Private loans yielding 9% in Pounds – gap in the market delivers a winner for SA investors

In our changing world, opportunities emerge all the time – but taking advantage requires research and understanding. Westbrooke Alternative Asset Management specialises in seeking out these anomalies with its UK private loan offering among the most popular with its South African investors. In this interview, Westbrooke’s Dino Zuccollo explains to BizNews editor Alec Hogg how the company identified a niche in the UK and explains how it translates into delivering a net return of over 9% in Pounds with low risk.

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Edited transcript of the interview

Alec Hogg (00:13.038)
Dino Zuccollo is the head of investor solutions at Westbrooke Alternative Asset Management. We haven’t had a chat with him for about 18 months. Today, we’ll catch up on what’s happening in the alternative investment field, especially since many people are becoming quite nervous. You can’t expect Nvidia to keep going up 100% every few months as it has been. Perhaps some money is being taken off the table and put into strong yielding investments, which is what Dino and his colleagues at Westbrooke specialize in.

You know, I’ve been thinking about our business model portfolio, Dino. We bought into Nvidia, which I think many people worldwide have done. It has gone ridiculously high, about 300% since we bought in. So, what we did was we sold enough to repay our capital investment with some profit, and we’re just letting the rest ride. I’m sure that’s the kind of strategy many investors are considering today when they look at the returns they’ve enjoyed from big tech stocks and are presumably looking for safe places with high yields, which is your specialty.

Dino Zuccollo (01:04.058)
Hi Alec, and hello to everyone watching this conversation today. Certainly, something I’m very interested to talk about. We’re not wealth managers, so to caveat what I’m going to say, we don’t spend most of our day at Westbrooke advising clients on where to allocate their capital. We’re more focused on discussing the products we offer. However, we do see what you just described often. For years, it used to be NASPERS where this problem arose. Now, you see stocks like Nvidia where a client invests, the stock does really well, and suddenly they become significantly overweight in specific asset classes or equities.

What you’ve done with Nvidia is a great example of what many of our clients do. Any investment portfolio should have a model around it, determining what percentage goes into equities, bonds, and fixed-income investments. Within that, there’s a sub-allocation, such as private debt within a bond portfolio. It’s crucial to avoid becoming overexposed to something like equities, as it materially increases your risk, which is something we help clients manage.

Alec Hogg (03:00.014)
Yeah, it’s very easy to get excited when things are going up, but when you stop and reassess, investing is about having alternatives or balance. Otherwise, you can lose all those gains in an instant, and it happens every time. Let’s talk about the private debt market. When we spoke 18 months ago, it was December 2022. At that time, equities weren’t performing well, interest rates were high, and private debt was a place where people could get higher returns with not much higher risk. Can you explain what you do in private debt and how it has developed over the last 18 months?

Dino Zuccollo (04:01.146)
Sure, Alec. To put it into context, private debt today is one of the world’s fastest-growing alternative asset classes, with about $2 trillion in assets under management globally. The asset class has doubled in size almost every four years, and big providers expect this trend to continue. The question many ask is, what is private debt, and why has it become so popular?

In summary, a private debt transaction is where anyone other than a bank makes a loan. It started post-2008 global financial crisis when new regulatory red tape made banks slower and focused on larger loans. For example, in the UK, where our flagship Yield Plus private debt fund operates, banks don’t like to extend credit for less than 20 million pounds and take quite long. This opened up a sector focused on providing capital to businesses and properties where banks can’t operate effectively.

Why has it been popular recently? High-interest rates are a key factor. When interest rates are high, equities underperform, but you get paid well for private debt. For instance, our UK private credit fund, Yield Plus, returned about 5% per annum in sterling five years ago when cash rates were close to zero. Now, we’re earning between 9% and 9.5% in sterling, without taking much additional risk. So, for clients looking for good returns per unit of risk in this uncertain environment, private debt has been an attractive option.

Alec Hogg (06:38.606)
Have you seen a big increase in demand for your funds? And can you unpack how they work? Sensible investors might be thinking of taking some money off the table from big tech stocks like Nvidia and looking for alternatives.

Dino Zuccollo (07:09.53)
Yes, there has been an increase in demand. At Westbrooke, we’re currently raising about 20 million pounds per quarter from South African-connected capital. Our investor base usually has some link to South Africa, even if they now live overseas. This base has grown steadily, with quarterly investments increasing from tens of millions a few years ago to around 20 million pounds now.

We recently surveyed our wealth manager base, which includes high net worth individuals, about 100 wealth management businesses, and some institutions. We found that 70% allocated to private debt. The remaining 30% primarily cited a lack of understanding as their reason for not investing. This shows where South Africa stands compared to North America and Europe, where average family office allocations to alternatives are over 50%. In South Africa, I’d be surprised if it’s above 10%. There’s still a significant way to go in increasing awareness and understanding.

Alec Hogg (09:32.366)
That’s a very good point about alternatives. You were the chairman of the 12J operation. Many people regret not taking greater advantage of that. Now, there’s the 12B section A ending in February. Some people are skeptical, thinking it’s too good to be true because of the massive tax incentives. Perhaps that’s what’s happening in the private debt market. When you explain it, we see that banks aren’t operating there, and there are good businesses in that field. With a diversified portfolio, you can run a successful business without the overheads banks have, giving investors a good return.

Dino Zuccollo (10:37.338)
An interesting anecdote, Alec: In the UK, we’ve lent to businesses that also have listed bonds. Generally, a bond is an unsecured claim, so bondholders stand last in line after secured creditors. We’ve lent to these businesses with tangible asset security, meaning we stand ahead of the listed bondholders in case of default or liquidation, and at a higher rate than the listed bonds.

Alternatives, or private market assets, are often better described in this context. 12B and 12J are tax incentives with different risks. The core of the multi-trillion-dollar industry, where giants like Blackstone operate, involves the same investments but accessed differently. The debate often is whether the higher returns are due to an illiquidity premium. Alternatives have become popular because the listed markets are shrinking. For example, the number of listed companies on the JSE and in the US has halved. For true diversification, investors now need to consider private market assets, which offer a larger investment universe.

Alec Hogg (12:57.262)
It’s all about educating yourself. We see your ads on Business News showing yields over 9% in pounds. People might think that’s too good to be true. How can you explain getting 9% in UK pounds from South Africa?

Dino Zuccollo (13:22.682)
The starting point is that interest rates are higher now. The cash rate in the UK is 5.25%, up from 0.25% a few years ago. In Westbrooke Yield Plus, we make loans in the UK market, mainly against properties, which is about 70% of our focus. We play in a niche market that the banks can’t operate in effectively.

We do smaller loans, under 20 million pounds, which banks avoid. This amount is significant in rands but manageable in pounds. We also provide short-term credit, from 12 to 36 months, allowing us to manage our portfolio and ensure liquidity for our clients. Lastly, we deal with complexity better, using our banking experience to offer a higher quality approach to a market segment in the UK. Our borrowers often see us as a temporary lender while they refinance with a big bank later. This approach allows us to offer a higher spread above cash rates to our clients.

Alec Hogg (16:34.83)
So, if someone wanted to invest in the Yield Plus Fund, how much do they need to invest, how long do they stay in, and what will happen to returns if interest rates fall?

Dino Zuccollo (16:53.786)
Great question, Alec. At Westbrooke, we structure investments well for South African investors for tax and other reasons. When you invest in Yield Plus, you buy a share in a company regulated and domiciled in Jersey. Returns are either taxed as foreign dividends at 20% withholding tax or have no tax events until you exit if you’re in a roll-up class.

The minimum investment is 100,000 pounds, but wealth advisors can offer pooled structures for lower amounts. We’ve recently removed lock-in periods. Now, you can give six or 12 months’ notice, making it a flexible 6 to 12-month investment.

Regarding interest rates, we’ve moved about half of the portfolio to fixed rates. This provides a cushion if interest rates fall, ensuring returns don’t drop as sharply as elsewhere. We’re always looking to balance risk and return effectively.

Alec Hogg (19:27.534)
Do you have tranches for raising money and then lending it out, similar to how the 12B investments work?

Dino Zuccollo (19:48.73)
Yes, it’s ongoing, Alec. We don’t have specific tranches. Instead, we constantly raise and deploy capital in the UK. Since our UK private debt strategy launched five years ago, we’ve raised nearly 100 million pounds. We have about 20 loans in our book at any time, with several repaid regularly. This allows for new capital deployment almost immediately, enhancing returns through compound interest.

We deploy capital efficiently to maintain high returns for our clients, meeting the ongoing demand for loans in our niche market.

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