Rising interest rate cycle bumps Westbrooke Sterling private debt investment yield to 9%-10% p.a.

Nowadays, investors seek more than just traditional avenues, which often underperform. To outperform they are searching for innovative and special investment opportunities. In this interview, Richard Asherson from Westbrooke Alternative Asset Management updates us on an opportunity that focuses on a high-yielding investment in a hard currency – via the UK market. – Alec Hogg

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Edited transcript of the interview with Richard Asherson of Westbrooke Alternative Asset Management.

Alec Hogg: Hi Richard, speaking with you again is good. Westbrooke offers an intriguing alternative to traditional banking and savings accounts. People are sometimes uncertain about overseas investments, but your firm specialises in what you term ‘alternative assets.’ Today, we’ll delve into your expertise in lending, which seems to be filling a gap that banks have neglected, particularly in hard currencies and the UK market. When did you start focusing on this?

Richard Asherson: I’ve been involved in lending for my entire professional career. I initially started as an investor before moving to Westbrooke to help establish the asset management business. We have been involved in lending and downside-focused capital investing since 2015.

Alec Hogg: So you’ve amassed considerable data on how this operates, particularly concerning the UK?

Richard Asherson: Westbrooke is a multi-asset, multi-strategy manager and advisor in alternative assets. Our portfolio ranges from private credit, today’s main topic, to real estate and private equity. One of our key differentiators is our history as an operator and owner of assets. This gives us a unique perspective on risk, unlike traditional banking environments. We offer a unique gateway into private markets and alternative assets, and our approach to risk mitigation helps Westbrooke achieve asymmetric returns.

Alec Hogg: To whom do you typically lend?

Richard Asherson: We lend to various borrowers for various reasons. These are generally well-established sponsors or entrepreneurial management teams. They might be acquiring a business or an asset and require funding for that, or in some cases; they may need growth funding for either an acquisition or organic capacity expansion.

In the medium term, as we’ve grown within the UK market, we’ve positioned ourselves as medium-term lenders. We come at a higher capital cost than traditional high-street lenders, so businesses naturally refinance with high-street banks as they mature and become more eligible for standard lending.

Alec Hogg: So, do businesses and property buyers approach you for immediate cash needs and refinance at a lower cost when they can?

Richard Asherson: It varies, but speed and flexibility are generally what clients seek from us, especially for acquisitions. In the UK, we focus on the ‘forgotten middle.’ These are specific types of sponsors and transactions that don’t fit the high street criteria nor are large enough for corporate investment banks. Our deals usually range between £5 million to £20 million and often require faster funding than traditional banks can provide, particularly in the current environment where quick action is essential.

Alec Hogg: How extensive is your loan portfolio?

Richard Asherson: We manage about 40 to 50 loans at any time. Diversification is crucial for us, especially as a downside-focused fund.

Alec Hogg: What measures do you take to secure the loans?

Richard Asherson: We have a comprehensive due diligence process informed by Westbrooke’s risk philosophy. We examine the borrower’s character, alignment, and track record, supported by evidence. Character is essential, as even the best assets won’t ensure repayment from a borrower unwilling to pay back. We also evaluate cash flow to ensure its sustainability and security. Lastly, we look at collateral only after the first two criteria are met. Our due diligence includes third-party evaluations, valuation reports, and the usual governance and security structures seen in traditional banking.

Alec Hogg: It sounds like you’ve developed a rigorous process.

Richard Asherson: Indeed. When dealing with loans with fixed upside, you can’t afford to take risks that could result in capital loss. Therefore, we focus on mitigating other types of risks in various ways.

Alec Hogg: Have you had any bad debts or loans that have gone awry?

Richard Asherson: Certainly, we’ve experienced some stress in our portfolio, which is somewhat expected in the lending business. Over the fund’s seven-year history, we’ve had to make provisions against three transactions, predominantly due to COVID-related factors. Thankfully, we had to write off less than 1% of the portfolio, underscoring the importance of diversification in our strategy. The other two we successfully managed to resolve. Effective risk management and early warning mechanisms are key aspects of our operations, something we’ve learned from our experienced investment committee and advisory board.

Alec Hogg: Now, let’s shift focus to the funding side. Our community wants to know how much your fund needs to invest and the expected returns.

Richard Asherson: Westbrooke Yield Plus is a Jersey-domiciled public fund regulated and administered in Jersey. It’s classified as an expert fund, open to professional investors, usually in increments exceeding $100,000 or the equivalent in other currencies. Investments go into a diversified portfolio of loan instruments. We’re generating a net yield, after all, fees and costs, between nine and 10 percent in pounds. Our target is to offer returns in the range of cash plus four to cash plus six, which we are successfully achieving.

Alec Hogg: That’s a juicy yield.

Richard Asherson: The yield is compelling, given the current market environment. Currently, risk-adjusted debt yields in the UK seem to outperform equivalent equity returns on a risk-adjusted basis.

Alec Hogg: Regarding the minimum investment, is it $100,000?

Richard Asherson: For individual investors, yes, it’s $100,000. However, the amount can be lower through a wealth manager or an advisor. They’ll guide you through portfolio allocation, and we usually fit into what’s termed as the ‘alternative fixed income bucket.’

Alec Hogg: Can financial advisors pool smaller amounts from various clients to meet that threshold?

Richard Asherson: Exactly. There’s no minimum investment requirement for financial advisors, as they are considered professionals. They can invest smaller amounts, and it’s best to consult them for personalised advice on portfolio allocation.

Alec Hogg: Tell us about your South African client base, especially given the attractive 9 to 10% yield in hard currency.

Richard Asherson: We’ve been fortunate to build a strong South African client base, including high-net-worth individuals, family offices, and institutional wealth managers. We currently have over 350 South African investors, ranging from the $100,000 threshold up to multi-million-pound investors.

Alec Hogg: You’ve had only one bad debt over the last seven years?

Richard Asherson: That’s correct. Only one, and the possibility of recovery remains. We take it very seriously, affecting us both professionally and personally.

Alec Hogg: Is the UK’s demand for Westbrooke’s financial offerings increasing?

Richard Asherson: Yes, due to market stress and our growing business. Capital constraints are pushing demand for alternative capital providers like us. We’ve expanded our lending sizes, which has made us more relevant to sponsors and advisors.

Alec Hogg: So, you’re now competing with traditional banks?

Richard Asherson: We offer different, often more flexible products. We’re faster more commercial, and our approach is more partner-driven than transaction-focused. Despite being more expensive than traditional lenders, our clients appreciate our approach and often return for future business.

Alec Hogg: Lastly, are the investments spread across the whole portfolio?

Richard Asherson: Yes, investors are exposed to a diversified range of Westbrooke Yield Plus portfolio loans. Our primary focus is to protect capital, and any yield on top is a bonus. About 15 to 20% of the fund is our investment, aligning our interests closely with our clients.

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