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Summary
Summary
Investment Opportunity: This business opportunity offers 25% total return through 11% credit and 14% equity within the $7 billion livestock finance market.
Loan Book Strategy: Targeting $50 million loan book expansion with short-term trader and longer-term breeder products for stability.
Risk Management: Secured loans against appreciating cattle assets with diversified geographical exposure to minimize risks.
Capital Structure: 80% of investor capital in mezzanine tranche 1 yields 11%, aiming for 20-25% net returns through scaling.
Competitive Positioning: Customized lending and advanced monitoring technology differentiate from banks and smaller lenders.
Investment Timeline: Investors need to commit by December 15th, with a rare opportunity to invest at zero equity cost.
Notes
Investment Opportunity and Market Positioning
The meeting presented a unique chance to acquire a livestock finance business operating in a $7 billion Australian market with a clear gap between large banks and smaller lenders.
Tim Samway highlighted the opportunity to invest in a special purpose vehicle offering an 11% per annum credit return plus an additional 14% equity return, netting a 25% total return after fees, addressing a market underserved by major banks.
Scarcity Partners’ minority stake in Privity Credit leverages their expertise in structuring and workout experience to capture this niche opportunity. (Slide 2)
The business targets mid-market livestock lending, aiming to scale through a hybrid of short-term and longer-term cattle funding products that offer diversified loan durations and income streams.
This opportunity arises from shareholder misalignment that stalled previous growth, allowing for a reset at zero valuation versus the prior $9-10 million equity valuation, giving investors an entry at significant discount.
Product Strategy and Loan Book Growth (slide 5)
The core strategy is to revive and expand the existing loan book of approximately $50 million, anchored by a short-term trader product and a newly introduced breeder product with longer durations.
Atiya Habib explained the short-term trader product lends to farmers for young cattle purchases with a 9-12 month duration, while the breeder product funds milking cattle over 2-3 years, providing intermediate cash flows and progeny as additional security.
Combining these products targets an average loan duration of 12-18 months, optimizing portfolio stability and cash flow.
Growth will come from restarting lending to existing mid-cap clients and expanding to larger clients within Privity’s networks, enhancing scale and diversification.
Future product rollouts include mortgage insurance and identified acquisitions, which are not yet factored into current projections, indicating further upside potential.
Risk Management and Structural Protections
The business employs a multi-layered risk management approach emphasizing asset appreciation, diversification, and active monitoring.
Lending is secured against cattle assets that appreciate as cattle gain weight, reducing loan-to-value ratios from initial 85-90% to 70-75% over time, creating a built-in risk buffer.
Loans are diversified across states and rainfall regions to mitigate geographic and climatic risks, such as drought impact, preventing concentration risk.
Active portfolio monitoring uses a combination of statistical models, physical inspections, and emerging technology including satellite-linked cattle tracking to verify weight gain and health, enabling early intervention if collateral value declines.
The lending structure is supported by an asset-backed securities (ABS) setup that isolates loan assets in a bankruptcy-remote entity (Finco), ensuring lender security and prioritization of payments to mezzanine and senior lenders (slide 6).
Privity Credit anchors the subordinated mezzanine tranche, aligning their interests below senior and mezzanine lenders who receive the 11% yield secured by collateral and cash flows.
Capital Structure and Return Scenarios
The investment is structured to deliver stable credit returns with significant upside through equity participation in the operating company.
A minimum of 80% of investor capital will be allocated to the Finco mezzanine tranch 1 generating the 11% yield, while up to 20% funds working capital in the operating company, which drives EBITDA growth and equity value.
Ryan Donnar outlined three return scenarios (slide 7): A) partial capital and sub-11% returns if credit losses materialize, B) achieving the stated 11% stable return, and C) target of 20-25% net annual returns if originations scale and refinancing reduces funding costs.
A senior financier (an Australian bank) is already secured for initial funding, with a securitization structure planned to expand the loan book to $200 million with a lower cost of funds, unlocking higher equity returns.
Past success with a similar restructuring and growth of a $25 million auto finance book to $175 million demonstrates the team’s ability to execute and scale (slide 8).
Competitive Positioning and Management Alignment
Privity Credit differentiates from major banks and competitors by offering nimble, customized lending with hands-on credit management backed by advanced monitoring technology (35:01).
Major banks lend against farmland at lower LVRs and offer less tailored products such as cattle funding, while smaller competitors offering cattle funding lack operational and tech capabilities to actively manage risk.
The cattle funding business adds value through its specialised risk controls, loan customisation, and collateral management, filling a market niche that banks and other players do not serve efficiently.
Management alignment was a key previous failure; the new management team will hold equity stakes to ensure incentives are aligned with investor returns, a point confirmed by Ryan Donnar (36:56).
Scarcity Partners’ approach involves equity ownership for all employees and management to foster long-term commitment and performance.
Timeline and Investment Process (slide 10)
The investment process is urgent with a tight timeline to secure funding and start operations.
Investors must commit by December 15th with funding closing on December 18th, reflecting the rare chance to buy into an operating loan book with customers for zero equity cost but backed by assets and yielding stable returns.
The team emphasized that such opportunities are infrequent, and even mezzanine lending without equity upside at 11% yield is considered attractive in the market.
