How we think about investing: Ryan Donnar in conversation with Tim Samway

Privity Credit’s Managing Partner Ryan Donnar discussed private credit in Australia and how the team think about investing in direct corporate lending. Watch the conversation between Ryan and Scarcity Partners’ Chair Tim Samway.

Please note this is a machine generated transcript.

Tim Samway 00:00
Ryan Donnar, the managing partner at Privity Credit. So Justin talked about a general aversion to commercial real estate. And you guys have an aversion to commercial real estate. Is that enough? I mean, if there’s a client out there thinking of investing in your funds like that can’t be all that you’re going to hang your hat on.

Ryan Donnar 00:24
No, there’s a bit more to it. But you know, our experience is not in construction risk or commercial real estate. There’s plenty of good players that do that. Sure we’ve spoken about some of the headwinds facing that sector, but there’s really good specialists in that space, here in Australia, which people have exposure to. We do get the calls, but someone’s calling us. They’re probably spoken to about 12 other people who they should have been speaking to before coming to ourselves. So what’s different about you guys? Yeah, so privity credit, we’re Australian, New Zealand private credit manager. We’re focused on direct corporate lending.

Ryan Donnar 01:05
So direct corporate lending typically to growth or to growth corporate companies. You know, ticket sizes that we specialise in is about five to 50 mil. So that is, that’s pretty much where we operate. 50% of the book would be that gross, direct corporate lens into typical corporates that you will come into some examples later on. The other 50% of our book is earlier stage, structured, warehouse or structured asset type transactions.

Tim Samway 01:35
So I’m going to stop you there. What the hell does that mean?

Ryan Donnar 01:39
It’s ring fence pool of assets. So most people would be exposed to RMBs or ABS. We get involved and do it earlier. Use all the same principles. We’ve got experienced operators with 30 years experience setting this stuff up for the banks, and we’re able to use the same principles and data and extract close to double digit returns, but for the equivalent of an A minus type risk.

Tim Samway 02:03
So as an example, what does that look like? You know, like name one.

Ryan Donnar 02:08
So we’ve got an auto finance group on our book, Rapid. Rapid is the group and so they’ve got a pool of diversified auto loans.

Tim Samway 02:20
So how many?

Ryan Donnar 02:22
It would be about 15,000 odd loans.

Tim Samway 02:24
15,000?

Ryan Donnar 02:25
Yeah, right, yeah, yeah. So lots of small type loans. So our how we operate in that space? We’ll get involved, build them up, see them through that initial stage, and then we’ll bring in a the likes of an IFM or an ad, will get involved, and they’ll go into senior, and when we’re comfortable with their originations, we’ll drop down into sort of a junior, sort of position within the stack there, but still with the right credit enhancement support there.

Tim Samway 02:51
So this is lending money through a warehouse to people getting second hand cars. Isn’t that risky?

Ryan Donnar 02:58
You might think that typically, the people in this space, you know, the car is what they need to get to work, that’s where their cash flow comes from. So, you know, I think we’ve said it before, some of these people would rather pay for their car than their electricity can. That’s not a great concept to think about, but that these people wouldn’t get car loans anywhere else, not at this point in time. The banks lend the money, not at this point in time. So they’re usually people that might have had a minor strike. It could be a phone bill. It might be someone that’s, you know, unfortunately, had a separation, and for whatever reason, their bank things are impacted, and they’ve got to go through a transitionary period and build that credit profile back up. Yeah, and it’s about managing a risk across a whole portfolio, correct? Yeah. So a default rate is, is in, yeah, you acted in, you know that when you’re lending into that space, and that’s, that’s one example. We’ve got ones in the ag space, which is more against pools of, you know, cattle and dairy cattle. There’s pools of receivables to, you know, into listed, listed groups, but yeah, so you’ve got that diversification there. You understand the static loss data, so you’re structuring so that if something does go wrong, you know we’re not and our investors are not going to be exposed to the two losses.

Tim Samway 04:16
I’ve asked this question of multiple credit managers, private credit managers, and every one of them hedges and and when I ask you today workouts, is that that’s a part of this business. I’ve asked other managers, how many workouts? And there’s blah, blah, blah, you know, we won’t talk about that. Workouts. How many have you had over 11 years?

Ryan Donnar 04:37
Yeah, we’re in our fourth vehicle now. Average one to two material what I call material workouts and restructures per fund.

Tim Samway 04:46
How much money have you lost on behalf of your clients in workouts?

Ryan Donnar 04:49
Have to touch but to date with we’ve managed to recover 100% of principal interest. On one exposure we wrote off some of the default interest. We do hit the companies with pretty significant 5% default interest, because there’s a lot of time and that additional risk is there to compensate our investors for that that process. So the reality is, if you lend money in any meaningful manner, at some point, things do go wrong. Everyone runs great spreadsheets that you look at when you start processes. It’s all about how you structure from the outset and how you manage that. So the team have all got backgrounds across kind of Australia and internationally, structuring and arranging these types of good market transactions, most importantly, restructuring and working them out. So across experience from institutional banking, investment banking, and we’ve got partners of law firm. So having that experience and breadth of network is what really matters in those when those things happen.

Tim Samway 05:51
Scarcity partners, investment in your equity. So clearly, what do we bring to the party in your in your view? And the benefit to the clients investing in scarcity into your equity is that you get to 3 billion, and the operating leverage really hikes up the profits.

Ryan Donnar 05:59
Yeah, look, we weren’t actively looking. We had been approached by one other multi asset manager. We’re approached by a pure play private equity, which didn’t suit us. We thought we’d end up being jet started for Qantas. In that matter, we had heard about scarcity in market, and a number of our stakeholders said we really need to be talking to Scarcity. Thankfully, you guys reached out. It was Justin who reached out and what was really compelling to us and what was missing from ourselves. So we’ve obviously been around for a period of time. Got a strong track record, good research, double digit returns consistently, even when rates were close to zero, but it was really around that distribution piece, and having that, I guess, the growth capital, which is what the transaction was for ourselves to invest and help us to scale, and what was compelling and even before we closed the transaction, Scarcity team and identified it was our now new head of distribution, Nigel Credlin, who’s in the room, who came in from a wealth background and could add value by assessing how we do things and so forth, and that with the obviously the rest of the experience of the team, having that experience to scale. So for us, we’re at that sort of low 200 million mark, and it’s really about how we get through and we do have that ambition, and we will be getting to that 3 billion in sort of four to three to four years. So being with partners that have been with groups and done that is pretty nice. Yeah, that’s That’s right. And look, a lot of the work’s been done. The growth is there. In terms of, we’ve got the existing portfolio. We’re diversified across a lot of sectors. We’ve been following, you know, other names, like just adding a second and third, slightly higher ticket sizes, as well as into that. What I said the structured asset side, where they’re warehouses that are quite scalable. We have our fingers ready to go. It’s just about getting to this stage.

Tim Samway 08:14
Yeah. Okay. So the question is, can you explain how the investment actually works? So we’ve bought 30% of the equity of Privity. We haven’t disclosed the number, but you can actually work it out from the fund. We just agreed that we wouldn’t spend our lives talking about the amount of money we put in. But the capital went in and Ryan, what did you use it for?

Ryan Donnar 08:38
It’s there for growth purposes. So it wasn’t a money off the table event. We’re all able to manage our partners and let them know why that wasn’t the case. We’re really focused on where we’re going to be in four to five years.

Tim Samway 08:52
So brought some of the younger people into the equity stack. Yeah, we’re so we great, created that alignment across the whole organisation,

Ryan Donnar 09:01
Yeah, and that’s been a focus for our ourselves in recent years, and we’ve continued that and taken that further. So all, bar one individual, has equity within the fund, and we’re in discussions with that individual, and that’s certainly going to be a factor for us moving forward. And we certainly see the value in doing that.

Tim Samway 09:21
Yeah, so in a way, this is just a we did it at Pinnacle with metrics. We might not get to 22 billion, but, but it’s still a fantastic result. Question is about the history is closed end funds. Are there any plans for open ended funds?

Ryan Donnar 09:35
We do at the moment, the current, current fund, there is a closed ended fund, and it has a co invest piece across with an open ended structure that’s available for people to invest in at this point in time. So we made that decision as part of this fourth vintage to add the open end, which has proved quite popular, particularly obviously platforms and the wealth groups.

Tim Samway 09:56
Yeah. So you’re on just about every major platform which actually is necessary part of being available to a wider retail strategy.

Ryan Donnar 10:05
Yeah, I think we’re on nine platforms at the minute.

Tim Samway 10:08
What do you mean by warrant upside?

Ryan Donnar 10:11
Yeah, look, so our focus is on, you know, we’re stable cash flows for investors and preservation of capital. That’s, that’s what we do. In addition, and we don’t really factor in our targeted returns from time to time, we’ll pick up warrants. So if there’s something that’s high growth opportunity, and we see our capital taking even though we’re senior, secured and we’re comfortable at all stages, if we can see that we’re going to take a company from call it, you know, 40 mill EV up to 200 we’ll pick up some small warrants in that. So that’s an equity, and we take warrants. It’s just more tax effective for for our investors.