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In this interview, Westbrooke Alternative Asset management’s product development head Dino Zuccollo explains how South African investors now have access to a high yielding alternative to fixed deposits. Westbrooke offers a portfolio of loans it has made to top rated private companies, playing in a space that highly regulated banks don’t. Diversification reduces the risk of these 12-month- plus loans, which yield returns (14% is common) that are vastly superior to better known alternatives. Zuccollo unpacked the opportunity for Alec Hogg of BizNews.
Find Timestamps Below:
- Dino Zuccollo on Westbrooke’s story – 00:00:48
- On being the biggest investor – 00:02:26
- On how to start private debt funding and how to invest in this alternative asset class – 00:04:03
- On interest if one is not able to raise money with a bank – 00:06:35
- On investing in a portfolio of private businesses – 00:20:54
Excerpts from interview:
Dino Zuccollo on Westbrooke’s story
The Westbrooke story starts in 2004 when the group was formed originally with a view to investing in private equity assets around South Africa, predominantly. The group was founded by Martin Sacks and his partner Rob Fihreh, who in turn is a part of the business called Capricorn Capital Partners, with some prominent families sitting behind it. The original idea of the group was to invest controlling stakes in businesses around South Africa that we invested in our own group, Capital Only, and we’ve successfully done that for more than 20 years. Some of the assets in that business include the likes of the Coricraft Group, which we sold earlier this year. But in 2012 we started the Westbrooke Alternative Asset Management. The idea of Westbrooke is as a vehicle where we bring clients along for the ride. We are the biggest investors in everything that we do, we invest principally in things that we want to invest into. But there are some markets where you need client money to help you to achieve scale. And to your point, today we manage about 8 billion rand across three geographies: South Africa, the UK and the US. The idea of Westbrooke Alternative Asset Management is that we invest clients in the world of alternatives, in a highly aligned investment model where clients can benefit from the fact that they are invested alongside people who have a good track record of success and also have material amounts of their money alongside them. What we benefit from is that clients help us achieve scale in our key markets of operations.
On being the biggest investor
In the products that we invest in each fund, correct. It differs in time. It begins that way. Obviously, at a point it becomes hard to sustain that level if you get too big. Let’s look through the ecosystems: the ecosystem is that we invest our own money first and only our own money. We test concepts to ensure that things work the way they say. And then the second round is generally friends and family. Third rounds into things with a high net worth base of clients and then in the fourth round we begin to open offering up to a wider base, which in our instance is generally a very large base of wealth managers throughout the country who support us.
On how to start private debt funding and how to invest in this alternative asset class
It’s an interesting thing, alternatives in general, because what you’re doing as the underlying basis is you’re making in this instance a private loan, which in many respects is similar to private equity style, investing in nature, your due diligence in businesses, you’re working out the cash flows. In some instances it’s real estate as opposed to businesses, etc. But at the top level, what you’re doing is you’re running an asset management structure. So it’s a little bit of a hybrid where the traditional investment public are used to a lot more investing in things like listed equities and fund-a-funds vehicles, which is all very much in the world of listed and liquid. So, let’s take a step back. Private debt today is the world’s third largest alternative asset class of about $1.4 trillion in assets under management, and really gained prominence after the GFC in 2008. What happened in 2008 is we had Basel and the response from Basel was that obviously there was a very steep increase in the level of regulation that specifically focused on banks. That made it a lot harder for banks to put out money. And so banks in turn pulled back and what they did is they withdrew from certain areas of the funding markets and those areas of the funding markets that they generally withdrew from were in respect of making smaller sized loans, or loans for shorter durations, because what they worked out quite quickly is that if you want to put out less money, it’s much harder to make a return given the level of implementation costs. What is private debt’s private debt? This is the asset class where any non-bank lender provides a loan to a company. And following GFC, non-bank lenders have taken a specific interest in the asset class because what one is able to do if you invest right is you can get higher returns potentially than the level of risk that you need to take. And at least from our perspective, we’re all about maximising the spread between the risk that you take and the return that you get in exchange for it. We operate in two jurisdictions – South Africa and the United Kingdom, specifically in the private debt space. We moved into the US, but not for clients just yet. And in each of those geographies we exploit specific niches in the markets where we don’t think that the banks are playing substantially.
On interest if one is not able to raise money with a bank
So there are different reasons you can’t raise money from a bank. You might not be able to raise money from a bank because the bank doesn’t want to lend to you. Now, that’s the kind of thing that we don’t want to be doing. You don’t want to be the lender of last resort. But there are many other reasons that banks, for whatever reason, can’t do a loan. The areas we like to specialise in are as follows: There’s some rules that banks employ, so if we use the UK as an example, there’s a rule, loans of less than £20 million, banks don’t like to do it. Now in South Africa, times 20 to the pound, you can make a five, maybe £10 million loan. That’s 200 million rand. It’s actually quite meaningful to us. So we play A, in smaller tickets, we play B in shorter duration. So we are actually quite happy to make loans of, let’s say 12 months or 24 months where banks, if they’re going to go through all the work, want to make a five year lend.. And the big thing for us is speed and complexity. Being a small entrepreneurial business, we’re able to turn answers to our barriers much quicker than incumbent lenders are doing. And that’s where we’re seeing a lot of opportunity. Generally, if you find a good borrower, it doesn’t mean that they’re not going to be able to get money from the bank. It just means that they’re at the back of the queue and sitting at the back of the queue might take you six months to get a loan from a bank, but you might only have two or three weeks. And so in that instance, we’re replicating many of the credit metrics of what a bank would give, but at a higher rate. And the reason we’re charging the higher rates is for speed and shorter duration.
On investing in a portfolio of private businesses
There is an ecosystem of alternatives. Alternatives have funds. Some of those are open ended, some are closed ended, some are deal by deal syndications. There’s all sorts. In our private debt funds, I mentioned earlier, capital preservation as a key metric was a key for the philosophical concept. There is no upside in debt, not the debt we are doing. Our debt funds don’t include things like equity warrants. We think it’s too high risk. We’ll put that in a different fund. So if there is no upside in debt, then it stands to reason that your focus should be on reducing risk as far as you possibly can. And the best way to reduce risk, aside from being good investors and applying the right principles around credit, is to diversify. In the UK we have 59 private loans in our portfolio – that offering is called West Brookfield Plus. In South Africa we have 14 – called the Westbrooke Income Class. We will never have as many positions in the South African offering as we do in the UK offering. The market is just not as deep. But there are other ways that you can create diversification. Lending to lenders is a good one because they in turn have hundreds, even thousands, of end user rental or loan contracts in turn.
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