Livewire: Returns today, risk tomorrow. The next shakeout will show who got lending right

Hosted by Chris Conway of Livewire Markets, the episode features a detailed discussion with Privity Credit on private credit investing in the Australian mid-market.

Please note this is a machine generated transcript.

00:00:05 Chris Conway

Hello, and welcome to the Rules of Investing, a podcast that gets inside the minds of leading investors, economists, and industry experts, and is brought to you by Livewire Markets.

My name is Chris Conway, and today we’re stepping into the world of private credit, where returns can be robust, but investors, like in any asset class, need to be aware of the risks.

My guest is Ryan Donnar, Managing Partner and Investment Committee member at Privity Credit.

Since 2013, Privity has launched 4 funds. The first three funds were predominantly for institutional investors. But in 2021, Privity opened up to wholesale investors looking for a private credit fund that offers diversification across the Australian and New Zealand corporate direct lending market.

Ryan, welcome to the Rules of Investing.

00:00:46 Ryan Donnar

G’day, Chris. Thanks for having us.

00:00:48 Chris Conway

Let’s dive right in at the top, Ryan. What are two or three of the most important themes that are shaping private credit into 2026? There’s a lot going on. Why do they matter for investors?

00:00:59 Ryan Donnar

Look, I think private credit’s very topical.

You’re certainly seeing a bit of it in the press throughout 2025 and into 2026.

From our perspective, I guess what I’d call out as #1, I think you’re seeing an evolution here in Australia with the knowledge gap and the knowledge learning of investors and understanding that private credit is not just one asset class.

It’s important for investors to understand what they’re actually invested in, what the underlying risk is and distinction between the various offerings and opportunities within private credit.

For instance, you could start with corporate lending and just within corporate lending, that can be across SMEs, mid-market where Privity focuses, and then the large end of town, large cap.

And also within that, there’s different security, being senior, the most secured position against the prime assets. It can be second lien, so they’re sitting down still assets, but behind something else. Or there’s mezzanine, which may be further away and slightly riskier from the actual underlying assets and cash flow.

There’s also asset back lending, which is in the early stage, is something that we do at Privity. And there’s everything that’s well known in Australia, obviously real estate, development, finance, that it counts for basically 50% of exposures in Australia. It’s well catered for and it’s a reason that we don’t go there and offer. And then there’s stuff like special sits or other real assets like infrastructure and so forth.

Private credit is quite a dynamic space. There’s a lot of sub-segments. And so I think it’s important that investors know what they’re invested in and who they’ve got managing that exposure. And do they have the experience there? Structure and security probably matters more than the labels, as does the experience with the manager.

I’d call out for #2 as really just the increasing investment from the market into private markets. And we see that continuing to grow in 2026 for private credit, in particular. This is really just following trends that have taken place overseas. We’re many, many years behind in terms of penetration for offshore markets, private credit accounts for 70% to 80% of lending.

Here in Australia, it’s kind of that 15% to 20%. You see different things mentioned. We do see that means there’ll be reasonable inflows. For instance, in the mid-market of they’re talking overall, so overall credit, looking at that growing around 20% per annum, about 30% in the mid-market.

What that means for investors, obviously it can mean that there’s more capital coming in, which is more capital chasing deals. You need to be aware of structural pressures coming into the market, pricing pressures. The important thing from our perspective for investors is just making sure who’s controlling the lend. Who’s there structuring the deals, making sure they’ve got the experience and can deal with things as and when they evolve, as they always do within lending.

Ownership of the origination, I think, is also important for investors to be aware of. So that all comes with things growing. I think ultimately the big thing for investors, as we’re seeing this asset class increase, I think it’s an important asset class for investors because of the yields that it provides and the capital preservation component.

It’s really making sure they’ve got the right experience managers who can deal with whatever situations arise.

00:04:21 Chris Conway

Yeah. Ryan, just a follow-up question there on that education point that you talked about and the big bucket that is private credit and the multitude of options that you just talked through.

Just let’s shake the conversation or frame the conversation a little bit. In your experience, what does private credit look like at its best when done really well? And then, what’s the other end of the spectrum? Don’t name any names or anything like that, but what is private credit? Just so that the new investor to private credit understands this is peak private credit or the best way it can be done and this is really, where you want to sort of stay away from.

00:04:57 Ryan Donnar

Private credit done well is stuff that is stuff that is really there to support the underlying Australian economy. Guy Debelle, former deputy chair of the RBA, wrote an article last year talking about the importance of particular segments of growth which support the underlying economy of Australia. the SME called out a lot of money has gone into property. If I was to go into the bad without individualising, certainly it’s there’s been things that have been in the headlines and all your investors would be well-versed in them.

There has been some pretty aggressive lending in the property space and a lot of concentration in that space. As I mentioned before, it’s greater than 50% of what private credit is for investors here in Australia at this point in time. So, with that becomes, the bad side would be new entrants coming in. They might not be as transparent around valuations of the underlying assets. They might be using valuations that are on a completed basis as opposed to, it’s just a hole in the ground, which is really not representing to the investors where their risk and exposure is. Some of them turn out okay, some of them end up spectacularly poorly, as we’ve seen on occasions.

Private credit’s done well is, experienced team structuring around, a corporate, I’ll use as an example, understanding and sitting with the management teams, the shareholders of companies, understanding what their plans are, structuring and supporting that business. But it’s something that’s got good control so that they can step in. The importance of stepping in is so that you can have conversations whilst the value is preserved for the company, as well as protecting our investors, which is absolutely paramount. And what is good is when you get the evolution of supporting something through private credit environment, and then it might refinance into a standard, cheaper cost of funds and bank market down the track. And there’s plenty of examples of that here in Australia.

00:06:56 Chris Conway

Yeah. Seems like in this space, there is absolutely no substitute for experience and relationships and knowledge and all of those things.

00:07:04 Ryan Donnar

Absolutely.

00:07:04 Chris Conway

Yeah. Ryan, talk to me about the biggest misconception investors have about private credit right now. And I sort of asked this question in the context of, what are your clients, talking to you about? And sometimes you need to sort of reframe their understanding or expectations.

00:07:20 Ryan Donnar

Quite often, I think it comes back to the return and risk balance and its investors understanding that and that really plays out across a number of facets, but it still comes back to returns and the risk. Often investors, we do face that question from time to time, if the returns are high single digits or sometimes low double digits, it must be risky.

The reality is that really depends on the opportunity and the structure of the deal. There’s a lot of companies within that bid market who are looking for growth capital and who are looking to continue to grow. And by doing it through borrowing money and with the cost of funding, it’s tax effective because that reduces their tax burden.

00:08:01 Chris Conway

Yep.

00:08:02 Ryan Donnar

And it’s more about them not having access to capital as an alternative to get that growth through. That is something we see certainly from a company perspective. So the whole pricing and understanding where things are at is the key. Understanding just because someone is baking 12% returns on a product, you need to understand what that underlying loan is and the security is to understand that you’re in a safe position and it’s suitable.

So high growth companies, that makes sense. If it’s a steady state business, if you try to put 15% cost of funds on there, you’re going to face issues in terms of serviceability and so forth. The risk return piece is kind of what we see as the key.

The other component around risk is, and a misconception, I think, in the market, and it still comes back to returns, is what it means if there’s a default. And there’s a misconception that if there’s a default in a portfolio, that’s a disaster. Well, actually, if something’s structured correctly and these companies are living, breathing objects and they do have deviations. So if you set tight covenants, you will have the right to step in, which is the default. And you can make sure that tweaks are made and the right changes are made so that the investors get a good return moving forward. You can even readjust the pricing and structure at that point in time.

That’s something that came out by the Alvarez and Marshall report recently from the US, which looked into the defaults actually. They found that there are a lot higher level of defaults in the mid market, but that’s because they set tight covenants and they can actually get around and have the conversation.

00:09:39 Chris Conway

That’s on purpose to give the lender more, not outs, but more avenues to a positive outcome.

00:09:46 Ryan Donnar

That’s correct. It’s all about preservation of value. It’s also for the companies and they need to understand that as well. It’s preserving their equity value in the underlying business so you can move forward in a good manner.

00:09:57 Chris Conway

Let’s talk about the current environment, Ryan. So interest rates here in Australia, they’re seemingly on the march higher. In the US, it’s a different story. But how do rates and the growth backdrop affect borrower quality and then what is manageable and then what starts to create some pressure?

00:10:15 Ryan Donnar

Yeah, it’s a good question.

Again, it’s obviously we’re in a rate environment that’s increasing. It’s not necessarily high from a historical basis, but it certainly is with people with their near-term bias on. I think that we’re in a high rate environment. The growth story and productivity here in Australia, that’s obviously something that’s topical at the moment. And obviously inflation, underlying inflation and what that does to things. So the way we think about for our investors when we’re looking to make an investment, and that’s thinking about the companies as well that are looking for private credit solutions.

Firstly, at the moment, you’d be looking at supply costs. Are their supply costs going to increase? And then that gets back to, well, what’s their revenue? Do they have power in terms of their pricing or are they takers and they can’t pass that through? Obviously that’s where you then need to sit there and think, okay, well, what sort of structure is possible? How much money can you lend to that type of a group?

Where you see pressure emerging? Obviously with higher leverage and weaker cash flows. A lot of the focus, people always think about rates and are they high or are they low? Our focus at Privity has always been around where’s the cash flow generation and what does that sustain in terms of supporting an interest rate.

We did get questions from some investors as rates were rising. They said, we used to get them in a high single, low double digit returns. Why are we not getting them 15% returns now? The question back with the comment back was, that’s because we want to get your money back. We do look for other ways to get returns, but there’s only so much burden you can put on cash flows of a business, particularly those looking to grow.

00:11:51 Chris Conway

Yep.

00:11:52 Ryan Donnar

So for us, when I think about that in terms of what’s going to go on, there’s still a lot more capital coming in. There will be more deals coming up. In the mid-market where we operate, privately held companies, those people tend to operate through the cycle. So irrespective of what’s going on, they’re going to be looking for opportunities. We’ll just adjust the structures as we move forward.

00:12:14 Chris Conway

Ryan, you referenced this earlier about, a lot of capital flowing into private credit and there has been, essentially more money chasing either the same amount of deals or sometimes even less deals depending on where you are in the market. So where are you seeing crowding and where do opportunities still look attractive in terms of the Privity lens that you apply?

00:12:35 Ryan Donnar

Yeah, look, crowding occurs when there’s greater access to an opportunity that’s just, pretty 101.

00:12:41 Ryan Donnar

Every market, pretty 101, and it’s across markets, and it’s nothing unusual here with private credit.

I mean, in the context of Australia, we’ve historically had a huge slant towards property. That’s just what Australian investors have historically done. There has been a huge wave of capital that went into that. So we had seen some overcrowding there and you’ve seen some structures being tested. So people were pushing things out in terms of the risk and returns that were on offer. And there are a lot of new entrants that came into that space. People accessing deals, local accountants and so forth and lawyers shooting around different products. And that’s always a bit of a concern that things are getting a bit hot. There should be a bit more normalisation in that space as unfortunately a few people would have had some poor experiences.

Hopefully people with the good operators, we’ve got a lot of very good operators within that space here in Australia. That’s not Privity. We focus on the mid-market into corporates and supporting emerging growth companies and that early stage asset-backed security lens.

We think that there’s good opportunities within that space because of what I said before, there’s a continuing deal opportunities. So we can see that continuing into the future.

In terms of other areas, there has been some pricing pressure, particularly around cause of accessibility. If someone could just, effectively buy into a loan that somebody else has arranged like a global IB or one of the majors here, you can get some pricing pressure.

On occasions it goes to structural. So we have seen some of the larger cap deals going around at the moment which have getting those cover light features, which those of us who have enough gray hairs to have enjoyed working offshore during GFC would understand some of the implications of that.

So yeah, CovLite, some of the sponsor stuff from time to time because there’s only so many opportunities coming up, they can be crowded.

So that’s why we like some of the bilateral where you actually have to do your own structuring and arranging and boots on the ground. There’s less competition because you need to have more people on the ground here to execute on those transactions.

00:14:51 Chris Conway

Ryan, another thing that you referenced when we were talking earlier is, the banks have pulled back only 20% private credit in Australia. It doesn’t compare to some of the international markets. But just in terms of what kinds of borrowers are turning more and more these days to private credit here in Australia?

00:15:08 Ryan Donnar

I think I’ve covered enough on the property space and that was an active decision and the regulators got involved and the banks supported that. That was an obvious pivot here in Australia post really since the GFC.

00:15:21 Chris Conway

Yeah.

00:15:21 Ryan Donnar

I think the most important thing to think about, banks in general, it’s quite a, I see it as co-opetition between the banks and private credit.

It is a very healthy environment, particularly here in Australia. We’re very fortunate to have a well-capitalised banking system. Where we see a lot of the opportunities.. For various reasons, the banks are still very good at the SME business banking things where they can get some property backing.

It’s all about that capital relief and why they do that from an efficiency perspective. They’re great at the large cap stuff, even some of the sponsor stuff. They get good cross-sell on products. There’s term-outs, so where they can then go to capital markets to take out their exposures and get good fees. It makes sense that the banks are doing well and operating in that space and that’s their focus.

00:16:12 Chris Conway

Yep.

00:16:13 Ryan Donnar

Banks’ balance sheets in general are still, growing. It’s just which areas they’re growing. So why we like the opportunity and think there’s within the mid-market is, banks still service that space really well. They service steady state businesses.

So, sorry for a golfing analogy, but the banks are fantastic at hitting a seven iron down the fairway. Off the tee, down the fairway, get on for three and hopefully get away with the one or two parts.

00:16:44 Chris Conway

Yep.

00:16:45 Ryan Donnar

And we’re lucky to have that here. But where there’s businesses that have growth opportunities that are event driven, there might be some complimentary M&A, they might have some contract expansion. That’s the areas that the banks struggle just from a resourcing like this in the mid market relationship people would have 100 clients, they don’t have time to quickly assess something and get that packaged up for the client. They’ll often, the opportunity will be gone, or they’ll have to go to an expensive other part of the market to raise equity capital, which they don’t necessarily want to do.

It’s really those growth companies that are looking for the opportunities. We also think there’s good opportunities within the structured assets base, as I mentioned before, earlier stage, still stuff that has really good data and so forth, but earlier stage in getting in and setting up those structures and their warehouses, not to use too much terminology for people, but basically it’s pools of assets.

00:17:44 Chris Conway

So car loans or…

00:17:46 Ryan Donnar

Car loans, stuff in the agri-space, small business loans, all those sorts of things which give good diversification and good cash flows and great discipline structures for investors.

00:17:57 Chris Conway

Yep.

00:17:58 Ryan Donnar

But they’re all the areas that are really popping up as good opportunities moving forward.

00:18:04 Chris Conway

Ryan, your background is in origination and credit risk. So mate, you know exactly where all the bodies are buried. What does it make you especially cautious about though, then investors might not immediately see? Where are you looking for those bits of risk?

00:18:19 Ryan Donnar

Yeah, look, it’s hard not to be shaped through some of your background, without going too much into the depths of my age, but starting out just post dot-com, working through the GFC in London and investment banks.

00:18:37 Chris Conway

You’ve seen it all, mate.

00:18:38 Ryan Donnar

Really seen. And across our team, there’s people who work through a lot more cycles, even than myself. A lot of us have that sort of 25 year plus experience. But it’s structuring and arranging, but it’s also restructuring experience. So what that makes me cautious about for investors, it’s just understanding what’s under the hood. It really comes down to, what we noticed within certainly structuring transactions pre-GFC, there was a lot of liquidity around, everyone was piling into deals. I was on the syndications desk at that stage, so we would structure and then sell down those exposures. The larger deals at that stage were in the mid-market, the larger deals, when they looked into the data rooms, people were buying and investing into deals.

Forget about looking at loan documentation, due diligence, they would get an invitation and they would see what ticket was available, call it $50M, and they would go in and offer $100M because they knew they’d get scaled back, which is frightening, but it’s only when things go wrong and then you’d go through the restructures of some of these transactions. Liquidity can disappear very quickly, and then all of a sudden people go back to the first principle.

00:19:48 Chris Conway

And so just to ask, is that the thing that scares you, Ryan, is when liquidity disappears?

00:19:53 Ryan Donnar

It’s more the flow on from that. It’s getting to the first principles, understanding the documentation, a structure, and the discipline in the actual underlying deals and loans.

00:20:04 Chris Conway

Got you.

00:20:05 Ryan Donnar

It’s where we get to the point of controlling the lend and then understanding what’s in an underlying portfolio. So what concerns me is people might be investing, but they aren’t thinking what’s the underlying exposure.

We had the explanation of the various sub-segments. It’s people understanding what that is. It’s what can be buried in the details. If there’s cov-lite transactions, and this is more of a feature offshore, thankfully, although a lot of your investors and listeners will be invested offshore.

If there’s cov-lite structures, by the time something goes wrong, there’s not a lot of recovery and flexibility to turn things around because you’ve got around the table too late. And where it gets into the detail is the definitions can change that. Some people would have a three-page definition of EBITDA whereas they should be focused on cash to service the underlying loan. So what concerns me is really in that detail, weak documentation, cov-lite structures.

00:21:06 Chris Conway

So just take me through cov-lite because you’ve said it a couple of times.

00:21:08 Chris Conway

So obviously cov is covenant and so it’s just not a lot of conditions because covenants are conditions essentially, right?

Not a lot of conditions on the way the money should be deployed or the covenants for bringing the money back. Like, yeah, what do you mean by that?

00:21:22 Ryan Donnar

Yeah, there’s multiple. So you’ll have financial covenants.

00:21:24 Chris Conway

Yep.

00:21:25 Ryan Donnar

The financial covenants, you wanna make sure you’ve got your leverage is okay. That’s like your debt to EBITDA.

00:21:31 Chris Conway

And if it blows out past a certain point, then you break the covenant and then it triggers an event.

00:21:35 Ryan Donnar

And then there should be things like debt service, ability to repay or interest cover so that they can service and there should be something to protect the balance sheet. And then there’s things around, their CapEx bends, what they can do across budgets and so forth.

Now, we talk of cov-lite and people will read about that. It’s where the covenants down to, say, one covenant. It might be something so far down the track, and then if the definitions are loose in the underlying documentation, this is something that ASIC’s called out around trying to get uniformity.

By the time you get there, there could be a lot more risk than what people thought actually underlying.

00:22:14 Chris Conway

Right. So it’s basically handing over the money and saying, do whatever you want sort of thing.

00:22:18 Ryan Donnar

Not quite, but you would be kind in some certain cases.

00:22:23 Chris Conway

Right, got you. Let’s talk a little bit more about, as specific as we can be, some of the sectors or the structures or the borrower types.

Now, again, I know that having spoken to a few people in the private credit space, there is privacy concerns, but just sort of what are some of the flavours, I guess, of the deals that you’ve been doing, Ryan, and what sectors are they originating from and borrower types and things like that. Give us as much detail as you can.

00:22:52 Ryan Donnar

Okay, yeah, no, thank you. Again, it’s a good question. It’s what people are curious about. And it is actively being debated here in Australia. I think the regulators, knowledge that our market’s more, you can’t always give the names away. Whereas in offshore markets, you can because there’ll be a dozen key competitors here, then we might have two or three.

So actually, what becomes sensitive is, do you want to know the name of a company? Or do you want to understand the underlying covenants, the loan details? Myself, I’m concerned with the details. And I think investors should be, because that tells you where the risk is. But look, there are, I’ll try to share names as I can.

00:23:30 Chris Conway

Yeah, sure.

00:23:31 Ryan Donnar

From the Privity perspective, we are sector agnostic. We’ve historically had backing from big players from sustainability backgrounds. What that really means is we focus on where the world’s going. So, thinking about what’s happening now, what’s new, where the world’s going to go. We don’t look at old tech and we don’t do things that come out of the ground because we don’t have that expertise. We stay in the areas of what we know in essence.

Our key approach is to structure and manage as though we are heading into a recession or a global event. And that’s probably us being shaped and all of us working through the GFC.

00:24:11 Chris Conway

Yep, seen the movie before, yep.

00:24:14 Ryan Donnar

And at the moment, we’re in an environment where we’re seeing a lot of noise and it’s continuing. Some are arguing it’s not more than historically has been the case. I think it’s a bit more erratic these days, but people are getting used to that. So we just prepare for what could eventuate, whatever that might be.

In terms of the sort of stuff we’re looking for and the opportunities, it’s really in that senior secured mid-market stuff, which we see as being under-serviced in the market here, but a really important segment and the backbone of Australia. I mentioned that earlier, stage asset-backed security stuff we spoke about. Although, we have just gone into agri and supporting a group that’s, and thinking about that, it’s something that where they, they’re looking at hearts and lungs strategy. So it’s the working capital of farms, you have in corporate farms. So everything from the stock, it can be the cows or the sheep, yep, but it’s also the equipment and the assets there.

It’s the things that generate the income, not necessarily underlying land. So that sort of stuff that we like. In terms of an example, recently, we’ve just had one that just got refinanced, which is, again, it’s not front page news when it happens in private credit, but it’s part of the story.

In mid to late 2024 were approached, and there was an advisor we knew, Salter Brothers.

00:25:39 Chris Conway

Oh, Salter Brothers do the hotels.

00:25:41 Ryan Donnar

Yes, they do the hotels. They also do a bit of advisory work, and they have a few other different funds as well, those guys. They came to us with a group called IPSI, a privately held business that had some external capital and shareholders that we knew. It’s an online payment service, data security solutions business, which supported kind of SME businesses, but had done a lot of, had contracted revenues and had recurring revenues from governments.

00:26:07 Chris Conway

Yep.

00:26:08 Ryan Donnar

And it provides an important technology, payment solutions and data security, which is pretty important for those underlying clients. We saw that as something that was pretty stable. At the time, it was actually banked by a bank. I won’t name the bank, but there was a bank there. They had director’s guarantees. We provided a little bit more lending to support the growth that they needed. They’d taken on external capital, so it didn’t make sense that they would still hold those director’s guarantees over the few founders. So we allowed that to go. And the positive story, it had good cash flows that we were contracted around, and we had good first security. That recently sold, it was announced, a bank bought it. This is where private credit and the banks do work well.

00:26:52 Chris Conway

Sure.

00:26:53 Ryan Donnar

Commonwealth Bank actually acquired the business.

00:26:55 Chris Conway

Okay.

00:26:55 Ryan Donnar

And they’re going to integrate that to support all of their business and institutional clients.

00:26:58 Chris Conway

Right.

00:26:59 Ryan Donnar

Again, just another good story and positive things that happen in the space. But we see lots of those opportunities that will come up from time to time.

Certain areas where the banks might pull back for recent news, if something’s gone wrong, there’s always opportunities around that, and they’re the sort of things that we look for and actively try to get into.

00:27:22 Chris Conway

Yeah, that’s really interesting. So, started being, well, had bank involvement, then private credit and then sold back to a bank. So it’s interesting the way that an asset can move around and the life that it goes through and the people that fund it along the way and it’s been growing the whole time and it seems like it’s been a good story for everyone in that particular instance at least anyway.

00:27:39 Ryan Donnar

Absolutely.

00:27:40 Chris Conway

Yeah.

Now, Ryan, you’ve talked a couple of times about controlling the lend. I know this is super important for Privity so I just wanted to ask you this question straight up and down.

What does it mean in practice and then why does it matter for your end investors, I guess is the most important outcome.

00:27:56 Ryan Donnar

Yeah, so from a Privity perspective where we talk about controlling the lend, it’s really around owning the origination source. It’s not necessarily about, just looking to the market and buying other loans that someone else has structured and it’s been sold to a lot of people, shown to a lot of people.

All our deals come through advisors that we have a long history with. So you tap into that sort of 20 plus years experience of people in the markets and advisors who have been around the company, who know the history of the company, they can understand why they might not have retained enough equity to support whatever that growth is at that point in time. So they need to step outside of traditional banking environments.

But it’s then getting around and doing your structuring and arranging. We say structure, structure, structure a lot.

00:28:46 Chris Conway

Yep.

00:28:46 Ryan Donnar

But it’s that work you do upfront, which is where things work for investors. It’s about setting all of the terms, it’s about running their own documentation, and it’s running additional due diligence and not just taking what, there might be vendor due diligence as a business is looking to be sold and there’s an M&A process, but it’s going in and doing your own work as well.

That’s really what we see as controlling the lend.

00:29:15 Chris Conway

Just on that Ryan, some of that work, does that mean, say, speaking to competitors or understanding people in the supply chain? Like, how do you get those extra data points?

00:29:24 Ryan Donnar

Yeah, just tapping into, and I can give an example. So we went into a QSR business a number of years ago. And there were some wages scandals going on at the time.

00:29:34 Chris Conway

Right.

00:29:35 Ryan Donnar

The additional due diligence there was to go to specialist legal firms.

00:29:40 Chris Conway

Gotcha.

00:29:40 Ryan Donnar

Who could then get involved. We went in and did samples across various of their sites, made sure they were complying with wage laws, looked at all of their practices and governance, ended up coming up with a traffic light system with the law firm. That basically was required from that potential borrower. We’re competing against banks to do this transaction at the time. Because of the scandal, everyone got nervous. This is where there can be that overreaction.

00:30:06 Chris Conway

Yep.

00:30:07 Ryan Donnar

So we’re able to do that additional due diligence.The company made improvements before we actually lent any of our investor money. And in terms of controlling that lend, it’s about actively managing that through the life of the loan. We’ll take board observer rights and, we’ll see ahead of waiting for data points to come from the company.

Even though we take monthly monitoring, we’re ahead of the curve understanding what’s going on across the group, what their strategies are and how they’re looking to move. That’s what we mean by controlling the lend.

00:30:37 Chris Conway

Yeah. No, that’s very cool.

In that context of controlling the lend, Ryan, again, I imagine you get this question from investors and potential investors. What are some of the early warning signs that, a deal or something isn’t going as it might be expected?

00:30:55 Ryan Donnar

Yeah, look, and when you’re doing a deal, so we probably would take forward to our initial stages less than one in 10 transactions, and then it’s probably one in 10 get approved at that initial stage. You take what is given to you from the advisors, you offer up some terms, and then you look to take a deal forward.

In due diligence, if you see creep in, things aren’t matching up to what the story was told, if there’s not good rationale for that, that’s the signs you see at a deal level.

00:31:27 Chris Conway

Yep.

00:31:28 Ryan Donnar

And, it’s just that important moment to have the discipline to walk away. If people are getting too aggressive on documentation phase, they actually sit there and say, why?

00:31:40 Chris Conway

Yeah.

00:31:41 Ryan Donnar

Why does somebody not want a covenant, they’re standing behind what the business model is, and they understand that we just need to have a conversation to protect their position as well as our investor’s position. That to us is always a red flag, any type of attempt of that sort of creep.

00:31:56 Chris Conway

Yeah.

00:31:57 Ryan Donnar

For investors thinking about it, if they’re looking in general across and considering managers, one thing there you’d be looking at, is there increasing capitalisation of the interest as opposed to cash pay within a portfolio without explanation?

Often it makes sense to have that as a tool for high growth companies. But if it’s for companies that are past that growth stage or there’s extensions of loans beyond certain periods, or there’s covenant easings and wavings. They’re the sorts of things I think important for investors to look at. And they’re early warning signs if you’re thinking you’re assessing a manager.

There are two levels. There’s the underlying borrower, and then there’s thinking about private credit managers as well.

00:32:42 Chris Conway

Yep.

Ryan, let’s round out this part of the podcast just by talking about ASIC’s increased focus on private credit. I know you do a lot of stuff around for privity, around and looking at this sort of stuff and regulation.

So just talk me through, what do you think it’s trying to improve? And then again, what questions do you think investors should be asking managers, people like you, before investing?

00:33:08 Ryan Donnar

Yeah, look, it’s been interesting and it’s certainly grabbed a lot of newspaper attention and rightly so. Look, I think in the most simple terms, what the regulator’s looking to do and the industry in general is just a real focus on, and let’s remember it is an emerging asset class here in Australia.

Important to note that actually a lot of the institutional investors, they look to the Australian local scene and look at the disciplines that some of the managers have and they look to get their overseas operators to adhere to the same sort of standards.

00:33:43 Chris Conway

Right, so we’re actually operating pretty well, contextually.

00:33:46 Ryan Donnar

In certain spaces. People that are doing the correct things are doing that.

00:33:50 Chris Conway

Gotcha.

00:33:51 Ryan Donnar

So I think, look, what the regulator is really looking at is transparency and governance, in short. There’s a lot of other nuances to it. But yeah, as you alluded to, we are involved into industry groups and responses to the working papers.

We welcome the initiatives that are being looked into. In some respects, I think it’s important that everyone’s playing on the same level field. So if there are people that aren’t adhering to the same standards, they’re probably operating at a lower cost, so their returns might look higher. But that’s just because they may not have the required controls in place.

00:34:30 Chris Conway

And essentially, the end result of that is that they’re taking more risk, right?

00:34:34 Ryan Donnar

Potentially. Are we taking more risk or there’s less transparency? It’s just harder to tell. They might be doing entirely the right thing. It’s just not as easy for an investor to assess.

I think private credit in general has been acknowledged by the regulator with Guy Debelle’s piece last year, it’s playing an important part in the growth of the economy. It is essential. It’s important that we work through this moment, take on board, what’s being discussed. A lot of the good operators have been doing it anyway.

But in terms of questions, I would be asking any manager, and a lot of it comes to, and it’s highlighted in the ASIC report, but things like what are your valuation policies? Do you have external trustees? Are they gatekeepers?

00:35:19 Chris Conway

Yep.

00:35:20 Ryan Donnar

Controlling, making sure you do what your investment mandate says you should be doing. Are the funds and even the manager themselves, are their financial accounts audited? Again, it’s all just about making sure you’re getting validation and checks.

Is there external research?

00:35:35 Chris Conway

And again, that’s the ratings agencies that you’re talking about, yep.

00:35:38 Ryan Donnar

The ratings agencies that would come and rate funds and give them a recommendation or approval for the various ways that you can distribute product here in Australia.

And then the next layer down, I’d probably ask about how their various committees work, how do they handle things like conflicts and so forth, just to make sure that governance piece is there.

I think it’s important for investors to be confident enough to ask managers a question. And if anyone’s trying to push back on giving you the responses, that should be a big red flag.

00:36:09 Chris Conway

Ryan, let’s lighten it up a little bit. We finish always with three standard questions for our rules of investing guests.

First one, could you tell me about a big win or a big loss from your career? Usually people focus on the big wins. What happened and what was the lesson?

00:36:24 Ryan Donnar

We said we’d make this light. Anyway, I’m going to go back to the GFC. Okay, I’d tell you that for myself as a career high. I was working through what took place over in London. It was pre, seeing how things can get when people are just chasing. Just because the other car is speeding doesn’t mean you’re allowed to speed, but you can still get a ticket. And then seeing how things went the other way with all of the restructures and so forth. But the volume of work that you’re exposed to, so being relatively sort of mid-level, that’s a junior into mid-level, the banker, the breadth of experience you get in terms of the types of deals you see, the industries.

Australia can be quite specialized in terms of teams. You’ve got your project finance team, you’ve got your leverage team, and then you’ve got all of the segments, within insto. You might be a food and beverage specialist or you might be a telco specialist. You can get a lot more breadth of exposure offshore. So working through that environment, seeing all the big restructures, it was carnage, but it was actually pretty cool and good fun and an awesome learning environment to work with good people.

00:37:29 Chris Conway

I sort of know what you’re talking about, mate. I started as an equities analyst in 2007 just before it all teed off. So baptism of fire for both of us.

00:37:38 Chris Conway

Ryan, what do you think investors are getting wrong about private credit right now as we stand here today?

00:37:45 Ryan Donnar

Yeah, I’d probably go back to the earlier observations and people need to just be careful not to assume that all private credit is the same.

00:37:51 Chris Conway

Yeah.

00:37:51 Ryan Donnar

And understand what the underlying exposure is. The other big thing is, and we say it often at Privity, Private credit’s not perfect credit. So, don’t be afraid if there’s a restructure or a default that happens somewhere, as long as you’re backing the right managers. And again, you make sure you choose those that have experience who manage assets through a cycle and have experience doing that. Often through that change creates good opportunity.

The returns can actually become a lot higher for an investor. So if people have the right controls and documentation, they can pass costs through increased interest and so forth, higher costs, which is a better return for investors.

Unfortunately for managers like myself, it’s where grey hairs come in for myself and the investment team, but it can be a great outcome for investors.

00:38:41 Chris Conway

Ryan, last one. If markets were to shut for the next five years and you could only lend to one type of borrower over that period, who would it be and why? Or what type of borrower?

00:38:51 Ryan Donnar

Yeah, look, I’d probably go to what’s at our core at Privity. I mentioned it just loosely, but it’s really about investing where the world’s going and making a positive impact that comes with that. And that’s what private credit does do. It’d have to be a counterpart that’s got strong cash flows, conversion of that cash, got great security. But importantly, it would be someone that’s an employer of choice. Lots of downstream jobs are created and services. So it’d be a good, stable, strong return for investors. But importantly, it would be something that still contributes to the Australian economy. That’s particularly why we enjoy servicing sort of that mid-market space here in Australia. So we’d continue to do that.

00:39:34 Chris Conway

That’s fantastic, mate. Well, done.

Ryan, that’s it. Thank you so much for sitting down and taking us through the world of private credit and indeed Privity. It’s been an absolute pleasure.

00:39:45 Ryan Donnar

Thanks, Chris. Thank you very much.

00:39:47 Chris Conway

Thanks for listening folks. Remember you can subscribe to the Rules of Investing on all the major podcasting platforms or via the Livewire Markets website.