[TOP STORY] Alternative assets as an interesting class


SIMON BROWN: I’m talking now with Dino Zuccollo: he’s from Westbrooke Alternative Asset Management. Dino, I appreciate the weather, as always. Let’s just approach alternative assets as a class. I was looking at some charts earlier this morning. Stocks, almost anything you traditionally invest in that gives you a daily price update, [are] have a “red year” so far. One of the advantages of alternative assets is the lack of liquidity, the lock-in process and just the structure part. You are probably not having such a difficult year with your alternative investments?

DINO ZUCCOLLO: Hello Simon, and thank you for having me on the show, and hello to everyone listening. Yes, you’re right. I think this is a pivotal moment in the progression of alternative assets as an industry here in South Africa right now. What we are seeing in the markets is that there is quite a bit of pain across the board. Alternatives – I guess the thesis has always been that they are illiquid, not listed.

What is an alternative in simple terms?

Simon, this is essentially a direct investment, as opposed to investing through an exchange or listed instrument. I always make the example that, if you buy a Reit stock on the JSE, an alternative is a direct acquisition of ownership, for example. This is something we all know very well, as many of us have invested in a home.

Now to your point, because an alternative is illiquid and unlisted, we are not subject to the same volatility and rapid price movements that we see occurring in our investments.

There is a consequence of things that might have nothing to do with the actual value of the instrument you have invested in. So we’re seeing record customer flows right now.

SIMON BROWN: I was just chatting with Wayne McCurrie about Mr Price [annual] results: good results and the market pushed him down. If you are a shareholder, you are scratching your head. One of the benefits of this listed space is that I want to call it the “doghouse”. I think I’m making words up there, but you got the meaning of this niche – you got one. One you’re looking at is basically investing in unlisted properties in the UK – well, not investing in these, they’re loans, but it gives you a pretty decent cash return. We’ll get to the details in a moment. Some people might look [that] and think, ‘oh, I can do better with my tech stocks’ – but of course not in 2022.

Tell us a bit. It is essentially short-term financing. Am I right?

DINO ZUCCOLLO: Yes correct. The asset class you’re talking about, Simon, is called private debt. Indeed, what is done in private debt can be defined as the fact that a person other than a bank lends a loan to a company. So, as Westbrooke, for example, we are a non-bank lender.

It’s definitely not the sexiest asset class around, but I think at times like this, you don’t want sexy, do you? You want stability, you want consistency, you want reduced risk.

So where we’ve been investing a lot lately is in this world of private debt. It is done through funds and in a structure where clients are exposed to a diverse pool of private loans in and around the UK. I think the advantage, Simon, is that if you invest, for example, in a two-year fixed deposit, you will earn in sterling somewhere between 1% and 2% per annum. An investment in private debt can earn you – at least with us – north of 6% per year without necessarily in my opinion having to take more risk.

Now, in the world we find ourselves in, where stocks have been falling for a long time, inflation is incredibly high and bonds are incredibly volatile, the question is where would you put your money without getting poorer in real terms. I think private debt is potentially a solution that can help clients in this regard.

SIMON BROWN: I want to get to “potentially” in a moment but, before we do, people are going to say that non-bank debt is almost loan sharking in a way… It’s not, it’s just [that] sometimes banks may not be the right structure for the borrower, and that’s where you can also step in with good old-fashioned due diligence?

DINO ZUCCOLLO: Yes. The big change in the market, Simon, was Basel in 2008. This imposed a whole series of regulatory requirements on banks, which made their ability to extend credit incredibly difficult. They are not allowed to lend against certain types of assets. It takes them an incredibly long time to get loans approved by their credit committees and usually because of the costs involved there is a minimum ticket size below which they simply won’t play.

Now at least what we’ve found in the UK market is that there’s a very, very large segment of what we call small and medium sized businesses of really quality businesses looking for a debt financing and usually, at least in our case, it’s against real estate. So you’re actually protected against a property in central London, which we think is an attractive investment.

Now, a lot of these guys can’t get debt from a bank – at least short-term debt – and that’s where we play. So I would say that’s actually the furthest thing from loan sharking.

It’s pretty much what you’d find in a bank, except faster, better, faster, to use the cliche.

SIMON BROWN: Some of the key metrics, things like LTV, you can manage that. Whether the building is worth, I don’t know, £1 million; perhaps you would only lend £600,000 to have this guarantee. Nothing is perfect, but it gives you a sense of security in case something goes wrong.

DINO ZUCCOLLO: Yes. So what do you want for debt? You want a quality loan, with a significant reserve of equity. So in our case the average value of a loan, or for every million pounds of property we are secured on, is around £570,000/£580,000 in debt. But you want more than that. You want to make sure you are lending to a high quality person.

A very, very important principle for us as a company is that you can make the best loan to someone who is dishonest, and you will probably lose money. If you make a loan to someone who is honest, even if it’s not the best loan, that person is likely to pay you back. It is therefore a safety factor; it is a factor to whom you lend; it is a factor of the credit parameters. And then, from an investor’s perspective, we like to say – this is very important – that there is no advantage in debt. It’s not a stock investment where if your loan pulls light, you’re going to earn more.

So what do you want? You want diversification. Currently, we manage a portfolio of 45 underlying loans; no loan exceeds 5% of the portfolio. This ensures for a client, when you go through something like Covid, if you have any loans that don’t work out – we had those too, everyone does – what’s important is to make sure that a single loan that goes bad is not going to bring down the entire investment and will not have too significant an impact on returns.

SIMON BROWN: We mentioned that these are not the go-go actions. This is going to give you a good stable and predictable return in sterling, which is an attractive point. It fits in – and we’ve already talked about it – with that type of alternative investment that is part of your portfolio and is never an overall type of investment. It’s a few percentage points, maybe up to 10 or 15 at the end of the portfolio.

DINO ZUCCOLLO: It’s interesting. I was looking at the stats yesterday – I actually have the stats in front of me, and you’ll probably find them interesting – in the early global allocations to alternatives by institutions [were] 22% average; by family offices, 35% on average; the Yale University endowment 75%. So it’s definitely something that’s getting more and more interesting.

Regarding your point of view, private debt, Simon, I see it as an alternative to fixed income or some sort of cash or bond investment. It’s not your entire portfolio; it’s not necessarily the biggest allocation, because the trade-off is that you’re locked in.

You are not in this world of daily prices and liquidity, as you are going to find in the traditional market.

So the advantage is that you get a significantly higher yield [and] you get some tax efficiency, which is great. The downside is that you’re locked in for a while.

Where I see private debt playing a very valuable role is in a well-diversified portfolio. So you have your high risk, you have your low risk. And then in your low-risk bucket, you sort of get a split between daily priced and liquid investments that you can find in the bond markets.

Then there’s an element of the portfolio that wants a stable cash return that’s not volatile, that’s going to pan out, that’s not going to move too much when things like Ukraine happen. That’s really what we offer customers here.

SIMON BROWN: These numbers are staggering – 22%, 35% and 75%. I have to readjust my sight. But I think your point, Dino, is well understood as the alternative asset space expands. I want to delve into this – perhaps the fastest growing kind of industry in the investment world.

Dino Zuccollo of Westbrooke Alternative Asset Management, I appreciate the early morning.


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