Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. The extreme volatility in financial markets in recent weeks has emphasized the importance of diversification in investing, but also the value of defensive, uncorrelated assets. One such asset which seems to be growing in popularity is real estate private credit. But like any asset, it's important to know exactly what you're investing in. This is, of course, general information, only a starting point for your research, and you should seek professional advice before making investment decisions. Tom Cranfield is the executive director of Australian alternative real estate Investment Management ZAGA, which is a great partner of this podcast. He joins me now in the studio. Tom, Welcome to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. The extreme volatility in financial markets in recent weeks has emphasized the importance of diversification in investing, but also the value of defensive, uncorrelated assets. One such asset which seems to be growing in popularity is real estate private credit. But like any asset, it's important to know exactly what you're investing in. This is, of course, general information, only a starting point for your research, and you should seek professional advice before making investment decisions. Tom Cranfield is the executive director of Australian alternative real estate Investment Management ZAGA, which is a great partner of this podcast. He joins me now in the studio. Tom, Welcome to Fear and Greed.

Thank you very much, Sean, thank you for having me.

Thank you very much, Sean, thank you for having me.

It might be self evident. But while we're all going defensive.

It might be self evident. But while we're all going defensive.

As you say, it may well be self evident. I mean we've been a business that's been established for nearly eight years now, so for us, it's not a new trend. We've seen a growing trend towards the asset class across that entire time period. We would like to think it's because we can deliver consistent, stable returns that investors are comfortable with the risk on. It's our job to be an investor first business and produce those returns that they are comfortable with. In the current climate, it would seem the turbulence in public markets is driving that shift. I think our role within that you mentioned correlation our industry is far more correlated to interest rate movements. Real estate is an asset class in Australia that's extremely well understood. Over large or sustained periods of time, real estate values have trended up. So I think people are comfortable that the security for the loans which we are providing as a real estate private credit manager have a safe, stable underpin and they understand where interest rates are at in the cycle. The low correlation to the public markets only heightens the demand from wealth advisors, family officers, high networks and other types of sophisticated investors who want income generation in a stable, insafe in way.

As you say, it may well be self evident. I mean we've been a business that's been established for nearly eight years now, so for us, it's not a new trend. We've seen a growing trend towards the asset class across that entire time period. We would like to think it's because we can deliver consistent, stable returns that investors are comfortable with the risk on. It's our job to be an investor first business and produce those returns that they are comfortable with. In the current climate, it would seem the turbulence in public markets is driving that shift. I think our role within that you mentioned correlation our industry is far more correlated to interest rate movements. Real estate is an asset class in Australia that's extremely well understood. Over large or sustained periods of time, real estate values have trended up. So I think people are comfortable that the security for the loans which we are providing as a real estate private credit manager have a safe, stable underpin and they understand where interest rates are at in the cycle. The low correlation to the public markets only heightens the demand from wealth advisors, family officers, high networks and other types of sophisticated investors who want income generation in a stable, insafe in way.

Okay, so this is the diversification argument. Really, just explain how that fits. How real estate private credit fits in to that spectrum of diversified assets.

Okay, so this is the diversification argument. Really, just explain how that fits. How real estate private credit fits in to that spectrum of diversified assets.

Yeah, I mean, from our perspective, we always say to people, we're not here to replace your equities portfolio. You know, there are people that are trained in the sixty forty model that are now looking at the current trend I've been hearing lately is twenty five twenty five, twenty five, twenty five. Whether or not that's that's the way it goes, we'll have to wait and see. From our perspective, the diversification is to say that the population and investors require income to be generated in a way that they can rely on. We are here to help them earn that income, and we're here to do it in a way that they can effectively see us as the boring manager who gives them the stable, consistent return without all of the risk. So we're trying to deliver that without a commensurate uplift, and from our perspective, that's what we're seeing. The change is the asset class become more prevalent or people taking alternatives as a part of their portfolio. And most people commonly define us to fit within the alternative bucket of fixed income. And it's the fact that you can get the alternatives fixed income bucket for that return in a way that doesn't have some of the publicly traded markets movements, So for example, we don't mark to market our book, so that daily movement the net asset value people can make the return without risk of capital loss, or that they can get in a way that is able to be done on what we would call a rinse and repeat basis for them.

Yeah, I mean, from our perspective, we always say to people, we're not here to replace your equities portfolio. You know, there are people that are trained in the sixty forty model that are now looking at the current trend I've been hearing lately is twenty five twenty five, twenty five, twenty five. Whether or not that's that's the way it goes, we'll have to wait and see. From our perspective, the diversification is to say that the population and investors require income to be generated in a way that they can rely on. We are here to help them earn that income, and we're here to do it in a way that they can effectively see us as the boring manager who gives them the stable, consistent return without all of the risk. So we're trying to deliver that without a commensurate uplift, and from our perspective, that's what we're seeing. The change is the asset class become more prevalent or people taking alternatives as a part of their portfolio. And most people commonly define us to fit within the alternative bucket of fixed income. And it's the fact that you can get the alternatives fixed income bucket for that return in a way that doesn't have some of the publicly traded markets movements, So for example, we don't mark to market our book, so that daily movement the net asset value people can make the return without risk of capital loss, or that they can get in a way that is able to be done on what we would call a rinse and repeat basis for them.

Why are we hearing so much about this now? I mean, you sort of definitely talk about twenty five to twenty five to twenty five, twenty five and sixty forty, which seems to have been going on forever, right, alternative asset classes, be they in fixed income or elsewhere. Why is it that we're talking so much more about it now?

Why are we hearing so much about this now? I mean, you sort of definitely talk about twenty five to twenty five to twenty five, twenty five and sixty forty, which seems to have been going on forever, right, alternative asset classes, be they in fixed income or elsewhere. Why is it that we're talking so much more about it now?

I think as it relates to private credit, the original shift was driven by change in regulatory rules, and that saw the banks change the amount of market share which they wished to have, particularly with regard to real estate. So project financing, which we are most exposed to in respect of our investment thesis, is very strong on providing construction finance to establish developers within the middle market. So for us, that segment of the market, which had traditionally been dominated by the four major commercial trading banks. In twenty fifteen, twenty sixteen, they started to recede their market share, and it's the growth of that, driven by the withdrawal of the banks that has established the private credit sector because you can get the returns in a manner that we believe to be safe, sable, consistent, and as I said, Vincent repeat, that has attracted larger and larger amounts of investment. There's less volatility, there's less uncertainty, purity of the real estate that sits underneath it. Within from our investment thesis, predominantly major metropolitan markets, so deep and liquid markets, although we can talk about in liquidity within the asset class, but deep in liquid markets that allows people to feel comfortable and that they're investing in something that they understand. But the shift for the market to be greater and more established. We see ourselves as filling the gap that has been left from the banks taking a less less market share, and then we've seen institutional and sovereign and offshore investors come in and want to grow that market space. So in respect to the market itself, according to Alvarez and Marcel's research A and M, they released a report I think two months ago. It says that private or non bank lenders represents seventeen percent of the commercial real estate debt market. That market's about four hundred billion dollars according to their estimates. So they say that we have the ability to grow to thirty five percent of that figure, and that's driven by institutions offshore, local investors wanting more exposure to a safe and sable asset class. If you look at the US, the estimate is that their market for non bank lending is around fifty percent and the UK and Europe is thirty five. So we actually expect the trend and the growth and you know, the portfolio diversification to continue as it has done for the last eight to nine years.

I think as it relates to private credit, the original shift was driven by change in regulatory rules, and that saw the banks change the amount of market share which they wished to have, particularly with regard to real estate. So project financing, which we are most exposed to in respect of our investment thesis, is very strong on providing construction finance to establish developers within the middle market. So for us, that segment of the market, which had traditionally been dominated by the four major commercial trading banks. In twenty fifteen, twenty sixteen, they started to recede their market share, and it's the growth of that, driven by the withdrawal of the banks that has established the private credit sector because you can get the returns in a manner that we believe to be safe, sable, consistent, and as I said, Vincent repeat, that has attracted larger and larger amounts of investment. There's less volatility, there's less uncertainty, purity of the real estate that sits underneath it. Within from our investment thesis, predominantly major metropolitan markets, so deep and liquid markets, although we can talk about in liquidity within the asset class, but deep in liquid markets that allows people to feel comfortable and that they're investing in something that they understand. But the shift for the market to be greater and more established. We see ourselves as filling the gap that has been left from the banks taking a less less market share, and then we've seen institutional and sovereign and offshore investors come in and want to grow that market space. So in respect to the market itself, according to Alvarez and Marcel's research A and M, they released a report I think two months ago. It says that private or non bank lenders represents seventeen percent of the commercial real estate debt market. That market's about four hundred billion dollars according to their estimates. So they say that we have the ability to grow to thirty five percent of that figure, and that's driven by institutions offshore, local investors wanting more exposure to a safe and sable asset class. If you look at the US, the estimate is that their market for non bank lending is around fifty percent and the UK and Europe is thirty five. So we actually expect the trend and the growth and you know, the portfolio diversification to continue as it has done for the last eight to nine years.

Tom, stay with me, we'll be back in a minute. I'm speaking to Tom Cranfield from ZAGAT. Ahead of the break, we talked about the growth in the sector. Where do the risks come in? Because every investment has a has a risky side to it.

Tom, stay with me, we'll be back in a minute. I'm speaking to Tom Cranfield from ZAGAT. Ahead of the break, we talked about the growth in the sector. Where do the risks come in? Because every investment has a has a risky side to it.

Absolutely every investment has a risky site. I think there's lots of reputable managers. I think that any emerging asset class, you've always got to do your due diligence, the same as we do with respect to the fundamental and our sins we conduct on the counterparties with which we invest money with. So I think it's understanding the licensing regimes, the governance, making sure that you're dealing with highly reputable management teams, executive teams, businesses that have got long track records, the established management teams, and they've got all of the licensing in place, and you can understand all of that. Ideally, if you could speak to your advisors, they should have some level of knowledge of the different managers in the space, because, as I say, the sector has been established for a long time. So if you can take that due diligence to a strong level and understand who you're dealing with, then the counterparty risk becomes acceptable. From our perspective, it's the same. On the other side, we're continually doing deep dive analysis to make sure that who we invest out our investors' money on behalf of with as the same type of risk that we're saying to do with managers.

Absolutely every investment has a risky site. I think there's lots of reputable managers. I think that any emerging asset class, you've always got to do your due diligence, the same as we do with respect to the fundamental and our sins we conduct on the counterparties with which we invest money with. So I think it's understanding the licensing regimes, the governance, making sure that you're dealing with highly reputable management teams, executive teams, businesses that have got long track records, the established management teams, and they've got all of the licensing in place, and you can understand all of that. Ideally, if you could speak to your advisors, they should have some level of knowledge of the different managers in the space, because, as I say, the sector has been established for a long time. So if you can take that due diligence to a strong level and understand who you're dealing with, then the counterparty risk becomes acceptable. From our perspective, it's the same. On the other side, we're continually doing deep dive analysis to make sure that who we invest out our investors' money on behalf of with as the same type of risk that we're saying to do with managers.

Okay, counterparty risks, So it's not that different to doing your homework on a MidCap that's listed.

Okay, counterparty risks, So it's not that different to doing your homework on a MidCap that's listed.

It's not that different, I suppose From our point of view. Data drives decisions, so we're always undertaking our own fundamental analysis to ensure that the rigor with which we put due diligence on I use the word counterparties in more simplistic terms borrowers is very The veracity of that is very high, because it's extremely important that we don't just understand the asset for their money that we're investing or that we're lending. It's that we understand the people that we are giving it too, so their capacity, their capability, their character, and the fact that we know that they have the ability to deliver on the project outcomes that we're investing our investors' money on that need those outcomes to be achieved.

It's not that different, I suppose From our point of view. Data drives decisions, so we're always undertaking our own fundamental analysis to ensure that the rigor with which we put due diligence on I use the word counterparties in more simplistic terms borrowers is very The veracity of that is very high, because it's extremely important that we don't just understand the asset for their money that we're investing or that we're lending. It's that we understand the people that we are giving it too, so their capacity, their capability, their character, and the fact that we know that they have the ability to deliver on the project outcomes that we're investing our investors' money on that need those outcomes to be achieved.

And what about liquidity. It's not as liquid as a listed asset.

And what about liquidity. It's not as liquid as a listed asset.

It's traditionally not as liquid, there's no doubt about that. I think that's one of the reasons why there's a difference in the premium for the return between private credit and the bond markets. You've seen many managers now have new and innovative structures such as listed investment trusts. You've got liquidity via funds, and then you've got people who wish to have less liquidity or they have less need for liquidity, more need for income. So to those people attracted to our space traditionally who want more or have more need for recurring and stable income, they're less likely to need principle, so drawdowns back are low. We have actually seen in in our history our investors the average investment has more than grown by fifty percent with our base because people, if they are comfortable with your ability to deliver and your track record is strong and sound, then they are giving you more money because what they're more interested in is the income return that they get on their money.

It's traditionally not as liquid, there's no doubt about that. I think that's one of the reasons why there's a difference in the premium for the return between private credit and the bond markets. You've seen many managers now have new and innovative structures such as listed investment trusts. You've got liquidity via funds, and then you've got people who wish to have less liquidity or they have less need for liquidity, more need for income. So to those people attracted to our space traditionally who want more or have more need for recurring and stable income, they're less likely to need principle, so drawdowns back are low. We have actually seen in in our history our investors the average investment has more than grown by fifty percent with our base because people, if they are comfortable with your ability to deliver and your track record is strong and sound, then they are giving you more money because what they're more interested in is the income return that they get on their money.

And most of your investors at ZAGA.

And most of your investors at ZAGA.

Our investors are all sophisticated wholesale investors. So for us, that ranges from small institutions, large corporates, listed vehicles, family officers, high net wealths and wealth advisors. We run five dedicated investment funds, including a variable capital company or a VCC in Shorthand out of Singapore. We have representation in Melbourne and Sydney, and our management team has over three hundred years of learning experience combined.

Our investors are all sophisticated wholesale investors. So for us, that ranges from small institutions, large corporates, listed vehicles, family officers, high net wealths and wealth advisors. We run five dedicated investment funds, including a variable capital company or a VCC in Shorthand out of Singapore. We have representation in Melbourne and Sydney, and our management team has over three hundred years of learning experience combined.

Right given where we're going, they're looking at the crystal ball here, five years, ten years? Is this sort of private credit and real estate private credit? You mentioned some numbers you can get from seventeen percent in double thirty four to thirty five percent. At some point though, APPA is going to change regulations for the banks, the bank's going to say, hold on, we're missing out here, we need to jump back in, or has the horse bolted?

Right given where we're going, they're looking at the crystal ball here, five years, ten years? Is this sort of private credit and real estate private credit? You mentioned some numbers you can get from seventeen percent in double thirty four to thirty five percent. At some point though, APPA is going to change regulations for the banks, the bank's going to say, hold on, we're missing out here, we need to jump back in, or has the horse bolted?

Look from our perspective, we say the banks is a great partner. You know, I mentioned the fact that we do a lot of construction financing. We have a strong thematic around population growth, economic growth and the housing supply, demanding balance to invest in people's money. On that theme, the bank for us is a great source of exit from loans. So they're funding the home loans for the buyers, for off the plan purchases. If we're building a shopping center, we're funding the build of a shopping center, they're funding the takeout of that. So we still see our ability to be symbiotic in the market with each other is extremely good. I think think it comes back to the covenant packages, the lending parameters, and we see ourselves as a lasting relationships business. So we want to have relationships on going with the major banks. We want to have them with the developers, and we think that there's more than enough market for everyone to go around, and as I said, seventeen percent on the other side, that still means they're eighty three percent of the market, So there's plenty of market to share for everyone, and I think that will continue to be the case for a long time. I just think developers now from what we see, they like the certainty of capital. They understand what the investment managers are seeking, they understand what the lending parameters might look like, and they're able to use those terms to lock in, for example, the time that their builder is going to start because there might be less pre sales. So it's the nuances of what we do, and again that reinforces why you need reputable managers that have a clear track record of being able to deal with these groups. But I think it's how we go about our business that will allow us to continue to coexist with banks and each other will be viewed upon favorably.

Look from our perspective, we say the banks is a great partner. You know, I mentioned the fact that we do a lot of construction financing. We have a strong thematic around population growth, economic growth and the housing supply, demanding balance to invest in people's money. On that theme, the bank for us is a great source of exit from loans. So they're funding the home loans for the buyers, for off the plan purchases. If we're building a shopping center, we're funding the build of a shopping center, they're funding the takeout of that. So we still see our ability to be symbiotic in the market with each other is extremely good. I think think it comes back to the covenant packages, the lending parameters, and we see ourselves as a lasting relationships business. So we want to have relationships on going with the major banks. We want to have them with the developers, and we think that there's more than enough market for everyone to go around, and as I said, seventeen percent on the other side, that still means they're eighty three percent of the market, So there's plenty of market to share for everyone, and I think that will continue to be the case for a long time. I just think developers now from what we see, they like the certainty of capital. They understand what the investment managers are seeking, they understand what the lending parameters might look like, and they're able to use those terms to lock in, for example, the time that their builder is going to start because there might be less pre sales. So it's the nuances of what we do, and again that reinforces why you need reputable managers that have a clear track record of being able to deal with these groups. But I think it's how we go about our business that will allow us to continue to coexist with banks and each other will be viewed upon favorably.

Tom, thank you for talking to Fear and Greed. Sure, and thank you very much for having That was Tom Cranfeld, executive director at Zagar, a great partner of this podcast. This is the Fear and Greed Business Interview. Remember this is general information only and you should seek professional advice before investing. Join us every morning for the full episode of Fear and Greed. Business years for people who make their own decisions. I'm Chanel one, enjoying your day.

Tom, thank you for talking to Fear and Greed. Sure, and thank you very much for having That was Tom Cranfeld, executive director at Zagar, a great partner of this podcast. This is the Fear and Greed Business Interview. Remember this is general information only and you should seek professional advice before investing. Join us every morning for the full episode of Fear and Greed. Business years for people who make their own decisions. I'm Chanel one, enjoying your day.