AFR Companies&Markets

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Inside Coles New boss Steven Cain will need new strategy p15

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Market snapshot spend $9.2b S&P/ASX 200 Index (points)

●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●● Close 6180 Joyce Moullakis more than just ‘‘access to capital’’ and 6165.30 were adapting to a more competitive 6170 The local private equity industry is deal environment. sharpening its focus on governance, ‘‘One of the keys to differentiating deal structures and navigating digital oneself in an increasingly competitive Change 6160 YTD disruption as it fends off further fee market is to offer more creative struc- +1.7% pressure and players look to deploy tures to best solve the specific situ- 6150 $9.2 billion. ation,’’ he said. Some 500 attendees will converge on ‘‘The PE market as a whole is trying the Gold Coast this week for an annual to move to becoming solution capital. 10:00 12:00 2:00 4:00 talkfest at Private Equity This can take many forms but having and Venture Capital Association Lim- the flexibility and the capability to S&P/ASX 200 stocks Friday ited’s (AVCAL) conference. structure a transaction that caters to a This year’s event, a 25th anniversary, specific founder is a real advantage.’’ Best Close ($) Change (%) comes as the industry continues to con- Advent Partners’ boss Robert Lynas 1.935 +5.45 front fee pressure from investors, Radcliffe-Smith said the firm had SpeedCast Intl 4.32 +4.85 Afterpay Touch 17.27 +4.22 including superannuation funds. added two people to its team of 10 and Vocus Grp 3.04 +3.40 A push from some pension funds – planned to hire further to improve its Richard Quin’s message is that a decade after the global financial crisis disdain for NEXTDC 6.15 +3.36 often using an intermediary – to co- deployment of capital. corporate debt remains – as does the opportunity for investors. PHOTO: JANIE BARRETT invest directly alongside private equity He believes Advent has benefited Worst firms is adding to the skirmish on fees. from having a defined investment Syrah Res 2.29 -2.97 That is despite some top-performing thesis and four targeted industry Primary Health Care 2.84 -2.07 global heavyweight private equity groups. Busting the myth of Super Retail Grp 8.55 -1.95 funds ratcheting up fees in 2018, after Mr Radcliffe-Smith also highlights Janus Henderson 38.10 -1.85 the sector globally raised a record technology and digital strategy as a key Seven West Media .995 -1.49 $US453 billion last year. focus for private equity. toxic credit products Private equity firms are also having ‘‘Digital disruption is now part of our Indices Close (points) Change ASX 200 6165.3 +36.6 to look more widely and compete 100-day plan [after investment],’’ he Nikkei 23,094.67 +273.35 harder to buy domestic assets, and the said. ‘‘We really have to lift it to the next Hang Seng (pm) 27286.41 +403.33 ●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●● Shanghai A 2808.26 -3.58 ASX is this year again becoming fertile stage.’’ ‘‘Credit investments went through a ground for the sector. For critics of the industry the col- Monday fundie Credit crisis in 2008. It was a great recession in Currency Change Local private equity and venture cap- lapse of Dick Smith in 2016 and the the US, and the closest thing to the Great TWI 61.9 +0.1 is more Moneyball, less $A/US¢ 72.04 +0.19 ital firms have amassed $4.6 billion in tumultuous Myer float have continued Depression, and credit did well,’’ he tells $A/¥ 80.65 +0.57 new capital commitments in 2018, tak- to taint the sector. Both were listed on Big Short, he claims. The Australian Financial Review. $A/€ 0.6146 -0.0035 ing their total war chest to $9.2 billion, the ASX by private equity owners. The headlines generated by the $A/£ 0.5470 -0.0039 according to the latest AVCAL/Preqin The industry would prefer to focus implosion in sub-prime mortgage- ●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●● Rates Close (%) Change data. on the positive examples including Jonathan Shapiro backed bonds fuelled a perception that Cash rate 1.50 steady The numbers include large raisings Veda Group and GenesisCare – both of all structured credit products suffered 180-day bills 1.923 -0.007 10-yr bonds 2.605 -0.001 by several firms including newcomer which passed through private equity In his 20 years managing fixed income equally as badly in the maelstrom that BGH Capital. ownership and will be case studies at and credit funds Richard Quin has had wreaked havoc on financial markets a Commodities Close ($US) Change It’s been a busy year in 2018 for Aus- the AVCAL conference. to navigate his fair share of financial decade ago. But the reality was much Gold (spot) 1193.31 -11.09 Iron ore 67.68 -0.58 tralian private equity investments as AVCAL chief Yasser El-Ansary said crises, including ones triggered by different, as structured credit products Oil WTI 68.99 -0.91 well, with announced deals including the industry group was taking gov- complex credit products. – which include asset-backed securities Blackstone’s tilt at Investa Office Fund, ernance and ethical concerns in the He’s had a harder time trying to con- and complex products best known by China’s CDH Investments’ offer for community seriously, last year refresh- vince the broader investing public that an alphabet soup of acronyms like Sirtex Medical and Permira’s acquisi- ing its code of conduct. the asset class he has championed has CDOs (collateralised debt obligations) – tion of I-MED Radiology. ‘‘We have taken streps and we con- not been a source of financial cata- performed well despite the carnage TPG Capital’s head of Australia and tinue to be actively engaged,’’ he said, strophe but one that delivered solid meted out to other asset classes, not- Go to afr.com New Zealand, Joel Thickins, said noting that it was a condition of returns to investors with significantly ably stocks. for live updates private equity firms were providing Continued p16 less risk than other asset classes. Continued p22 Seek, the growth stock that’s not growing ... yet

●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●● Jonathan Shapiro overvalued. It is the dial-up era is expected to stay so for another. on capital of 25 per cent but that had disrupter, Seek Limited. Seek, which listed in 2005, has been gradually dwindled to just 10 per cent, How a small group of high-flying Seek’s share price has gained a more one of Australian tech’s great success well below global peers of 15 per cent. Due technology stocks are defying gravity, modest 8.8 per cent this year but earlier stories, gaining 10 times. Along with That, she concludes, is evidence that short sellers and, if you believe stodgy this month had traded at an all-time REA, it redirected ‘‘the rivers of gold’’ ‘‘M&A had been dilutive to its core old value investors, common sense, is high of $22.94. It has a market that once flowed into the coffers of business’’. Diligence one of the main talking points among capitalisation of $7.4 billion. Fairfax Media shareholders as its That ‘‘core business’’ – the Australian fund managers at the moment. But there’s one curiosity – it’s not online jobs portal captured a huge and New Zealand operation – has These new market darlings – actually growing. Well, its top line may share of the classified market. benefited from a sustained pick-up in Afterpay, Appen, Altium and Wisetech be, but its bottom line most certainly To maintain the growth story, Seek companies recruiting. – have gained between 50 per cent and isn’t, which is why it issued one of the expanded and invested in large and But now that the jobs market has 190 per cent this year. Bullish investors largest profit downgrades of the particularly lucrative offshore markets. recovered to more long-term levels, who bought their stories feel recently concluded reporting season. But the analysis presented by Liu growth in its core business could be vindicated but the trend has infuriated Since 2009, Liu explains, Seek’s questioned the quality and harder to come by for Seek in future. those who believe the market is getting revenues have grown 7.5 times from sustainability of Seek’s capital Liu’s short thesis largely centres ahead of itself. $200 million to an estimated 2019 allocation. around the valuation. She points to a But last week at a hedge fund figure of more than $1.5 billion. Liu says Seek’s return on invested PEG ratio (price-earnings to growth conference in Sydney, Tribeca portfolio And while Seek’s share price has capital employed suggests it has not ratio) of 4.6 times as evidence the stock manager Jun Bei Liu shone the light on tracked its revenues higher, profit has been efficient in deploying its capital. has run too hard. a much larger tech stock she believes not followed. The bottom line has A decade ago Seek was a ‘‘highly (While not a perfect measure of fits the description of excessively remained flat for the past two years and lucrative’’ business generating returns Continued p21 AFRGA1 A013 22 Monday 17 September 2018 Companies&Markets The Australian Financial Review | www.afr.com AFR

From page 13 Myer spill Quin: It’s not The Big Short – it’s Moneyball looking

CDOs backed by corporate loans sailed less likely through the crisis, and investors who held their nerve and could handle the ●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●● drop in price, got their money back. Sue Mitchell Quin is the managing director of $7 billion Sydney-based credit fund A week ago ’s Premier Bentham Asset Management, which Investments was confident Myer was spun out of Credit Suisse Asset shareholders would vote against the Management eight years ago. remuneration report at the upcoming Bentham manages many types of annual meeting, triggering a board fixed interest, usually with a focus on spill. ‘‘[Chairman Garry] Hounsell must credit, varying from government step down immediately or risk having bonds, investment grade bonds and his board spilled by a strong share- high yield bonds, loans and asset holder revolt at the upcoming AGM,’’ backed securities, which make up Mr Lew said last Wednesday after about 22 per cent of Bentham’s Global Myer reported a $486 million bottom Income Fund. line loss and its seventh consecutive Bentham is a small, tightly knit team quarter of falling same-store sales. and Quin is generally reluctant to Mr Lew, who had been sniping at appear in the media. Myer since Premier acquired a 10.8 per But on the 10-year anniversary of the cent stake at $1.15 a share in March last global financial crisis, and the 20-year year, finally saw his chance to appoint anniversary of the fund’s high yield three of his own directors to the Myer bond strategy that he has overseen, it is Richard Quin: Data shows asset-backed securities and collateralised debt obligations have done the job. PHOTO: JANIE BARRETT board. The Lew camp was unaware an opportunity to dispel some myths. veteran fund manager Geoff Wilson And one myth is that credit, and in margin above a benchmark rate, such the upside kick, but there is always an believe that investors are exposed to was quietly building a stake in Myer particular asset-backed securities, is a as the Australian bank bill swap rate) opportunity for the downside kick,’’ he risks for which they are not generally since early July following the arrival of toxic asset class. for investing in structured debt com- says. compensated,’’ he wrote in January new chief executive John King. In a recent presentation to investors pared to 2006. But Quin is adamant that investors 2008. On Friday, after seeing Myer’s full- in which the Financial Review was in In Australia, investors can earn 3.4 reaching for yield in credit, even with At the time that included some credit year results, Mr Wilson’s Wilson Asset the audience, Quin tried to convince times the spread from mortgage- Moneyball in mind, should not make the funds and mortgage trusts which were Management Group, including WAM them to focus more on the movie backed securities compared to 2006. mistake of believing these investments famously frozen in 2008 and ASX- Capital, WAM Global and WAM Lead- Moneyball than The Big Short when But can we trust those AAA and AA are a proxy for cash. In fact, if there’s one listed hybrids which tanked in value. ers, lifted their combined stake from thinking about this part of the credit credit ratings? The lesson of the crisis topic Quin feels strongly about it is ‘‘An ASX listing does not guarantee 4.9 per cent to 5.5 per cent. market. was that these assessments were liquidity risk. It remains dangerously liquidity,’’ he wrote. Mr Wilson took the unusual step of The Big Short did a fine job explain- deeply flawed. underestimated by credit investors with Those principles apply now more not only publicly declaring his support ing the role collateralised debt obliga- ‘‘People have less trust in rating short memories. than ever, but he says there’s evidence for Mr King, but indicating WAM was tions played in almost blowing up the houses so they are trying to gain your In January 2008, while he was still at bad habits are creeping back into the prepared to play an active role counter- financial system. trust by putting more protection into Credit Suisse, Quin penned a white industry and he’s remaining vigilant ing Premier’s campaign. ‘‘The new CEO ‘‘The Big Short is not great PR for these structures,’’ Quin says. paper titled Valuations and Liquidity in despite the apparent value on offer in John King is a proven retailer with a asset-backed securities,’’ Quin admit- That typically means the issuers of 2008. It was a response to what he was the asset class. Though he says struc- strong track record. We believe his ted in the presentation at the Portfolio these securities have to increase the tured credit is providing investors with strategy will deliver,’’ he said. Construction Strategies conference last amount of equity to absorb potential It was a great recession good value, there are some potential Far from being discouraged by month. losses to achieve those AAA or AA land mines that corporate debt Myer’s full-year results, Mr Wilson said But he says structured credit is now credit ratings. in the US, and the investors need to avoid. there were some encouraging signs more a Moneyball story. That is the ‘‘The rating agencies are trying to closest thing to the He’s a little bearish on high-yield cor- and concerns about the company’s other Michael Lewis book-turned-film rebuild their reputation. It’s a cost to porate bonds and the fund has been viability were fading. After falling that told the story about how a major the borrower but for the investor it’s a Great Depression, and shorting emerging market debt, which almost 5 per cent the day the results league baseball team used data to good place to be,’’ he says. credit did well he says offers little value to investors were released, Myer shares rose 37 per unearth undervalued talent. Quin’s overriding message is a dec- Richard Quin currently. cent on Thursday to a seven-month Credit, like baseball, is rich with data. ade after the financial crisis the disdain In the aftermath of the crisis, his high of 57¢ and gained another 4.4 per The data, he says, shows that struc- for apparently complex corporate debt fund was aggressively buying up Aus- cent to 59.5¢ on Friday. tured credit such as asset-backed remains. But so does the opportunity seeing among his competitors – they tralian bank hybrids issued overseas ‘‘There’s a realisation the new man- securities and collateralised debt obli- for sophisticated investors prepared to had large exposures to private loans that were trading as low as 30¢ in the agement team is already starting to gations have done the job. do the work, and for investors prepared but were a little slow to revalue them dollar. It was a tough job convincing achieve positive results and there could It is a little known fact but from 1994 to back them. after a dramatic change in conditions. investors that the Australian banks be significant upside in the company to 2013 there has not been a single In the context of an average Austra- He outlined that a well-constructed, were safe. Today he’s a little more cau- from here,’’ Mr Wilson said. default of AAA-rated or AA-rated CLOs. lian investor’s portfolio, an exposure to open-ended credit fund should obey tious on the local banks which he says ‘‘As a shareholder our interest is in The cumulative defaults of AAA and structured credit would provide a several basic principles: have market- are still highly geared. giving the new management team a AA-rated corporate bonds is higher at return of about 4 per cent versus a 2.5 to-market pricing to facilitate invest- ‘‘The banks are like an asset-backed stable environment to operate in.’’ 0.87 per cent and 1.13 per cent. per cent yield for the Australian fixed- ments and redemptions, be diversified security but you are investing right at Mr Wilson said Mr Lew’s campaign For the riskier component of CLOs, interest index. by issuer and industry (more so than an the bottom of the capital structure.’’ against Myer was a waste of sharehold- the BB-rated notes defaults over that Such an exposure would also avoid equity portfolio), invest in senior and However, what worries Quin the ers’ money and time. period have tallied 2.3 per cent, accord- equity market risk or interest rate risk secure exposures and invest in large most is the ‘‘high correlation’’ of the ‘‘I don’t know what [Solomon Lew] is ing to a Wells Fargo study, compared to (because interest paid is a floating rate markets with a broad mix of investors. investments among the average Aus- trying to achieve – it’s important he 16 per cent for corporate loans. so moves up as rates increase). ‘‘When credit portfolios are con- tralians. ‘‘Gearing up the wrong collat- gives the new management team time Yet investors can earn more than ‘‘Investors always want to be in equit- structed contrary to the principles of eral was a bad idea in 2008 and is still a to perform rather than throwing double the credit spread (the additional ies because there’s the opportunity for credit portfolio management theory we bad idea.’’ stones,’’ he said.

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