Talking Money To Us | Andrew Lockhart – Managing Partner from Metrics Credit Partners

Candice: [00:00:10] Hello and welcome to talk money to me. This is your need to know financial podcasts. I'm Candice Bourke. 

Felicity: [00:00:16] And I'm Felicity Thomas. Thanks for joining us today. And we are bringing you another one of our special guest shows. So today we actually have Andrew Lockhart, the managing director from Metrics Credit Partners, who has more than 30 years banking funds, management and financial market experience, specialising in leveraged and acquisition finance, as well as corporate and institutional lending. Now, Andrew's considerable experience includes being responsible for the origination and portfolio risk management of large, diversified and complex loan portfolios, including corporate restructurings. So if you want to talk about the corporate debt Australian market, Andrew is one of the leading experts within our industry. And in 2019 he was actually appointed the chair of the Australian branch of Alternative Credit Council, which is a subcommittee of the Alternative Investment Management Association. So welcome, Andrew, to talk money to me. It's great to have you on the show. 

Andrew Lockhart: [00:01:11] Thanks very much, Felicity. Thanks, Candice. Good to be with you. 

Candice: [00:01:14] Awesome. Now, just to protect ourselves here, talk money to me and Andrew, because we are going to be talking about the markets, credit and investment products. As always, guys, as a reminder, our podcast and the conversations we have here on the show is not considered personal advice, even though we are registered financial advisors at sharing partners. So as always, go out and seek the right professional advice that is relevant to your circumstances because this is not a financial product. Alrighty. Disclaimer out of the way. So Andrew, let's kick off our conversation today. Let's set the scene for our listeners. Can you explain exactly what Metrix does as a business? 

Andrew Lockhart: [00:01:50] Sure. So Metrics is a business is an alternative asset management firm. We specialise in providing finance to large companies. So what what our business is all about is raising capital from investors that are looking for an alternative source of income. But we use those proceeds of the money that's invested in our various funds to lend to companies. And so we have to source or originate those lending opportunities with companies. We have to negotiate and structure the appropriate terms and conditions. And then we have to obviously manage those lines to ensure that those companies service and repay their debt on time. Very important because that's what delivers the capital stability for our investors, but also an attractive income. And so I believe as a result of being closer to that point of origination or sourcing of the transaction, it can generate a better return for investors and and have a bit of means to manage and control risk. But the four areas where we're most active is to lending to both public and private corporates. Now we provide financing for project and infrastructure projects. So if you think about things like the Perth Stadium or the Victorian Cancer Centre, they're examples of our involvement in providing funding. We're very active in commercial real estate lending and that covers things like residential development of land subdivisions or high density dwellings. We do retail and commercial and hotels and others and large component of the industrial property development activity as well that we finance. And then the final component of our market is really providing acquisition finance, where private equity firms are buying companies. And so where we we work in and compete against the banks to provide funding to those companies that operate in those various parts of the market. 

Felicity: [00:03:43] So basically you're probably one of the larger non bank lenders right in that space. 

Andrew Lockhart: [00:03:51] That's right. We we would be the largest non-bank corporate lender and we'd also be the largest commercial real estate related lender in the Australian market that isn't a bank. And so we have currently around about 11 and a half billion of assets under management. We operate 14 different vehicles that allow investors to gain access to the to the market and to our lending activities. And we currently provide funding to around about 260 individual companies or projects. 

Felicity: [00:04:21] Wow, fantastic. I remember when I first met you years ago. Now back in 2017, you actually spoke about how you were at NAB and a few of your colleagues decided to leave NAB and start metrics and you're able to give us a little bit more background on that to set the scene? 

Andrew Lockhart: [00:04:37] Yeah, sure. What actually occurred was I spent actually 26 years working for National Australia Bank and my partners had similar backgrounds working for for a range of commercial and offshore and investment banks here in Australia and offshore. What what occurred back in sort of 2007, 2008 was there was a regulatory change. It was the introduction. Of a new capital requirement that was imposed on the banks at the same time as the global financial crisis. And so what myself and my partners realised was know the banks would be subjected to greater levels of regulatory pressure, is requiring them to hold more and more capital against their assets. And yet in the Australian market, most companies were very reliant or heavily reliant on banks for funding. And so you have this situation where a lot of money has gone into the superannuation system and been focussed on equities, whereas in the, in the providing of provision of debt, most of that debt financing came from banks and it really recognises the fact that most Australian companies don't have an external credit rating and most Australian companies are unable to access alternative sources of funding through an institutional bond market. And so Australia doesn't really have a deep liquid corporate bond market. And so what really occurred was the need to sort of bring our skill set in terms of the origination and the assessment of risk to investors that would like to have gained exposure to a diversified range of direct lending to Australian companies. And so what we really did was bring about, you know, raising capital in a large way that could make us relevant to banks and to borrowers of larger corporates to give them a means to diversify their funding sources. But also for investors recognising that it's very difficult to get direct exposure to well diversified pools of credit and fixed income in the Australian market that aren't banks or government bonds. And so, you know, the real lending activity or the real financing activity in the Australian economy is through loans that are generally provided by banks. And so we work alongside those banks and and compete with the banks now to provide funding directly to those companies. So that's a little bit of the background to how we started and why. 

Felicity: [00:06:55] I always just thought that was such a great story. Andrew So I'm glad you could share it with our listeners. 

Candice: [00:06:59] And no doubt you're taking large chunks of that market share from the banks so well, don't you? So you're clearly in the business of providing debt. I guess. To break it down further for our listeners, can you just give us a quick one on one on the different types of debt and loans that you do lend out to these companies?

Andrew Lockhart: [00:07:16] It's actually very interesting. Candace, because the market is not homogenous. You know, often people have this misconception that subinvestment grade loans are higher risk. But as a lender, what our responsibility is, is to understand the company that we provide funding to understand what drives their cash flows. So how will the company servicing repay the debt and then to try and mitigate the risk associated with the credit risk of providing funding to companies. And so we do everything across the entire capital structure now from senior unsecured and high investment grade loans through to subinvestment grade loans, through to higher yielding, higher returning funds like mezzanine debt or subordinated debt or debt where we might take an equity kick. But what we've done is we've structured our various funds to allow an investor to determine what is the return objective that they are seeking. Therefore, what is the risk profile that they will need to incur to generate that return? And then what are the ways in which we can create liquidity from our asset class to meet investor requirements? And so what we've tried to do is to sort of say, well, we can we can originate anything from a line that generates a return of, say, 100 basis points or 1% over the over the bill, right. All the way through to generating a line that might pay 20%. But the risk and return profile is quite different. And so it's very important that investors think about what is their risk tolerance, what is their return objective, and then they've got a range of alternative ways in which they can gain access to. So through through our listed funds, for instance, the mix table, the metrics master income trust, we would say is, is predominantly investment grade and it really caters to the defensive part of the client portfolio, giving investors sort of an alternative to traditional fixed income. So, you know, move out of hybrids, move out of, say, traditional bond funds and gain exposure to direct lending strategies in the Australian market. That's an alternative. Whereas at the other end of the spectrum, we operate a fund called the Metrics Income Opportunities Fund or multi that fund is designed to give investors a higher return. So obviously there's a higher level of risk associated with that lending activity because it's not all senior secured loans. 

Felicity: [00:09:35] That's right. And you also have the unlisted direct income fund as well, which is the same as MF. Am I. 

Andrew Lockhart: [00:09:42] Right? That's right. And the reason for that is we realise that investors there are some investors that value daily liquidity and the ability to buy and sell and trade those units. On the stock exchange. There are other investors that like the alternative to traditional fixed income that Amex delivers. But they don't want the risk around the volatility of the traded price on the ASX. So if you go back to March of 2020, we were putting out and advising the market that the net asset value of our portfolio was $2, which was equivalent to the IPO issue price. But unfortunately the market sold the units down to a low, I think of around about a dollar 25. And so there was a disconnect between the traded value on the ASX versus the value of the underlying portfolio. And so we recognised that some investors wouldn't want that volatility and so we created the Matrix Income Direct Fund or Matrix Direct Income Fund, if that as an alternative. So that fund is slightly different. It just provides investors with liquidity on a monthly basis as opposed to a daily basis through the ASX.

Felicity: [00:10:52] So that's what a great buy that would have been mixed at, you know, at $25, 27. So much upside there. I guess, you know, this probably leads into the next question. Why do you think investors should consider an allocation into fixed interest as an asset class, given the current economic conditions and market volatility we're seeing? Are you seeing more inflows into your funds? You know, what is your perception of what's going on at the moment? 

Andrew Lockhart: [00:11:19] I think from an investor's perspective, they look to have a well diversified portfolio. If they're 100% invested in growth assets like equities, then obviously that that might present a diversified portfolio in terms of the number of companies they might hold, but it doesn't give you much diversification across different asset classes. And so if you're trying to reduce the correlation between, say, equities and other assets, then diversification across asset classes is quite relevant. And so, you know, if you if you think about a portfolio structure, people would say, well, you know, the shares that they might hold, you know, you can have periods where big bouts of volatility might impact the capital value of those investments. And yet investors might be, say, holding those shares just to receive the dividends and say, you know what, we're right. That is sort of saying, well, there's an alternative way that you can generate an attractive source of income that reduces the correlation with other parts of your portfolio. So the equities, property, fixed income, they all play a role. Then the diversification in private is quite appealing for people, particularly in the current environment, where the underlying loans that we provide to companies are predominantly floating rate, short dated floating rate loans with appropriate securities controls and protections means that as interest rates rise, the total return to an investor increases. And so I think that is it's very relevant in the context of providing investors with greater levels of capital stability and an attractive source of uncorrelated income. So if you think about investors, they're looking for a way in which to gain income off their portfolios, particularly those that are moving towards retirement and that don't want to have large drawdowns on their capital. Big problem in the low rate environment is that if you're not generating sufficient income, you're drawing down your capital consistently. And so that need to find an alternative, attractive source of income that can reduce the drawdown risk for an investor is very important. And then, you know, when you think about investing in equities, investors are investing in equities to gain the access to the growth in earnings of the company. They're looking for capital gains and growth in value. And so they invest in equities when they invest in debt and fixed income. What you're looking to do is to reduce that risk of volatility around the capital structure. So equity, where's the risk? In terms of the volatility, it can move around. But effectively, what what our investors are gaining exposure to is a capital structure of a company where the equity equity is wearing at risk and you've got a greater level of stability in the value of the of the company that you're providing financing to. So I'll give you an example. Everyone sort of says, you know, look at property prices. You know, property prices might fall. You know, I have a severe stress test for residential property prices that they require the banks to adhere to. That provides for a 35% decline to property prices. If if lend money to a company and say you lend the maximum being, say, 60% of the value of the property, then the property has to fall by 40% in value before you as a lender are exposed to risk of loss. So effectively then that first 40% decline in the value of property is an equity risk, it's not a lender's risk. So again, that highlights the fact that in a very simplistic way, you know, that that equity component of, say, the first 40% of the capital structure is at risk to equity and the. Ours is where lenders funds would be expunged. So obviously a lender then also takes security over the property and might take guarantees and other protective measures to mitigate risk. But again, it's not the same risk as being invested in property equity. 

Candice: [00:15:14] And that's 100%, as you've explained, is the reason why as advisors we commonly would outsource to experts like yourself in your funds for that debt exposure to help right out, you know, the market volatility and you've touched on it. So I want to kind of go back there and in the March, April 2020 volatility, we saw obviously you had every fund manager hates that disparity of your actual underlying assets stayed true at $2, but the share price listed was very different, a dollar 25, like you said. So two questions there. Did you have outflows at that point? And I guess that was a very uncertain time. We were really cautious. Are we going to go into a deep recession? This is a good opportunity here. Exactly what you did in those couple of months where you touching base with companies very often. Were you worried about your delinquency rate? You know, how did you manage that risk? And obviously, now we know that that shoot up was very quick. 

Andrew Lockhart: [00:16:08] Yeah, it was an interesting time, I think. You know, it was certainly a cash squeeze. First and foremost, you know, you effectively had companies in industries that were being shut down through no fault of management or shareholders. It was just simply the government in my decision. So you think about, you know, you lend money to it. We lend money to private hospital groups through no fault of their own. Elective surgeries were were terminated or stopped for a period of time. And as a result of that, the earnings that would be generated from carrying out elective surgeries wasn't available to a company. That's one example. So as a lender, what we did is we basically positioned the entire business. So all of the employees within our business moved to the portfolio risk management activities. We weren't looking to originate new lending transactions. We honoured all of the obligations that we had with borrowers that we'd given commitments to. And so if we'd given a borrower a commitment that we were going to finance a project or to be involved in their financing, we honoured all of those commitments through that period of time. In March of 2020, we terminated no capital raising that we were going to do with our ASX listed funding mix. We're in the market with RISE Class on $400 million at the time. Now given the price fell below the NAB, we made the decision to terminate that and hand back the $400 million that investors had committed. At the same time we did see investor redemptions because you've got to remember that the superannuation funds were also had to provide early access to members that were looking to gain liquidity. And so the combination of short term cash flow squeeze impact in terms of superannuation funds, early access together with the return of invested capital in the mix, meant that we were you know, it was a it was a difficult period in which to go through. But through that period of time, we met all of our obligations to our investors who did redeem. And what we've seen since then, these people have gained confidence in our team and the capacity to manage credit risk. We've gone through this process now two and a half years later. There haven't been any losses, no operational losses, no credit losses that have impacted investors. And so I think people have become more familiar with the asset class and more particularly with metrics performance in terms of how we managed through that process. But you know, over the last two years, what we've actually seen is material inflows into our funds as people are looking for ways in which to gain exposure to floating rate. So as interest rates rise, to be able to generate a high return. And that really contrasts with the most recent experience that investors have had, particularly those had been invested in bond funds that have now delivered negative months over the last six months, as interest rates have risen, has adversely impacted the capital value of investors in those bond funds, whereas in our funds, investors capital maintained 100 cents in the dollar, and they're now benefiting in terms of the form of higher levels of income. 

Felicity: [00:19:08] That's true. And it's so nice to have such a true defensive allocation. You know, we absolutely love metrics in our clients portfolios because of that and have kind of stayed away a lot from the bond market, to be honest, because I'm pretty sure some people are down about 10% in various bond funds, which is not great for a defensive allocation. Now let's turn our attention to one of your flagship funds, which is one of our favourite. So the metrics Master Income Trust or Metrics Direct Income Fund. So it targets about 3.25% plus the RBA cash rate, which is now 0.35%. Can you give us a little bit of an overview on the make up of the loans that you've got in this fund and what is the sector diversification like? 

Andrew Lockhart: [00:19:50] Actually, it's interesting question for you because I would always argue that sector diversification is less relevant than diversification to each individual. So if you think about it, yeah, we have a significant weighting to commercial real estate, but an industrial property that we finance, say in the Trade Coast in the Port of Brisbane will be different to the way in which, say a residential high rise development project will perform, which might be in Sydney, which again could be quite different to a in a hotel asset in Sydney or a land subdivision in Melbourne. Each of those, whilst they all get bundled up as a sector exposure to real estate, each individual borrowers circumstances will be different. I would say sector exposure or macroeconomic information or a view around the sector informs the lender as to whether or not you're going to provide funding or not. So if you think about, you know, a sector like the commodity commodities based sector, it much larger volatility and swings in earnings. Therefore, as a lender, you're going to have a much lower level of appetite to provide debt financing to companies in that sector because of the volatility in earnings. So as a lender, what you're looking for, a companies that have got a strong management, strong track record, well-diversified business models, and a known proven cash flow capacity. So you think about a commodities business, particularly something in pre-production that is an equity risk. You know, those businesses often get funded through equity. So in MDI, if what we actually have is you're right, the return target, if that fund seeks to deliver the RBA cash rate plus 3.25% income is distributed to investors on a monthly basis. Since that fund was launched with exceeded that minimum target return and importantly giving investors diversification across around 260 individual borrowers. Now the kinds of companies we lend to ASX listed companies, so we're lender to a number of ASX listed companies. We are also a lender to a number of government backed project and infrastructure projects. So if you think about things like the Sydney desalination plant or the WestConnex project or you know, the Victorian Cancer Centre that I mentioned before, the Mornington Peninsula Motorway, they're examples of projects with either been involved in what I think or are currently funding. We are also in real estate again a large, large number of projects that we finance that are generally short term. So if you think about building a large scale 25 storey residential apartment complex, that project for a lender might take between 24 to 28 months to complete that project. And so we've got a number of these financings that are rolling off on a regular basis. To give you an example. But as a business, we've completed 5.3 billion of new lending transactions this financial year to date. That's across around 219 individual loans. And in the next 90 days alone, we have something like $900 million of borrowers that are due to repay or refinance their existing exposures with us. And so it's very short dated and quite a large amount of churn through the portfolio. And we deliberately lend for shorter dated periods of time, generally between sort of two years to five years. And we do that because we believe it reduces the credit risk that an investor is exposed to. And if you're projecting out the forward cash flows or the earnings of a company, you can do that with a greater degree of confidence over a shorter period of time going on over a longer period of time. We also do it because we believe it reduces investors risks around market risks. So if credit spreads were to change and what we're seeing at the moment is really the removal of the Reserve Bank liquidity facility combined with the banks. Having to go back and raise funding in wholesale funding markets is actually putting pressure on credit margins as well. So we're actually in a position where the base rate is rising as well as credit spreads and margins are also increasing. And then obviously the other component about many for shorter periods of time is you get a greater level of repayment in churn through your portfolio, which allows our investors to generate additional income through fees that are charged to companies. So when we enter into a transaction with a company, there's an upfront fee that is charge that's a source of income for our investors. So for for all of these reasons, we believe that we've got very good disciplines around credit quality control, but it's also done to generate returns from investors.

Felicity: [00:24:35] Thanks for breaking that down for us. That's really very interesting. In a moment, we're going to hear more about what you actually do to protect the loans for investors and your thoughts on interest rates and inflation. So we'll just take a little short ad break and hear from our sponsors. 

Candice: [00:24:52] And we're back. So let's talk about obviously, it's it's been going well. That formula that you just broke down, right? You've achieved your target returns and sums. So that's fantastic. But what about the what if moments, I guess, how do you protect your investors at the end of the day with the businesses that you're lending out to? What security are you taking on for these loans? 

Andrew Lockhart: [00:25:13] Yeah, I think it's very important that, you know, as I mentioned before, macroeconomic decisions inform a lender in terms of whether or not you're going to lend to a particular sector or industry or how how much leverage those industries or businesses can sustain. And so, you know, we look at all aspects of the companies we went to looking at assessing management, management, track record, the quality depth of management, the ESG performance of companies. We're looking at the financial historical performance of the companies and the future projected earnings. So obviously, when as a private markets lender, companies are required to provide us with very granular inside information to allow us to assess the risk around lending to a particular company or a project. So when I say insight into an informational meeting, confidential information that is not publicly available provided to them to assess the risk. And so we analyse and assess them to determine what is going to drive cash flows. And then when we enter into a transaction with a company, we also then structure it to ensure that you've got risks around underperformance mitigated. And so generally, if I think it's about 98% of our portfolio would be secured loans, most companies or projects would be financed through what we call an SPV structure special purpose vehicle. And so part of that is, you know, you'll tighten security over the shares or the units of the trust. You'll take a fixed and floating charge over the company or the project. You might have a personal guarantee for a property. If it's a private development group, it would be recourse back to the sponsors. You'd have a mortgage. Are there any property assets? You might take security over other key agreements. So, you know, when you lend again, it recognises the priority ranking of a debt provider in comparison to other parts of the capital structure. So as an equity investor, you weigh the risk. As a leader, we mitigate the risk. So for instance, know a company, companies that we might lend to would be restricted from selling assets. For instance, without using the proceeds to repay debt. They might be restricted from paying away dividends or distributions to shareholders in priority to repaying the debt. So again, what a lender is looking to do is to protect them and structure so that the cash flow that's generated is first applied to principal and servicing of the debt obligation. And then after after the company's outperformed or improving and lowering the risk to a lender, then they might be able to reward shareholders with dividends or distributions.

Candice: [00:27:55] So I just want to ask a follow up question on that, if I can, Andrew. Has that security you've put in place ever happened before in the past? You know, in Run US Through what if you can disclose what happened there? 

Andrew Lockhart: [00:28:07] Oh, look, we've been involved in restructures and work outs of different companies that have underperformed. Yes. There's a whole range of ways in which a lender can mitigate and work through a restructure. You know, often the three levers a lender would generally pull would be, one, you'd look for the company in the shareholders to contribute additional equity capital. So if they believe there's equity, they then they would be incentivised to protect that. So if you think about a property, so the property falls 10%, well the shareholder is going to walk away from the value of their investment or are they going to, you know, potentially risk a default on an enforcement by a lender destroying even further value for a shareholder? Or is a shareholder motivated to inject further equity? So a lender would encourage shareholders to, first of all, inject additional equity. And we saw that through the pandemic. If you think about all of the deeply dilutive equity raisings that were undertaken through March and April of 2020 as companies raised equity to restore their balance sheet, or you go to the GFC again, large companies doing deeply dilutive equity raisings to pay down debt. And so generally a lender would require a company to raise equity. If the company cannot raise equity or fails to raise equity, then it might be that the company would negotiate a series of asset sales with lenders, and so they'd identify assets that could potentially be sold to be a source of repayment. Obviously, as a lender, you want to make sure that those assets aren't generating earnings that might adversely impact the future debt service capacity. But that's an alternative. And the third area would be potentially a default and enforcement on your security. And so and as a lender, particularly a non-bank lender, we think we've got a range of ways in which we can manage that the banks are not able to. To do so, for instance. Unfortunately for banks, they are high level. And they're regulated. And so they get a borrower that is in default. And then one of the ways in which we might manage that would be to to effect a change of control. And effectively move in and take control of the equity of the company. Now, the bank can't really do that because it doesn't want the banks holding equity in a bunch of companies. But also they required to hold 400% risk quite of their capital against any equity position so often for a bank. It's a very interesting decision that they might be able to see future value, that because of the regulatory capital required to be held against an asset, they're incentivised or often will have to take a hit at that potentially the wrong time. So our interest is to work with our companies and our investors to ensure that you're protecting and managing their capital over over time. And if you do have a restructure or work out that you need to take control of the company, then you don't ever want to be in a position. We are for Scylla. And you've got to give yourself plenty of flexibility and optionality to to work with the company management to correct the the performance and hopefully deliver better, better outcomes for investors over time. 

Felicity: [00:31:06] So you have a lot more flexibility, it seems, in the major banks. I think I like what you say, not having to be a forced seller, because I think that's also relevant in the share market as well. Not having to be a foster seller, ensuring that you've got enough defensive and cash assets on the side to kind of ride through these waves and get that better performance over time. So, you know, now that rising interest rates are a hot topic and you've also got rising inflation and supply pressures. Is this impacting the companies that you're lending to? And then in a rising interest rate environment, is this positive for metrics? 

Andrew Lockhart: [00:31:40] It's good and bad in the short term. Obviously, it provides an additional source of income for investors, but obviously when interest rates rise, there's increased market volatility. And so the flow on effects in terms of how that might impact business or consumer confidence and how that might flow through to business activity is always something you have to be wary of. When interest rates rise, obviously it's being done to slow or cool the economy and economic activity. And so through that period of time, it requires companies and management to navigate through more difficult circumstances or experiences. And so as a lender, though, what we're interested in is making sure that our borrowers can service and repay their debt even in periods of declining. So we'll give you an example. Say a company might be trading at ten times earnings on the on the exchange. It might have debt no greater than, say, three times. So, again, equity ways that that risk of deterioration and loss before earnings deteriorate to a position where debt might be impacted. So you've got to see a material decline in earnings and a material decline in the valuation of the company before a lender might be exposed. But importantly, in these circumstances, what we we see is, you know, without a doubt, economic activity will slow. You know, you've seen supply chain issues. We've seen now in terms of in Sydney, inclement weather impacting projects and delivery of projects. You've seen increasing of building material costs and the like or costs in general. So in one on one side of the equation, companies that have got pricing power and can push through price rises can see increased revenue. Now those that are in a position where they can't get a benefit in terms of rising revenue and aren't exposed to rising costs, obviously their margins are impacted. But as a lender, again, it's important that we've already worked through now to identify what that impact would be on different companies. So in short, I think rising interest rates certainly present an investor with the opportunity to generate a higher return. Now, in terms of housing, as interest rates rise, but equally it requires us as a lender to ensure that the companies that we provide financing to can not only sustain rising interest rates, which they can do that quite comfortably, is more about the flow on impact in terms of economic activity, you know, reducing sales pressure on margins, how that impacts performance. So, you know, you're seeing a lot of pressure in the system at the moment. You know, a lot of people, a lot of different companies struggling to find and retain staff. You've got unemployment at very low levels. You've got rising costs. We're seeing consumer sentiment turn negative as a result of rising interest rates and the pressure that that's having on people. So I think it's important that as a lender, we're always going to be more concerned about the downside risk than the potential opportunity. So if you think about the psyche of investors, investors are investing in equity with a view that the company's going to continue to generate. Return and growth and capital for us as a lender. When we enter into transactions, we worry about the downside risk and as a company going to perform. And so you structure terms and conditions with a view that not based on today's market circumstances, you're looking forward to ensure that any deterioration in economic conditions or business conditions don't adversely impact the performance of your company's capacity to service and repay the debt. 

Candice: [00:35:18] Sounds like you're busier than more than ever. Like with everything that's going on, like you've just unpacked, right? So I guess two questions that have come to my mind just hearing you go through that. Andrew, obviously, in simple terms, if you deem it riskier to lend out the debt, would then you negotiate a higher coupon, right? Right. Is that how the if I look at it from apples versus bananas, is that what metrics versus your opportunity fund meet is really different. Like walk us through the breakdown on you taking on more risk in moat so therefore a higher income you because I think you're targeting a 7% per annum payout there. 

Andrew Lockhart: [00:35:57] It doesn't have to be just risk you know often you know to raise debt financing in the Australian market. If you don't meet the risk tolerance of a bank, it can be quite difficult to generate, will get access to funding. And so what we also see is, you know, our team's capacity to assess and analyse risk and to be responsive to the needs of a client. Borrower drives an outcome for for our investors. And you don't have to be the cheapest in the market to be able to deliver a good outcome for for a borrower. But you do need to know the business and you need to know what drives the cash flow. So I would say that, you know, our business model is very much built on delivering a high level of service to our borrower clients to be responsive to those borrower clients, to understand their business and to ensure that we construct a terms and conditions that assist them to grow their business and do what they need to do. That the other end of the spectrum, the reason we do all of that is because we believe it delivers better returns for our investors. That investment in those relationships, that investment in delivering a service to our clients delivers a better outcome for our investors. So it doesn't necessarily mean you have to take higher risks to generate certain parts of the might be that you know banks come and go from different industries, different sectors. They might have an overweight position and therefore that that company and that industry kind of it can attract funding. You know, you see it all the time in terms of the foreign banks that are active in the Australian market. Sometimes it is, sometimes they're not. You know, if something changes at head office, it has an impact in terms of the Australian operations of that bank and as a result of that that presents opportunities for us. And so what we always see through the market is, you know, banks have, you know, will change their risk tolerance and their appetite for different industries, different sectors that might deliver a poor service to a company. And therefore the company is looking to replace one lender and bring in a new lender. They will create opportunities for us. 

Felicity: [00:37:57] Well, to end, Andrew, that was that was very interesting. Now, we also believe you're at Tokyo. So to me that it's really important for investors to know that investing isn't just equities or property. Right. You know, a lot of people get quite scared about investing, but they are safer, more defensive options like metrics and credit. So I guess what's your forecast of you for credit in the outlook over the next 12 months? And do you have any comments on the bond market? 

Andrew Lockhart: [00:38:24] Yeah, look, I think for us, I would say we're core feature of the Australian market and that is providing debt financing to Australian companies is necessary to support those companies grow. And it's, it's no different to the banks and you can have economic cycles that that wax and wane and then the end of it. Companies will always need debt financing and the challenges for us is to ensure that we continue to lend to good quality companies and we manage the risk and we and we've got long track records of doing exactly that. Now, if we go back over our nine years of our first fund since it was first launched, we delivered consistent month in, month out positive income for our investors. Over that period of time, we've continued to diversify the holdings and we've lowered the cost to our investors. So I think what we are about is delivering a good outcome for our investors and doing that in a way that demonstrates very strong discipline around the management of risk and delivering consistently in terms of what we've committed to investors in terms of returns and risk management. So I genuinely think that our activities are a core component of what goes on in the Australian market and it's great for investors to be able to gain direct exposure to that through a well diversified portfolio with professional management. In terms of the bond market, I look at it and say, well, you know, I think traditional bonds in not. In writing much in terms you've written. And unfortunately, we've now seen the last several months where investors capital has been impacted as a result of market interest rate moves, whereas in our funds, our business capital is being protected. There hasn't been any deterioration in the capital value of those investments, and we've actually now giving it a higher level of income for our business. But quite frankly, I think the investment in government bonds or in corporate bonds that are generating a very low return and having long dated exposures in potentially fixed rate exposures I don't think is a particularly appealing investment in comparison to short dated floating rate assets where they're well secured. You've got good knowledge of the companies we lend to and and investors can participate in in supporting the growth of those businesses. 

Felicity: [00:40:41] That's it. And look, you know, a really fun way that we like to end the conversation. We ask all of our guests are coffee, tea or tequila? What's your, I guess, poison? 

Andrew Lockhart: [00:40:52] Coffee? 

Felicity: [00:40:53] Coffee. 

Candice: [00:40:54] How many a day? 

Andrew Lockhart: [00:40:55] Too many. Right. 

Felicity: [00:40:59] Well, thank you so much for taking the time to chat with us. Everyone here at Talk Money to me will find that extremely interesting and I think it's really nice to get some additional insights into the credit market that you usually wouldn't hear, you know, in your in your every day. So thank you so much, Andrew. 

Andrew Lockhart: [00:41:15] Thanks, Felicity. Thanks very much, Candace. Great to join you today. 

Candice: [00:41:18] And as always, guys, this is the part of the episode where we're going to sing out our socials. Our Instagram handle is at. Talk Money to me podcast. Appreciate you following liking a couple of our photos and following our stories because we do keep our listeners updated on what's going on in the markets on a daily basis. Also, we apparently live and die in the podcast world on our reviews, so if you've got the time and enjoyed this show, please share it with a friend or family member and we'd appreciate any rating you would give us.

Felicity: [00:41:46] No. Five star only. Just like. 

Candice: [00:41:48] I always. I don't know about you, but I always give my Uber drivers five star, even if they were terrible. I'm just like, yeah. 

Felicity: [00:41:54] Well yeah, exactly. Why not? But obviously we're not terrible and it's a legitimate five star. All right, well, until next time, everyone. 

Candice: [00:42:01] See you then.