own.
Richard: Gotcha. Final question for today. What does the future look like for private credit in Australia? Is it a passing fad? I know you have started to answer it anyway. Is it here to stay longer term? Is it going to take a much greater segment of the market? What are your views?
Chris: Yeah look, I think the outlook is very positive, and it will continue to grow as the economy grows. The changes that have happened in the banks from an appetite perspective and the prudence perspective is here to stay. That won’t change and neither should it. As a shareholder of a bank, I think that’s a very important role that they play in society as the bedrock of the financial system. I think there’s a few things that I can see coming. One is regulation. I don’t need to go through that again. The second one is there is an enormous growth aspiration from particularly the bigger players in the market. Most of them are looking broadly to double their exposure in the next five years. There is just not the scale in the Australian market to be able to achieve that, and that’s part of the thing that’s driving pricing down.
If you combine regulation and maybe some more onerous requirements from a governance perspective along with the need of the bigger players to grow, but not organically, there’s going to be consolidation. There has to be consolidation, and I think that will be a good thing to rationalise the number of players. I think it will bring a next level of sophistication to the market. So, there’s no question that the market will continue to grow, hopefully responsibly and hopefully with a bit of a halo that it hasn’t had, recognising that we’re in the first 10 or 15 years and that the next 10 or 15 years will be all about becoming an established asset class, one that investors understand and continuing to grow.
Richard: Great. Thank you for your very good views today. It was a massive learning experience even for myself, and I certainly hope that our listeners got a lot out of it. Thank you very much for coming on the show today.
Chris: Thanks for having me, Rich.
Richard: Hi, everyone. I hope that you enjoyed the session with Chris today. I thought it was absolutely fantastic and really gave a good deep dive into a segment of the financing of the real estate markets that I don’t think is particularly well understood. The three takeouts that I certainly would like you to all keep in mind as you go along with your days are as follows.
The first one is I don’t think we need to fear private credit. In fact, my view is we need to embrace. As I said in the podcast a few times, I think people fear what they don’t understand or what they don’t know. And that’s perfectly reasonable. But the more I learn about it, I’m convinced that it has a very important role to play. It’s highly educated, but it does have a lot of their own self-governing mechanisms. I appreciate that not all private credit funds or fund managers are the same, but the majority of them are highly regulated, highly professional, have brands and reputations to protect and are playing a critical role right now, especially in Melbourne with keeping some of these projects afloat that have been impacted by the market dislocations that have occurred since the pandemic.
The second point I thought that Chris made that was very telling was the fact that 20 years ago when he was overseas in the UK, the banks and private credit were competing together, and it was perfectly fine. I suppose that makes sense because the more I learn about where private credit fits in the capital stack and also the role it can play at different points in the market cycle, which is quite different to where the big four banks play in Australia, I feel that they can be complementary to one another. I think that’s a different way to look at it rather than thinking that it’s something bad or something to be scared of.
Finally, when you look at the private credit and Chris started talking about the equity versus the debt and the opportunities or the role for both of these to play. Certainly, when I’ve spoken with the industry leading up to the pandemic, we had falling interest rates and equity seemed to be a much more attractive play for a lot of investors. When we then started having rapid interest rate rises, certainly for the next decade we’re going to have higher levels of inflation, it did seem that debt appeared to be much more of an attractive investment option. My gut and instinct says that we’re at an inflection point now, and I do feel that equity investment is going to come back and is going to start being attractive once again. Chris did make the point that a lot of people that put equity investments into projects still haven’t been repaid or had their funds returned. He compared that to how it was already being recycled with debt. I appreciate that, but I suppose in counter to that thinking, remember that the market has been badly dislocated, and it doesn’t mean that all bets are off with equity.
I can’t help thinking right now that as rates continue to decrease, new opportunities coming forward could ideally be placed for equity, especially if there’s not a huge amount of it in the market right now. Again, it’ll be interesting to see how that plays out, and that is obviously only my thinking, but it is based off a lot of discussions that I’m having with everyone in the industry. Anyway, that’s all I have to say for now. Hope you have a great day.
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