Welcome to the Fear and Greed Business Interview. I'm Sean Almer. We talk a lot on this podcast about the rise of private credit. It's expanded enormously in the last few years, and there's been no shortage of commentary around the sector about the benefits, about the opportunities, also about the risks. Today, I wanted to unpack all of that, including some of the factors that could affect the booming sector and why we're seeing more stories examining transparency in the industry. Remember this is general information only, and you should always seek professional advice before making investment decisions. Paul Miron is the managing director of Msquared Capital, great supporter of this podcast. Paul, Welcome to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Almer. We talk a lot on this podcast about the rise of private credit. It's expanded enormously in the last few years, and there's been no shortage of commentary around the sector about the benefits, about the opportunities, also about the risks. Today, I wanted to unpack all of that, including some of the factors that could affect the booming sector and why we're seeing more stories examining transparency in the industry. Remember this is general information only, and you should always seek professional advice before making investment decisions. Paul Miron is the managing director of Msquared Capital, great supporter of this podcast. Paul, Welcome to Fear and Greed.

Thank you so much.

Thank you so much.

So just the basics first, what is private credit? Why has it boomed in the last couple of years.

So just the basics first, what is private credit? Why has it boomed in the last couple of years.

Well, private credit you have to look at it from both sides of the balance sheet. You have borrowers, for example, who want to get finance, and then you have investors. There's a misconception that private credit actually do the deals that the banks they want to do. There's some truth to it as well. There is a two hundred and five billion dollars could be more, which is called a funding gap, and that funding gap is basically what private credit is.

Well, private credit you have to look at it from both sides of the balance sheet. You have borrowers, for example, who want to get finance, and then you have investors. There's a misconception that private credit actually do the deals that the banks they want to do. There's some truth to it as well. There is a two hundred and five billion dollars could be more, which is called a funding gap, and that funding gap is basically what private credit is.

This two hundred billion dollars or thereabouts is what people want to borrow, but the banks won't lend effectively, and private credit sits in there.

This two hundred billion dollars or thereabouts is what people want to borrow, but the banks won't lend effectively, and private credit sits in there.

And there's reason why the funding gap is growing. There's higher regulation and there are very good quality business, for example, that banks don't necessarily want to participate in. So for example, a normal term facility with a bank has a payback ratio of around two to three years, So any type of client that wants to borrow money for less than twelve months, it's not necessarily the type of business they want to do. So as a private credit provider, we find niches in the marketplace, so we think that from a risk and wart perspective, is very very good value. And as there's more maturity happening in the market, it's a very symbiotic relationship between private credit and the banks as well.

And there's reason why the funding gap is growing. There's higher regulation and there are very good quality business, for example, that banks don't necessarily want to participate in. So for example, a normal term facility with a bank has a payback ratio of around two to three years, So any type of client that wants to borrow money for less than twelve months, it's not necessarily the type of business they want to do. So as a private credit provider, we find niches in the marketplace, so we think that from a risk and wart perspective, is very very good value. And as there's more maturity happening in the market, it's a very symbiotic relationship between private credit and the banks as well.

Where it sort of sits in the middle and brings the two parties together. What sorts of assets are you talking about, or even to take a step back, what sectors are you interested in?

Where it sort of sits in the middle and brings the two parties together. What sorts of assets are you talking about, or even to take a step back, what sectors are you interested in?

Okay, So the type of sectors that we're interested in is that first of all, we're a secured private credit provider.

Okay, So the type of sectors that we're interested in is that first of all, we're a secured private credit provider.

They take it apart, secured right private credit provider.

They take it apart, secured right private credit provider.

Which is backed by property. So if a borrower comes to us for business purposes and they have a residential, commercial industrial property, we can do business. And that's just basically the first first requirement. And obviously every single deal is so unique. You know, every single deal is risk and reward perspectives looked at it. So how much is it gearing, what's the security, what's the So there's a different pricing mechanism for each particular deal. And I think there's a big misconception in the marketplace that it's a homogeneous marketplace which is private credit. But it couldn't be further from the truth, because like I've been in the industry for nearly thirty years, which I shouldn't be showing age that well, that way, to be in the.

Which is backed by property. So if a borrower comes to us for business purposes and they have a residential, commercial industrial property, we can do business. And that's just basically the first first requirement. And obviously every single deal is so unique. You know, every single deal is risk and reward perspectives looked at it. So how much is it gearing, what's the security, what's the So there's a different pricing mechanism for each particular deal. And I think there's a big misconception in the marketplace that it's a homogeneous marketplace which is private credit. But it couldn't be further from the truth, because like I've been in the industry for nearly thirty years, which I shouldn't be showing age that well, that way, to be in the.

Industry for thirty years, Paul, you look very young, but go on.

Industry for thirty years, Paul, you look very young, but go on.

Thank you. But nearly being in that in the industry for such a long time, the passion that I have for private credit is that every single transaction is so different and it possesses a different risk profile and for that there's a different there's a different return and a different way that we manage that particular debt as well.

Thank you. But nearly being in that in the industry for such a long time, the passion that I have for private credit is that every single transaction is so different and it possesses a different risk profile and for that there's a different there's a different return and a different way that we manage that particular debt as well.

Okay, so I'm just going to try and repeat what you said to me kind of in a one oh one sense. So everything is secured by property, yep. The asset could be all sorts of things, which makes it such a diverse and every asset is treated individually yep. And you're looking at the risk profile, how much money they want. Presumably that's from the both sides. So we're talking about people wanting money, but the provider of the funding, they've got to have a risk appetite to actually go with that as well.

Okay, so I'm just going to try and repeat what you said to me kind of in a one oh one sense. So everything is secured by property, yep. The asset could be all sorts of things, which makes it such a diverse and every asset is treated individually yep. And you're looking at the risk profile, how much money they want. Presumably that's from the both sides. So we're talking about people wanting money, but the provider of the funding, they've got to have a risk appetite to actually go with that as well.

And I think this is where the maturity of the industry is coming to fruition. Eight years ago when we started the business, when we said that we're a private credit provider, most people didn't even know what that was. In the last two years is absolutely exploded, and especially from an investor perspective as well. And you know, there's a lot of research from in America. What's the perfect portfolio? It was the sixty forty split. Now it has private credit in there where less than eight years ago, we were still determined as an alternative asset class.

And I think this is where the maturity of the industry is coming to fruition. Eight years ago when we started the business, when we said that we're a private credit provider, most people didn't even know what that was. In the last two years is absolutely exploded, and especially from an investor perspective as well. And you know, there's a lot of research from in America. What's the perfect portfolio? It was the sixty forty split. Now it has private credit in there where less than eight years ago, we were still determined as an alternative asset class.

We talk about private credit being uncorrelated to other assets. Just explain what that means and the benefits of that for an investor who's looking for diversification.

We talk about private credit being uncorrelated to other assets. Just explain what that means and the benefits of that for an investor who's looking for diversification.

Okay, so uncorrelated. This whole principle of uncorrelated actually came from Harry Markowitz and he coined up the whole philosophy in relation to a sixty forty split. And this was in the sixties and in the seventies a sort of developed as well. So the ideal portfolio for you to have was sixty percent shares forty percent bonds. So what happens there is that if shares go up, for example, bonds is that stable acid class. If it falls down, then your portfolio is still having sort of an absolute return over time and getting a superior return. So the two asset classes are non correlated. And so from the seventies and eighties you only had two asset classes that you had to really worry about. Today there's more than three thousand products out there, and so there's actually a research paper done by Benz that took sixty years worth of data between bonds and shares and mapped it, and what they found out that the correlation between bonds and shares is positively correlated. So therefore isn't the theory. It's not the theory at all, because the whole point is that if you have a black swan event, at least you've got a good part of your portfolio is stable, so your volatility of your entire portfolio is sort of trending downwards from that black swan event. Now, for example, it's correlated, and it's quite positively correlated. So this is why we have gone on from you know, the perfect portfolio of sixty forty now saying well you need to have a little bit of private credit in there, and the research saying between ten and twenty five percent. But it also depends on the person actually investing in a time horizon as well, and that's why you need to have a professional to look at it. But it's a lot more complicated, and that's why there's so much interest from institutional investors in private credit because it is deemed to be a replacement and it's if it's done correctly, you know, it performs very well in volatile times because the investment is a investment against a dead instrument. You know, I've given you a million dollars, you have to give it back, and this is the interest that you have to give me every single month. And if something goes wrong, I can take possession of an asset, asset that's worth more than your debt. So that's the whole principle.

Okay, so uncorrelated. This whole principle of uncorrelated actually came from Harry Markowitz and he coined up the whole philosophy in relation to a sixty forty split. And this was in the sixties and in the seventies a sort of developed as well. So the ideal portfolio for you to have was sixty percent shares forty percent bonds. So what happens there is that if shares go up, for example, bonds is that stable acid class. If it falls down, then your portfolio is still having sort of an absolute return over time and getting a superior return. So the two asset classes are non correlated. And so from the seventies and eighties you only had two asset classes that you had to really worry about. Today there's more than three thousand products out there, and so there's actually a research paper done by Benz that took sixty years worth of data between bonds and shares and mapped it, and what they found out that the correlation between bonds and shares is positively correlated. So therefore isn't the theory. It's not the theory at all, because the whole point is that if you have a black swan event, at least you've got a good part of your portfolio is stable, so your volatility of your entire portfolio is sort of trending downwards from that black swan event. Now, for example, it's correlated, and it's quite positively correlated. So this is why we have gone on from you know, the perfect portfolio of sixty forty now saying well you need to have a little bit of private credit in there, and the research saying between ten and twenty five percent. But it also depends on the person actually investing in a time horizon as well, and that's why you need to have a professional to look at it. But it's a lot more complicated, and that's why there's so much interest from institutional investors in private credit because it is deemed to be a replacement and it's if it's done correctly, you know, it performs very well in volatile times because the investment is a investment against a dead instrument. You know, I've given you a million dollars, you have to give it back, and this is the interest that you have to give me every single month. And if something goes wrong, I can take possession of an asset, asset that's worth more than your debt. So that's the whole principle.

Stay with me, Paul, we'll be back in a minute. My guest this morning is Paul Mirron, managing director of M squared Capital. Okay, we were talking about a benefit of private credit being diversification. Presuming we agree with that. What should we be worried about with private credit though? Because every asset class has.

Stay with me, Paul, we'll be back in a minute. My guest this morning is Paul Mirron, managing director of M squared Capital. Okay, we were talking about a benefit of private credit being diversification. Presuming we agree with that. What should we be worried about with private credit though? Because every asset class has.

Its risks absolutely, and look, as I said to you before, there's different loans and every single loan carries different amount of risk. I think what the biggest issue that we have in the industry as an industry so far, and because it's grown so quickly, is what questions you need to ask to understand the difference between different fund managers in relation to what type of loans you have in your in your in your in your book. So for example, so.

Its risks absolutely, and look, as I said to you before, there's different loans and every single loan carries different amount of risk. I think what the biggest issue that we have in the industry as an industry so far, and because it's grown so quickly, is what questions you need to ask to understand the difference between different fund managers in relation to what type of loans you have in your in your in your in your book. So for example, so.

I'm going to I'm going to stop there. So if I'm investing in it's whineing and put a million dollars into M squared, Right, I'm putting it into a fund which has a bunch of principles, parameters and that fund so you've got to trust the manager of that fund to go and match that money, which is in a trust or something is it.

I'm going to I'm going to stop there. So if I'm investing in it's whineing and put a million dollars into M squared, Right, I'm putting it into a fund which has a bunch of principles, parameters and that fund so you've got to trust the manager of that fund to go and match that money, which is in a trust or something is it.

So we have three options for our investors. So we give an ability for our investors to choose the individual loan they want to invest in. So from a transparency perspective, they can get a copy of the valuation, no the exact property, they can drive past it, they can see it, that can understand it, and we give them our philosophy in relation to why that is a good loan, the term, the return, every single loan is different, so you can actually see it, feel it. Then we have a pulled fund for retail and wholesale investors as well. Recently we've got SQM upgraded rating at four stars, which we're quite pleased with given the current environment as well, and that has over forty different loans and it's geared the average gearing across the whole portfolio. At the moment it's about fifty six percent. So the property market in general has to fall more than forty five percent for it to be at risk. The other interesting part we did it with that particular portfolio is because of our investment philosophy is that not all mortgages are the same and that we have a very strict criteria around it. So we've said, instead of chasing the highest return for investors, we're chasing the lowest risk. Let me explain that different loans carry different risk. So a construction loan has a different type of risk profile. Then for example, if you lend money against an apartment here in Piedmont, if you're lending money against rural property, if you're leaning money against specialized security. So what we've done, we've excluded specialized security, any second mortgages. That's the first mortgage fund only, no rural property, no specialized security, no land. Because in that particular fund we have monthly liquidity and so therefore the asset class is quite liquid. So a residential apartment or our house is quite liquid in that perspective as well. So all those type of benefits we've wrapped around in that particular product there, and then we have another pulled fund. They can do a bit of land, a bit of construction, a little bit higher gearing and no one's double digits at the moment.

So we have three options for our investors. So we give an ability for our investors to choose the individual loan they want to invest in. So from a transparency perspective, they can get a copy of the valuation, no the exact property, they can drive past it, they can see it, that can understand it, and we give them our philosophy in relation to why that is a good loan, the term, the return, every single loan is different, so you can actually see it, feel it. Then we have a pulled fund for retail and wholesale investors as well. Recently we've got SQM upgraded rating at four stars, which we're quite pleased with given the current environment as well, and that has over forty different loans and it's geared the average gearing across the whole portfolio. At the moment it's about fifty six percent. So the property market in general has to fall more than forty five percent for it to be at risk. The other interesting part we did it with that particular portfolio is because of our investment philosophy is that not all mortgages are the same and that we have a very strict criteria around it. So we've said, instead of chasing the highest return for investors, we're chasing the lowest risk. Let me explain that different loans carry different risk. So a construction loan has a different type of risk profile. Then for example, if you lend money against an apartment here in Piedmont, if you're lending money against rural property, if you're leaning money against specialized security. So what we've done, we've excluded specialized security, any second mortgages. That's the first mortgage fund only, no rural property, no specialized security, no land. Because in that particular fund we have monthly liquidity and so therefore the asset class is quite liquid. So a residential apartment or our house is quite liquid in that perspective as well. So all those type of benefits we've wrapped around in that particular product there, and then we have another pulled fund. They can do a bit of land, a bit of construction, a little bit higher gearing and no one's double digits at the moment.

Okay, we're running out of time. I want to quickly talk about regulation. When I in my youth worked at the Reserve Bank and the part that is now OPRA was within the Reserve Bank and we worked on that, and residential mortgage backed securities were being created by I think it was Macquarie and BT in that day. Now they are just part of the cabal structure now and we don't think twice about it. But at the time we were trying to get our heads around exactly what a residential mortgage of back security was, how safe it was, et cetera, et cetera. Private credit kind of reminds me of that. I know you've been in it for thirty years, but for many people this is new and as a result, I don't think regulators necessarily have totally got their head around it. Is that a risk for the sector?

Okay, we're running out of time. I want to quickly talk about regulation. When I in my youth worked at the Reserve Bank and the part that is now OPRA was within the Reserve Bank and we worked on that, and residential mortgage backed securities were being created by I think it was Macquarie and BT in that day. Now they are just part of the cabal structure now and we don't think twice about it. But at the time we were trying to get our heads around exactly what a residential mortgage of back security was, how safe it was, et cetera, et cetera. Private credit kind of reminds me of that. I know you've been in it for thirty years, but for many people this is new and as a result, I don't think regulators necessarily have totally got their head around it. Is that a risk for the sector?

Well, see, the fact of the matter is the way that regulators look at it. A bit of over fourteen fifteen years ago we had a GFC which was a total collapse of the financial system. Now the private credit is growing as such, speech it's growing over twenty percent per year. So if that industry were to fail or larger funds were to fall over, what's the impact And obviously we don't want to see that impact. And there's a couple of different layers there as well. You want to have investors being able to understand the risk that they're investing in as well. And there is other issues there because there isn't a standardization of information that is provided to investors. So it's like having this conversation right now. We all know the term private credit, but not many people ask what type of security or what type of loans you can do? So you know, often the industry says that a loan secured against the business without possible any real estate is still secured private credit fund and I don't think a lot of people in the market understand that.

Well, see, the fact of the matter is the way that regulators look at it. A bit of over fourteen fifteen years ago we had a GFC which was a total collapse of the financial system. Now the private credit is growing as such, speech it's growing over twenty percent per year. So if that industry were to fail or larger funds were to fall over, what's the impact And obviously we don't want to see that impact. And there's a couple of different layers there as well. You want to have investors being able to understand the risk that they're investing in as well. And there is other issues there because there isn't a standardization of information that is provided to investors. So it's like having this conversation right now. We all know the term private credit, but not many people ask what type of security or what type of loans you can do? So you know, often the industry says that a loan secured against the business without possible any real estate is still secured private credit fund and I don't think a lot of people in the market understand that.

So does it need more regulation And I don't mean that in a negative sense, more standardization perhaps of what you're selling.

So does it need more regulation And I don't mean that in a negative sense, more standardization perhaps of what you're selling.

Yeah, there should be a standardization of information that we can provide to investors. So if they want to see if they want to have looked through rights in relation to the portfolio, how often should we be doing that? What is a format and just the terminology that is used in the industry should be standardized and should be explained as well, because I think there's still a little bit of confusion relation to the language, which makes it very difficult to compare one fund to another fund.

Yeah, there should be a standardization of information that we can provide to investors. So if they want to see if they want to have looked through rights in relation to the portfolio, how often should we be doing that? What is a format and just the terminology that is used in the industry should be standardized and should be explained as well, because I think there's still a little bit of confusion relation to the language, which makes it very difficult to compare one fund to another fund.

We probably will get there, though, won't we, Because I mean, this is in a sector that's not going away.

We probably will get there, though, won't we, Because I mean, this is in a sector that's not going away.

And it's growing, and it's just basically going through It's like it's growing pains. Yeah, that's probably the best way to explain major.

And it's growing, and it's just basically going through It's like it's growing pains. Yeah, that's probably the best way to explain major.

Or something like that. Well, thank you for talking to Fear and Greed.

Or something like that. Well, thank you for talking to Fear and Greed.

Thank you.

Thank you.

That was Paul Miron, managing director of Msquared Capital and great supporter of this podcast. This is the Fear and Greed Business Interview. Remember this is general information only and you should always see professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed. Daily Business news for people to make their own decisions. I'm Sean Aylmer. Enjoy your day.

That was Paul Miron, managing director of Msquared Capital and great supporter of this podcast. This is the Fear and Greed Business Interview. Remember this is general information only and you should always see professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed. Daily Business news for people to make their own decisions. I'm Sean Aylmer. Enjoy your day.