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Expert Investor: Paul Wilson – Finding Opportunities In Australian Technology

26 November, 2020

We last spoke with Paul in 2019, when COVID wasn’t around, and the Australian technology sector was really picking up pace. We asked him back on the show because we wanted to know how he’d managed COVID, and what further investment opportunities it has presented Bailador.

Paul has had extensive private equity investment experience as a Director of CHAMP Private Equity in Sydney and New York, with MetLife in London, and as Executive Director at media focused investment group, Illyria Pty Ltd (private investment company of Lachlan Murdoch). 

Paul is co-founder and partner of Bailador – specialist investor in IT and Media. Paul is also Director of SiteMinder, Straker Translations, Stackla, the Rajasthan Royals IPL cricket franchise, and ASX listed Vita Group Limited.

In this episode, we discuss:

  • Why Paul invests
  • How Bailador navigated COVID
  • How they are now trying to find value and price companies
  • If Bailador’s investing universe has changed
  • Where there might be new opportunities in the Australian technology sector
  • Trends to expect to see play out in 2021

Bailador is a specialist investor in media and technology. They’re listed on the ASX under BTI.

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Bryce Leske: [00:00:57] Welcome to another episode of Equity Mates, a podcast where we follow our journey to invest, we break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going, bro? [00:01:10][13.0]

Alec Renehan: [00:01:10] I'm very good. Bryce can't wait for this episode. One of our favorite expert investors has come back for the show. [00:01:16][6.2]

Bryce Leske: [00:01:17] Yes, we must be doing something right. It is our pleasure to welcome Paul Wilson back for the second time. Paul, thanks for joining us. [00:01:24][7.4]

Paul Wislon: [00:01:24] Thanks, guys. Great to be here. [00:01:25][0.9]

Bryce Leske: [00:01:26] For those that haven't listened to our first episode with Paul, we suggest you go back and listen to that. It was a great deep dove into Paul's sort of philosophy of investing in everything that they're doing over at Balladur Technology Investments. So please do. But Paul has had extensive private equity investment experience as a director of Champ Private Equity in Sydney and New York with the Met Life in London and as an executive director at media focused investment group Illyria, which is a private investment company for Lachlan Murdoch. Paul is also co-founder and partner of Balladur, which is a specialist investor in IT and media. He is a director of site mind striker Translation's Stockler, the Rajasthan Royals IPL cricket franchise and ASX listed Vayda Group Ltd. So, Paul, you've got a lot going on and every time we meet you, you're at the beach and you're living the dream. [00:02:18][52.6]

Alec Renehan: [00:02:18] We've got great teams. [00:02:19][0.4]

Bryce Leske: [00:02:20] It's the game that is the case. We've brought Paul back in because when we last spoke to him, Covid hadn't happened. And there's a lot that's been going on in markets since. And we have a few questions about more specifically how he managed the process at Baylor door. So looking forward to getting stuck in. [00:02:35][14.8]

Alec Renehan: [00:02:35] Yeah, but before we do, we do play a little bit of a game here are overrated or underrated where we throw out a few indexes or themes that we may not otherwise touch on. And as Bryce said, Covid has happened since we last spoke. So I guess this is a Covid adjusted version of the game. So overrated or underrated how the ASX 200 has gone during this period. [00:02:56][20.4]

Paul Wislon: [00:02:56] Okay, I feel like I should give a general health warning here that I'm not usually a macro investor. I'm very focused on specific tech growth companies. But in the interests of playing the game, I would say I'm neutral to positive on ASX 200. So slightly underrated. A lot of it seems to be driven and dependent on a government stimulus, though, and certainly the Australian government has given every indication that they'll continue to pump prime. So on that basis, underwrite it [00:03:23][26.8]

Bryce Leske: [00:03:24] moving overseas then overrated or underrated? The Nasdaq 100? [00:03:26][2.9]

Paul Wislon: [00:03:29] I'd say relatively neutral once again, government is going to play a role, very different reasons. So the large tech companies are juggernauts that are very, very hard to stop from this point. But one thing that could give them a speed bump is regulation. So just looking at it through the other lens, [00:03:42][12.8]

Alec Renehan: [00:03:42] one of the features of the US response during this Covid period has been the Federal Reserve just printing and buying at an unprecedented level. I think seven trillion dollars or something around there at last count, overrated or underrated, that Federal Reserve response, [00:03:57][15.0]

Paul Wislon: [00:03:58] I think it was probably generally the right thing to do. You know, they've got to keep things ticking along and they probably don't mind if it does devalue their currency a little bit, given the trade wars that are going on. [00:04:09][10.6]

Bryce Leske: [00:04:10] Overrated or underrated here? We've seen both a huge run in tech stocks and overseas in America, overrated or underrated, the run in tech stocks? [00:04:18][8.5]

Paul Wislon: [00:04:19] Well, I would say justified. It's hard to say underrated when there's been such a run. But balancing that, there's a long, long way to go in performance of these companies. I've touched on the big US names just so dominant. Now, I think, generally speaking, investors have started to cotton on to just how powerful these tech companies can be, just how effective some software models can be. So I do think there's a long, long way to run talking my own book. I would say if you if you want to get one of those growth companies, it's got a long way to run, but way cheaper. You get them in an earlier stage. And that's exactly what we do. [00:04:55][35.7]

Alec Renehan: [00:04:55] Abelardo we'll get stuck into Balladur in a little bit. I don't know if I can say this, but we've interviewed a lot of experts on the podcast, very few. I've gone out and bought a fund after I've interviewed them, but Abelardo was one that I did. So I guess full disclosure, as we have this conversation that last time you convinced me and I'm an owner, [00:05:12][17.5]

Bryce Leske: [00:05:13] are you here to be reconvince? [00:05:14][0.7]

Alec Renehan: [00:05:15] Yeah, yeah, yeah. Why are you a little bit so has it gone? Well, we'll get to how it went during Carnival because it went up and down. Down, down. Yeah, but before we do, we normally ask the story of people's first investments. We've already asked you that when you came on the show last time. So we won't retread that ground. Instead, we want to ask you a more general question. Why do you invest? [00:05:36][21.7]

Paul Wislon: [00:05:37] OK, great question. I'll answer it by explaining why I began to invest and then kind of roll it into why I still do. I began to invest, specifically targeting venture capital growth companies, private companies. Part of the reason was I grew up in Queensland. I was seeing businesses that were getting to a certain. Stage and just getting taken over. And so I thought, what can we do to help these businesses just keep growing and employing people in the local community and then become successful on the global stage? And so that germ of an idea really took hold in my early 20s and it's kind of been my North Star ever since. Now, along the way, as was outlined by Bryce, I spent time in New York, London. I did buyouts. I became a little bit less philanthropic in my attitude and I made some money, which then allowed me to focus back on my true passion, which is expansion stage. And pleased to say that we now have a track record of helping lots of Australian businesses go and conquer the world, become world leaders in their segment, employ thousands of people and contribute to a vibrant tech and tech business sector here in Australia. So that's really the thing that gets me out of bed and excites me about what we do. [00:06:48][70.9]

Bryce Leske: [00:06:49] Yeah, I love that. Such an exciting, I guess, area of investment, that early stage sort of growth. So speaking of Bailando, Paul covid came pretty quickly impacted by the share price, along with the share price of many, many other companies. But internally, we're interested to understand a bit about how you navigated that sort of Covid period. [00:07:09][20.8]

Paul Wislon: [00:07:10] Sure. I mean, put myself in that frame of mind. It was interesting because markets everywhere were falling. There was just so much uncertainty. And without question, all of the businesses that I'm involved with, the first priority was the teams, the staff making sure people were healthy. And then the second element of that is working out, well, can we afford to keep paying everybody? What's the right size here? And you really don't know that until you know what your revenue is. And so it was a complex Rubik's Cube. You had to think about your customers in multiple markets at once, any government response? And then did you need to take any action to rightsize your cost base? And the other factor for us is we have employees all over the world. So in places like Australia, the government response was fast and clear as it was in New Zealand, and that allowed us to really not have to take many heads out at all in that first instance, whereas places like Spain is much, much more difficult. The government basically said you're on your own. And so it was a different response depending on different markets in different industries. Now, in businesses like Siteman, which leverages the travel industry, specifically hotels, I think a lot of people and a lot of our investors probably thought initially, oh, boy, this could be really bad for site mind. I was concerned, but actually quietly confident that the business model would be fine because ninety two per cent of gross margin of forsight minor comes from monthly subscription revenue. And so unless a hotel actively switches off the software platform, you're going to maintain the bulk of your revenue and gross margin and you'll be fine. You just might not get the growth acceleration for a little while. And then if you take that one step further. Will hotels survive? Most hotels actually can survive on about 30 or 40 percent occupancy. And one of the last things they're going to do is switch off something that generates additional revenue for them. That costs about two hundred dollars a month. And so I was very confident in the model and where we sat in the ecosystem. And even if you take it one step further, many hotels, infrastructure base of one operator goes out of business. Someone else probably steps in unless the infrastructure is repoll. That's their biggest holding site, Monder. And it's been super solid through the whole of Covid. But once again, so often the answer lies below the surface. You have to look at where the hotel activity is strong and where it's weak. Basically in economies where there's a lot of international travel, dependent's, it's weak like Thailand. If there's a strong domestic travel, like a Germany or US, hotels are very strong now, weaker in the city, stronger in the regions, weaker for corporate, stronger for tourism. So you just refocus. And so having a nimble management team that can react to that quickly is really key. And I've been so impressed with all of our management teams, their ability to react, to care for their teams and then switching over to some of the business that have benefited a lot. So we were chatting just before we started the podcast here. Broza, for example, is an online furniture retailer. So you could hardly get a better setting then having thousands of people locked in their living rooms, looking at their old furniture. [00:10:13][182.7]

Paul Wislon: [00:10:14] thinking, gee, I could use an upgrade, but they can't go to a store, so they go online. And so that business has benefited tremendously, both in top line growth and profitability. And that's indicative of the benefits and the success that e-commerce is having across the board. We've had a number of other businesses that are going very, very well through this. Lendee is is an online home loan platform, and you might not initially think that there'd be a benefit there, the benefit for lending streams from the fact that they are so good at what they do. And so if people are sitting around and they think our interest rates are dropping, maybe I should look at refinancing if they go online. Lending got an incredibly powerful funnel to capture those leads and then to progress qualification. The individual borrows a match them up with lenders, and so they've been incredibly successful through this period and there's been a number of articles in the press speculating about imminent IPO for Lendee. And certainly that business model and that management team can handle being a public company. [00:11:10][55.6]

Alec Renehan: [00:11:10] Yeah, not for people who are unfamiliar with Bayardo. We should just cover off. So Balladur is listed on the ASX ticker, but it's a listed investment company that invests in early-stage Australian technology companies. Correct me if I'm getting any of this wrong. It's pretty good. And your [00:11:24][13.9]

Alec Renehan: [00:11:26] and currently has a portfolio of 10 companies. That's right. So if people want to check it out as we're talking ASX ticker Bayti, I try. One thing that I find quite compelling about your approach is how conservative you are around valuing the companies in your portfolio. I think after we last spoke, I was doing some research and you were happy to value companies at zero if there was uncertainty or risk or there was a material disruption to their business, even when other investors probably wouldn't do that with the uncertainty caused by Covid, how did you go about trying to value the companies and trying to price in all that uncertainty? Sure. [00:12:02][36.0]

Paul Wislon: [00:12:03] So you're right. We tend to be very conservative. We tend to only change our valuations when there's been a third party investment or if it's been a year past that will take a look to see if there's been significant change. What I can tell you, there's been 21 third party transactions in the portfolio companies. Twenty one out of twenty one have been at or above our carrying value. So that's pretty good empirical evidence endorsement, I suppose, that that we are being conservative. How did we go about it with Covid? First of all, we determine whether the businesses would need additional capital, because if they did and there was a third party round, then you've got a benchmark. I'm really pleased to say that none of our 10 companies have needed any additional capital through the whole of Covid. And so generally there's a sentiment that says, oh, well, it must be high risk, it's earliest age, it's tech. And yes, there's a lot of validity to that comment. But just look at the facts. Look how many ASX 200 companies were forced to raise capital in emergency, raising a big discount and none of our small, supposedly high risk companies did at all. And there are no plans to if we raise capital for any of them, it'll be to drive further growth. And so strong business models, good product market fit, make sure all those elements are still there. Look at the data. We always just are driven by the facts, driven by the data. What's actually happened to our subscribers? What's actually happened to revenue? Have we controlled our cost base? Is there any more cash burn than there was before, or are we in fact better? And so we just looked at all those fundamentals that we always do in determining the valuations. [00:13:32][89.4]

Bryce Leske: [00:13:33] If you spoke about companies raising it pretty low valuations and getting slammed, were you going out there and looking for any bargains? [00:13:40][6.7]

Paul Wislon: [00:13:40] Yeah, we were and still are. And that is both for pilot or for new investments, but also for opportunities for our portfolio companies. So, you know, our business like site mind, which has, you know, a very hefty cash balance and a great market position and is a software business. So it's nice and stable is in a great place because there's a lot of travel-related businesses out there that are transaction based, volume based, and they're not in a great place. And so we've looked at a number of those to see if there's some tech or some particular aspects, even geographic spread that we can pick up. And so that's an ongoing situation. And a number of our companies are doing the same thing. [00:14:18][38.0]

Alec Renehan: [00:14:20] There you go. No companies that you can announce on the show tonight give us the exclusive. [00:14:23][3.0]

Paul Wislon: [00:14:26] Oh, no, I'd get myself [00:14:27][0.7]

Alec Renehan: [00:14:28] some ASX rules around. [00:14:29][1.3]

Paul Wislon: [00:14:31] I wanted so much action happening in almost all of our companies. Should be quite a bit of news flow over the next few months. [00:14:38][6.7]

Bryce Leske: [00:14:39] Something like Sidewinder, though. What's your thesis in terms of, you know, the next two or three years as to what's to come? Because surely that's come into play around. What are we expecting it to get back to 100 percent? Or like where are you thinking with that? [00:14:51][12.7]

Paul Wislon: [00:14:51] Yeah, once again, we try and be driven by the actual facts and not Christobel too much. What I can say is this, that the subscription revenue base to sideline is super solid and that will continue to grow. But the pace is hard to predict based on lockdown. Essentially, the transaction based part of Sideliners business is super exciting because we've continued to win new customers and we've kept the bulk of the existing customers. So as volumes do come back, that will go on a tear and grow much, much faster. Right. So that's our payments product. It's where we clip the ticket on some bookings. We processed over 40 billion dollars worth of bookings through the platform last year. So you only need a little piece. Wow. And and so that's a bit of direction of one of the avenues we're considering for acquisition for Samana is can we pick up something that leverages that even further but pick it up pretty cheaply. So then we had previously raised money for site mind at an billion dollar valuation compared to the original buyout or entry value of twenty five million. [00:15:52][60.3]

Alec Renehan: [00:15:54] And there's that growth. [00:15:56][1.6]

Paul Wislon: [00:15:57] Now this is our biggest winner so far, but we think we've got a number of companies that are capable of doing this. But on site mind, at the time of that rise, we mentioned that we were then looking towards an ASX listing. I think that's still the logical avenue for site mind. It's just the timing that's in question. But with its with its existing metrics, it would be in the top handful of software companies on the ASX immediately. Wow. [00:16:20][22.8]

Alec Renehan: [00:16:21] Well, on that IPO point, what's Bailamos philosophy when it comes to your portfolio companies becoming public? Do you look to sell your positions or are you happy to own public equities? [00:16:31][9.9]

Paul Wislon: [00:16:31] So I feel that what we've done so far, we've IPO had one business strike at Translation's and in that one we sold down about 10 per cent of our position at IPO and that produced an IRA from memory of around 43 per cent. We then sold down another 10 per cent once our shares came out of escrow, produced a similar return. The share price had gone up by about 30 odd per cent by that time, and we held the rest of the position. Interestingly, for striking. The price has come off since then, but there's a lot of super positive things coming for that company. So absolutely not a seller. But at some point in time we'll continue to harvest some cash. That's probably indicative of what we would do with some other companies. And we do have a number who are heading towards IPO, probably sell a little bit at IPO and then gradually sell down over time in order to recycle back into new investments and pay some frank dividends [00:17:22][50.5]

Bryce Leske: [00:17:23] as covid changed your, I guess, investing approach or your universe at all. [00:17:27][4.5]

Paul Wislon: [00:17:28] Yeah, what it's done is produced more rapid winners and some losers. So, you know, in the e-commerce universe, that whole segments on a tier payment is a sector that's super hot and public markets are rewarding businesses even at small scale. And so, look, frankly, we're probably not super active and pavement's things right now because of that sort of level of competition. Our core focus historically has been software as a service businesses. And I would say that will continue to super solid model. We just are seeing industries that are bigger winners and losers. And so it's all about looking at the metrics they produce. How much does it cost to acquire customer? How much do you get in the lifetime value of that customer? You really want to be making five times your cost for a solid company. Some can make much more seven or eight times. If you get one of those, then you want to see if you can jump on board as long as you think it's going to be sustainable. So one of the big things at the moment is, is trying to anticipate what's a short term surge versus what's a longer term sustainable, higher growth rate. And so that's probably one of the changes. [00:18:32][64.5]

Bryce Leske: [00:18:33] We're just talking about DocuSign, for example, that and, you know, with the announcement of the vaccine overnight, we're recording on the 10th of November. Well, potential vaccine anyway, and how a lot of the tech stocks were sold off because of potential, I guess, changes in how people are going to live their lives if vaccine comes through. It's, yeah. Something that's hard to anticipate. What's coming. [00:18:54][20.5]

Paul Wislon: [00:18:55] Yeah, it is. And you can go back and look at what happened to tech prices generally. We alluded to it earlier. Things were sold off, but then bounce back super quickly when people started to realize what was actually happening. In the real world, there are lots of movement, but that creates opportunity. [00:19:10][15.4]

Alec Renehan: [00:19:10] Yeah, yeah. I want to get to that share price point. But before we do, we're just going to take a quick break to hear from our sponsors. [00:19:16][5.3]

Bryce Leske: [00:19:17] Ren, you are all about getting fit. You've bought. The garment you bought, the golf membership at the gym membership and you're on the mind MasterChef and even in lock down last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:19:31][14.0]

Alec Renehan: [00:19:32] No, look, they didn't come, but all of that effort really was canceled out by the numerous menu log orders that were a real staple of my lockdown experience. [00:19:41][9.5]

Bryce Leske: [00:19:43] Well, we've just headed into a new financial year, so I think it's time you get money fit with Virgin Money, our latest sponsor. [00:19:50][7.0]

Alec Renehan: [00:19:50] That's right. Bryce with a high interest savings account bundled with a seriously rewarding everyday transaction account. You can manage your money easily on the go smash your savings goals and be rewarded for it. [00:20:02][11.9]

Bryce Leske: [00:20:03] And with the Virgin Money Go transaction account, you can earn rewards on your everyday spending with zero monthly fees. Sounds like just what you need. Ren. [00:20:12][9.3]

Alec Renehan: [00:20:12] Yeah, the FBI twenty one get Ren didn't quite work, but if y 20 to get Ren money, it might be to go [00:20:21][8.4]

Bryce Leske: [00:20:22] back to your own Bayt Virgin money terms and conditions and monthly criteria apply. Now let's get back to the show. [00:20:28][5.7]

Alec Renehan: [00:20:29] So Paul, you mentioned there that things fell off and then bounced back very quickly. And I think Abelardo share price was one example of that. It fell a scratch over 50 percent in, what, a month maybe. And then it's recovered. It's up now. One hundred percent. So it's basically recovered. All the ground lost. I'm interested to know, I guess to start with, what was that like for you watching that price fall so quickly? Like, was that something you were paying attention to or did you try and just block it out? It's true. I've just sort of putting [00:21:02][33.3]

Paul Wislon: [00:21:03] my mind back in that time and place. It was interesting because I obviously had pretty good insight into how portfolio companies were going, and I was trying to explain that to the market through our commentary in the NTA statement and so on. But it was the sort of environment where it pretty much doesn't matter what you say, you're going to get slammed. And so we actually scaled back a little bit on some of our comms and just said, look, it'll be what it'll be for a while. We're telling you we don't think any of our companies need capital and they'll be fine. But time will tell, you see. But the record will show that once the share price got below about 60 odd cents, I couldn't resist. I bought another half a million myself. So, you know, I always put your money where your mouth is. I think. [00:21:47][44.4]

Bryce Leske: [00:21:47] Yeah, I think it's important. [00:21:48][0.7]

Paul Wislon: [00:21:48] And if ever I'm looking for indicators of how people really feel, I just want follow the money. [00:21:52][4.1]

Alec Renehan: [00:21:53] Yeah, yeah, yeah. [00:21:54][0.9]

Bryce Leske: [00:21:54] Well, I was talking about this with Dad and he's a shareholder and it happened so quickly. The price drop was like, you know, and it kind of 40 or 50 cents or whatever it was. What the hell. It was completely missed. I thought God damn it, I should have got in. [00:22:08][13.8]

Paul Wislon: [00:22:08] Whilst the share price has recovered, as as you say, the portfolio is down even better. So the discount to net tangible assets is actually wider than it was before. Our twenty per share is, I think, a dollar thirty seven now and the share price about a dollar three. And so for those value investors, it's opportunity right there. You know, the latest growth numbers we released portfolio while it was still growing at twenty percent, we think that will continue and then in time accelerate. So the opportunity is not completely missed. It's just not, you know, the absolute no brainer as it was before. It's interesting. There's another company that's starting to go down a similar path to us, Thorney Tech. And they just announced yesterday a catchphrase which is in an 18 per percent discount to their NTI. So there's that there's a market that already shows even comparable to that. We'd have some upside. But we're going to be replacing a piece of analysis next month, which looks at the UK where there are more funds that look like us. And we've found ten and seven out of those ten trade at a premium to NTI because they've been able to demonstrate realizations and valuations higher than their NTI. That's what we aspire to do overtime. And so, yeah, we still think there's a there's a long way to go for the share price. Yeah. [00:23:23][75.0]

Alec Renehan: [00:23:23] This is the reason that it's trading because a lot of Elyse's in Australia trade at a discount. But is the reason that your discount is so pronounced, mainly because a lot of your holdings are private. So there's that illiquidity. [00:23:35][11.7]

Paul Wislon: [00:23:36] Yeah, I think you're hitting on a really relevant point there. This is how I see it. I think a lot of investors say you're listed investment company. That should be a discount. You invest in private things, therefore the discount should be greater. I understand that step through of logic. However, if you take that second part and say, does the affect base support it? Well, as I mentioned twenty one times, the fact base hasn't supported giving it a bigger discount. It's supported giving it a premium. So if we get that number up to 30 or 40 or 50 times where we've delivered particularly, I think the key will be a couple of big high profile cash realizations. I think that'll be the moment where the light bulb really comes on and this is a patient long term game. So I, I don't worry about it day to day. I sometimes feel bad for people that if they're focused on that aspect of it, but this is a long game for us. David Kirk and I hold 12 Dollars million of shares between us and we're happy to leave that there and keep it growing. Just one other point I would make on our share price and why our discussion might be high. Know mind is over 50 per cent of the portfolio. So, you know, it's an unusually high concentration. The reason is because it's grown so much. It didn't start out in that concentration. I think there's still a lingering wariness in the market generally about the fact that its customer base is hotels now short spread across 35000 hotels all around the world. And it's been resilient through Covid so far. Just this morning, Abelardo, we released our monthly net Tangible Assets Statement. We dedicated our whole founder's commentary this month to talking about site MINDE, and we released a bunch of slides that the site mining CEO used at a Goldman Sachs conference last week just to let people know, look, this is solid as a rock. And so be interesting to see if there's a reaction to that. And people saying, well, actually, why is the discount so big if you've got these genuine winners in the portfolio and the largest holding super solid and is likely to be just a long term [00:25:32][116.3]

Alec Renehan: [00:25:33] cornerstone, in some ways it's a problem. Like I'm sure it's annoying for some of your shareholders, but it also creates shareholders that are truly going to be long term because, like, the cash realization will happen at some point. But it's just you have to be willing to live with the discount. Yeah. [00:25:48][15.5]

Paul Wislon: [00:25:49] And we've had five partial cash realizations, really just demonstrating the model. And those have produced a combined IRR of over 42 per cent. And we think we'll just keep producing those. But it's when we get some really big checks in that I think it'll come. [00:26:01][12.9]

Bryce Leske: [00:26:02] Yeah, it'll be nice. [00:26:03][0.6]

Alec Renehan: [00:26:05] We've touched on this a little bit, but it feels like the Australian tech industry is really starting to grow. Like we we've obviously seen the whack stocks be the sort of big five. We had the up highlight a moment. Well, I think we're probably still in that moment, but we're now seeing, you know, some more e-commerce and tech focused companies. IPO, you know, I adore beauty iPod recently, DDO, iPod recently. It feels like there's momentum in the Australian tax base as a whole. Are you saying that on the private venture side as well and sort of where the areas of growth in areas of opportunity that you're really saying? [00:26:37][32.2]

Paul Wislon: [00:26:37] Sure, I would agree with the statement that there's very positive sentiment among the investment community towards tech right now. And, you know, if you take one step back and think about the low interest rate environment that we're in and it appears we're going to be in for some time, that tends to increase allocations towards growth. And so, you know, growth is exactly what we're doing. And so we are seeing some more money flow into our sector. We're seeing people who raise they haven't raised before. We're seeing other people raise funds. The good news is that the supply side of that equation in terms of available companies to invest in has also been growing and building momentum over the last decade in a big way. I really feel like ten years ago there was a lot of money for start ups and not a lot for expansion. And they used to call it the Valley of death. I'm not sure that's the case anymore. I think the Australian ecosystem now is starting to cater pretty well for all the steps on the journey. And importantly, the the mindset of founders and management teams these days, I'd say, is much, much more global really. From the beginning. They're thinking about how can we be a very big business? How can we have a target addressable market of billions of dollars and not a few hundred million? And so I really applaud and encourage that bigger thinking. And it allows the businesses to have a much longer growth journey. So we're certainly seeing that. And then sector specific things are pretty hot. You mentioned fintech, the payment space, e-commerce. No doubt those valuations are significantly higher than they were before. SAS probably is relatively high versus historical levels. If you went back and did a broad benchmark of, say, three years ago, two years ago, one year ago now, you'd see a gentle step up more than a zigzag. So quite valuable. And I think that's just as more and more people cottoned on to how good the business model is. [00:28:25][107.3]

Bryce Leske: [00:28:25] We mentioned the impact that interest rates are having on driving people more to the growth side for people that are still trying to get their head around the whole macro environment and the impact of, I guess, monetary policy. I able to explain what you mean by that. [00:28:39][14.0]

Paul Wislon: [00:28:40] So if an investor has a pool of capital that often have a certain risk profile or a return or both in mind, when you're in a very low interest rate environment, the allocation that you're making to a fixed interest investments or anything that's linked to those is going to be producing a lower return than it has historically. And so if you want to stick to generating that blend at all in return, it naturally points you towards higher growth assets to try and balance that out, particularly in the current environment. I think lots of people are experiencing day to day how much more of a role tech is playing in their lives. And so it's a natural place to look for that growth. Then look at some of the Australian businesses that have been doing so well on the international stage and producing really nice returns. Well, there's the track record. And so those are all factors contributing. I would just add a little commercial for at all. There were perfectly positioned to take advantage of all of that would just add a value to a fraction of some of those larger comps the ASX. So we feel like we've got a lot of upside to harvest. [00:29:41][61.6]

Alec Renehan: [00:29:42] And maybe you guys need to duelist in the UK to get some of the premium over there. [00:29:47][5.2]

Paul Wislon: [00:29:48] That would mean getting on a plane more [00:29:49][1.1]

Alec Renehan: [00:29:51] through on that point around the low interest rate environment. One thing that we've been asking the experts that we spoke to is just specifically around things like discounted cash flows and risk free rates because interest rates are so low. When you are doing some of that analysis, what right do you [00:30:06][15.4]

Paul Wislon: [00:30:07] take such a tough one? Look, to be honest, we use discounted cash flows as a crosschecked, but never as primary valuation measure because they do depend so much and can move so much depending on your discount rate. We don't put a hell of a lot of faith in weighted average cost of capital models, particularly in the current environment. With such low interest rates, if we're going to use them, we're going to keep rates up at a level of return that we would expect to see as opposed to what the textbooks might tell you. And so we'd be looking to include, you know, 25 to 30 per cent as our implied cost of capital in order to arrive at valuations. But one of the things about our sector is it's quite easy for people to do a top down and go the target. Addressable markets, 40 billion dollars. We only need five per cent. Therefore, you should value an astronomical number, even though our revenues five million. So, you know, just it gets a bit absurd pretty quickly. We're much more focused on the three year plan. If those guys execute to that three year plan, what would the business look like? And discount that a bit from what we think it could do to risk it a little and then say, well, if it has those characteristics, how should it be valued then? And look around at comp's, same business model, same industry, same size. There's a lot of unit economics you can use in a software as a service business in particular. How much does it cost to acquire customer? What's the revenue per month? What's your gross margin? You really want that to be 75, 80 per cent plus you want payback periods of about a year. You want churn levels at a gross level to be no more than 10 or 12 per cent. You want net revenue retention, which is taking into account customers you lose take value off, but then customers that stay but upgrade or stick around with price rises. Add you want your net revenue retention to stick around 100 per cent or better. That means you've got a solid base and if you get revenue retention of better than 100 per cent, you're growing without even adding any new customers. So you want you want businesses that look like that. You want lifetime value to the customer acquisition cost of at least five times. So you need to believe that the business is going to be producing those sorts of things. And then you can start to use revenue multiples as as comps. But until you've got that sort of quality business, it's very difficult. [00:32:16][128.9]

Bryce Leske: [00:32:16] Yeah. What would you say to a beginner investor, I guess, who is looking at the likes of, you know, Amazon's the Afterpay who are trading at incredibly high PEs. And you hear they're listening to people say, you know, their pay is ridiculous, steer clear. Yet year after year, they're just turning away. What sort of advice would you give to them? [00:32:33][16.7]

Paul Wislon: [00:32:33] The advice I would give to them is to think about your time frame for investing. If your time frame is short, those prices are going to be driven by market sentiment. And so it'll just be the crowd surging in one direction or the other based off all regulators are going to tax them or, you know, they're getting traction in a huge market like China. So it'll be news based and you need to just be aware of that. And it's very hard to use fundamental valuation analysis in the short term. Longer term, I would suggest people focus on the businesses that they think are going to be winners. Do they have sustainable products that people want to use on a long term basis? Is the product market fit? Right. Do they have pricing power? What's the competitive situation like? Do they still have a huge addressable market ahead of them such that they can achieve high growth rates? Or are they going to plateau out and be producing cash? And so you can start to use more sophisticated discounted cash flow tools and think about them on yield plays and the like. So it's a very difficult question because the market's more than ever surge around on on news flow. And so now your time horizon, if you want to play in that short term time horizon and you feel that you have an ability to stay on top of news flow and the zeitgeist, well, that's a certain style. It's not what we do. We think about holding for three to five years or longer. And the valuation, if you get it, five, 10, 15 per cent wrong on the way in. If you hold it for five years and it's growing at 30 per cent per year, it's going to be a winner regardless. And so it's not the primary consideration for us compared to all those other things. [00:34:04][91.0]

Alec Renehan: [00:34:05] Yeah, that's some good advice. We definitely talk about long term investing on the podcast. I mean, yeah, there's nothing wrong with short term investing. Bryce bought some trading books at one time and we're going to learn charting. But yeah, I think long term for Equity Mates more [00:34:16][11.4]

Bryce Leske: [00:34:16] quickly put them back. [00:34:17][0.6]

Paul Wislon: [00:34:18] I think you lose a lot. Or sleep if you're doing short term trials. Yeah. [00:34:21][2.6]

Alec Renehan: [00:34:21] Yeah, you got to spend a little more time staring at a screen [00:34:24][3.2]

Bryce Leske: [00:34:25] screen, missing drops, missing climbs and stock charts. It's just not worth it. I like you know, we recently just spoke to Nick Griffin as well. And he has a very similar approach of just, you know, find those big companies that are going to dominate their field and just pack them in and hold. So. Yeah, it's a much more common approach to investing. Yeah. [00:34:47][22.0]

Alec Renehan: [00:34:48] It's a business centric approach to investing. It's like cut all the finance noise and just focus on what you're actually [00:34:53][5.5]

Paul Wislon: [00:34:54] paradoxically, when markets are falling, you're sometimes at your calmest because that might be presenting another opportunity to get some more money to work at better value. If you're confident in the business and you feel you know it, yet you see the value dropping and there's a chance to get some more. Well, that's the moments that you're looking for. Yeah. [00:35:11][17.0]

Alec Renehan: [00:35:12] Yeah. Paul, we want to thank you for taking the time and coming back on. I love listening to you talk about it. [00:35:17][5.6]

Bryce Leske: [00:35:17] Or are you more convinced now? [00:35:19][1.9]

Alec Renehan: [00:35:20] Ren, I remain at the same level on the show here. We love bold predictions, you know, looking into the crystal ball and thinking about what's to come. And so I guess as we get towards the end of 2020 and we look forward to twenty, twenty one, what are you looking at in, you know, for the year ahead? What do you expect to say? And do you have any bold predictions, [00:35:39][19.0]

Paul Wislon: [00:35:39] Bryce mentioned to start them on the board of the Rajasthan Royals cricket team in the IPL? So my bold prediction there is royals to win the IPL next year. Internationals with Steve Smith, Jaroff Raja, Jooste Batla, Ben Stokes are going to be coming into their own strong team. [00:35:54][15.2]

Alec Renehan: [00:35:55] Why didn't you win it this year? That long story. [00:35:57][2.6]

Paul Wislon: [00:35:59] One way of making the finals and not lack of crowd. I'm going to say OK before like I like, right? Yeah, yeah, yeah, [00:36:06][6.7]

Alec Renehan: [00:36:06] yeah, yeah. [00:36:07][0.4]

Paul Wislon: [00:36:07] That's one bold prediction. We actually haven't won the title since 2008, so we'll be pulling out all the stops. I would say he's not the ball prediction, at least two, maybe three IPOs of bilateral portfolio companies within the next 12 to 18 months. [00:36:24][16.2]

Alec Renehan: [00:36:24] OK, that's a big prediction. Yeah, that's exciting. If you have a story about [00:36:29][5.3]

Bryce Leske: [00:36:31] nice and any sort of trends or catalysts that you anticipate might sort of kick the market in either direction next year, I think [00:36:37][6.2]

Paul Wislon: [00:36:37] the role of government will be key across the globe. And certainly in Australia, the unemployment level is going to be jumping up big time to the full impact of that sort of thing hasn't been felt because of the effectiveness of job keeper unless that's continued or replaced with something similar. I think we're in danger of having some pretty high unemployment levels and some pretty big impact from that sort of thing. And just getting back to normal and the pace at which that happens is absolutely going to be OK. [00:37:04][26.4]

Bryce Leske: [00:37:04] Yeah, well, Paul, as always, it's such a joy and pleasure to speak with you and hear what's going on. Bailando looking forward to those three potential outcomes next year and seeing how it all plays out. So thank you very much. [00:37:16][11.9]

Paul Wislon: [00:37:17] Thanks, guys. Appreciate it. [00:37:17][0.0]

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