[0:02] David

Our guest today on the Clifford Chance Private Capital podcast is Frank Danielli, who's Head of Global Credit Solutions at MA Financial Group, 1 of Australia's leading alternative asset managers.

[0:15] David

Frank is responsible for MA Financial's Global Credit Solutions platform, which invests across asset, back lending, corporate debt and specialty credit verticals.

[0:26] David

He holds degrees in commerce and law from the University of Sydney and has a professional background in strategy, consulting and financial advisory, including restructuring.

[0:33] 
David

Frank, it's great to have you on the podcast.

[0:38] David

Thanks for joining today.

[0:40] David

To kick things off, could you tell us a little bit about MA Financial and your your roll bit?

[0:45] Frank

Thanks, David.

[0:45] Frank

Good to be here.

[0:46] Frank

So MA Financial Group, we're an alternative asset manager listed on the ASX.

[0:51] Frank

We manage about $15 billion of alternative assets but mainly focus on credit and real estate.

[0:58] Frank

In addition to that, we operate what we call a lending ecosystem, which is a very scaled platform associated with the world of lending and includes a financial infrastructure business, Finshaw with about $179 billion of managed loans on platform and our non bank lending franchise.

[1:15] Frank

Other includes our MA money business with now over $7 billion of loans.

[1:19] Frank

In addition to that, we also have where MA started the Moles Australia corporate advisory business.

[1:26] David

ou started your career at MA Financial in advisory, restructuring advisory principally and then you transitioned into the private credit business from there.

[1:36] David

Could you talk a bit about that?

[1:38] Frank

Yeah, so, well, in fact, so I started on what I call the dark side of credit.

[1:42] Frank

So I was, as you say, David, a restructuring investment banker.

[1:46] Frank

And what that means is advising Special Situations, hedge funds and companies as well as sometimes banks where there's in a, they're in a situation where there's a debt gone wrong.

[1:58] Frank

Could be a good company with a bad balance sheet.

[2:01] Frank

It could just be something that's changed in a particular industry.

[2:04] Frank

But the point is the balance sheet needs to be recapitalised in your job is to fix it.

[2:09] Frank

I know we, you know, we worked on many transactions coming together back in the day.

[2:14] Frank

And so having done that, especially in the post financial crisis era, we were really front and centre to changes that were happening in the credit markets generally.

[2:24] Frank

And so going back now about a decade, what we did was to build a credit asset management business to capitalize on what we saw with some major thematic changes around the way lending would be done going forward.

[2:40] Frank

So today I'm head of what we call a global credit solutions business, which is our private credit lending business.

[2:40] Frank

And it really built that up from the start.

[2:47] Frank

But it, but it, it all began from working on the other side, from being in the dark side of credit.

[2:53] Frank

Today, my job is never to be there again.

[2:55] Frank

It's it's the right loans that hopefully don't go through distress or work out, or at least that it's a very low chance they do.

[3:03] Frank

And when they do, it's a small problem.

[3:05] Frank

So it's using a lot of the learnings from workouts and applying them in the in, in the normal performing when the business.

[3:12] David

Can you talk a little bit about how you actually apply those learnings in your, in your new role?

[3:19] Frank

Yeah.

[3:20] Frank

So you know, our philosophy in private credit is about avoiding losers, not picking wins.

[3:26] Frank

Yeah.

[3:27] Frank

We're not trying to find the best loans out there in the world that that could ever be done.

[3:32] Frank

What we're trying to do is to have a very rigorous process to filter out things that don't work, that puts you in a in a problem situation, and to make sure that when we're riding loans and managing our portfolio that we put ourselves in a good position because inevitably the world changes.

[3:53] Frank

Sometimes the world goes through cycles, sometimes there's structural changes in markets, something.

[3:59] Frank

Sometimes low probability events actually just occur.

[4:02] Frank

And when they do, you want to make sure if you're a lender that you've got good security, good asset backing, other defensive features, so you can go in and get either all your money back ideally or as or as much as your money back as possible.

[4:13] Frank

So the learnings from a workout have really been foundational to how we approach the credit business and how we designed our process of lending to make sure that we can deliver on our goal, which is really just consistent income for recycles.

[4:30] Frank

Keeping people's capital as safe as we can and trying to deliver them a premium in fixed income compared to what they could get if they just invested in bonds, which is the traditional way in someone's portfolio.

[4:42] Frank

They get access to, to, to, to income and, and yield.

[4:48] David

And so there might be some bets that make sense as an equity investor, but don't make sense as a private credit investor.

[4:56] David

Is that, is that right?

[4:57] David

You're, you're essentially not looking for significant upside, you're looking to minimize your downside risk.

[5:05] Frank

Exactly

[5:05] Frank

In fact, in our business, when we make a loan, as you know, the, the we, we, we contractually agree with the borrower, they're going to pay us an interest rate and they're going to pay us back out of the principal on that loan on, on certain terms.

[5:17] Frank

That's all we get.

[5:19] Frank

If that company goes up 10X in value, I mean our loan perhaps goes down in risk, but other than that we don't get more.

[5:26] Frank

We just get what was agreed.

[5:28] Frank

And so we need to make sure that we are minimizing the chance we can lose on one loan.

[5:33] Frank

But more important than that in credit, whether you're doing bonds or private credit, the, IT really highlights something that's very important about the world of investing, which is it's not just the investments themselves.

[5:47] Frank

Most of the alpha actually comes from how you run your portfolio and how you manage risk.

[5:53] Frank

You got to make the right positions, the right loans in the 1st place.

[5:56] Frank

You have to have a really good portfolio construction set of principles and, and governance frameworks around that.

[6:02] Frank

And then you have to be very attuned to what's happening from a risk perspective in your portfolio and how that's evolved and changing through time, how you're managing it.

[6:12] Frank

That, that that really is a different way of thinking.

[6:15] Frank

If you compare it to say, an equities portfolio.

[6:18] Frank

You know, I know personally, I, you know, I'm personal portfolio, sometimes invest in equities or with equity fund managers.

[6:23] Frank

I in equities, you can have a concentrated portfolio of say 10 or 20 of the best companies in the world that can be able deliver long term compound growth.

[6:31] Frank

Yeah.

[6:32] Frank

And if one or two of them don't work out it, it sometimes doesn't matter because the the others can make up for that.

[6:37] Frank

It's not like that in credit unless you've got very good diversification, low correlation and and thought very carefully about how you're building your book.

[6:46] David

When you think about alpha or you're trying to achieve alpha, is there ever an equity component to it through warrants for example or are you, you surely lending?

[6:57] Frank

There's lots of different brands of private credit.

[7:00] Frank

The, the brand of private credit that we're very focused on today, it's about 97% of our AUM is in this form of private credit.

[7:07] Frank

We call it a fixed income replacement.

[7:09] Frank

And so that is again trying to deliver what people used to get in, in a bond portfolio.

[7:14] Frank

But where they might say, look for for one part, let's say I've got the old 6040 portfolio and the 40% is the defensive assets there to protect me.

[7:25] Frank

What we're saying is, look, how much of that 40% do you need daily liquidity from say bonds or how much of it can you trade off liquidity to get a premium.

[7:34] Frank

And what we're trying to do is deliver that premium with a with a consistent risk framework overall.

[7:42] Frank

So the alpha we're looking for is not trying to say we want all our loans to be this top quartile loans and deliver 15%.

[7:50] Frank

We need to get there with debt warrants this that we're trying to actually say what, what's the, the true risk characteristics of this position, this loan?

[8:00] Frank

What would it give me in the public markets if I'm doing this in a proprietary private sense, what premium do I need to to to earn to do that?

[8:10] Frank

And that premium is probably 200 or 250 basis points.

[8:13] Frank

So I'd do it 2.5 percentage bonds.

[8:15] Frank

Yeah, which in the world of fixed income, you know that that's actually a lot.

[8:19] Frank

So it's basically the difference between maybe earning 5 or 6% in bonds and earning 8 or today in these interest rate environment around an 88 or 9% return.

[8:29] David

Yeah, I think as an investor, I like that because I know what it is that I'm investing in.

[8:36] David

I know that that 8% is referable to an actual claimable debt rather than it being supplemented by a a riskier product.

[8:44] David

Is that feedback that you hear from your investors?

[8:47] Frank

We do.

[8:48] Frank

And on the point of knowing the, the, the risk profile of what's in the TIN, that's a, a pretty important principle that's evolving in this space as well, which is that, you know, in private credit, the, the loans aren't traded out there in the market.

[9:06] Frank

They are generally proprietary oriented loans.

[9:10] Frank

And so from it, yeah, from a fund manager perspective, giving your investors good disclosure and transparency, not just about what's in your portfolio, that's a very basic level of transparency.

[9:22] Frank

But but the risk characteristics of it, where the risk adjuster returns actually coming from, as well as the governance environment in which we're actually running the money.

[9:32] Frank

How are you doing what you're doing?

[9:33] Frank

Where are these returns are really coming from?

[9:35] Frank

That's becoming more and more important.

[9:37] Frank

And we're and we're certainly seeing investors demand more of that, which is a great thing for the industry and we're very much pushing for that.

[9:44] David

OK, MA financials grown a lot and you're part of that business has grown a lot.

[9:50] David

How how do you how do you manage risk across a much larger pool of assets?

[9:56] Frank

Yes, that is right.

[9:58] Frank

And that's a general problem in credit.

[10:00] Frank

The the thing about credit is that it's actually really easy to grow.

[10:04] Frank

If you drop your underwriting standards and you lend on a loose basis, borrowers will find you.

[10:11] Frank

So you can put money out and put it to work.

[10:13] Frank

The the key thing is not putting money to work.

[10:16] Frank

The key thing is putting money to work on good terms, where you're gonna get your money back and you're gonna get your interest along the way.

[10:22] Frank

Yeah, high probability.

[10:23] Frank

That part's really hard.

[10:25] Frank

It's hard on an isolated basis for one loan.

[10:28] Frank

It's certainly hard as you're growing.

[10:30] Frank

What we think you need to do to do this well is you need to have the right universe of addressable opportunities so that you can be very selective.

[10:43] Frank

Now that means you can't just do one thing, you can't be what we call monoline.

[10:48] Frank

We lend across our platform into asset backed lending verticals which is basically large portfolios of traditional and speciality loans.

[10:58] Frank

A direct asset lending is where we're say secured lender secured by physical assets and to corporate loans both sponsor and non sponsor back.

[11:07] Frank

A lot of managers would just do one very narrow thing.

[11:10] Frank

And the moral hazard of that is that at some point in the cycle, it's not optimal to put your next loan in that sector.

[11:19] Frank

You need to pivot.

[11:20] Frank

But if you're only running a fund that just does one thing, are you really going to call up your clients and say, you know what, they would have have the money back or don't you know, it's, it's best you go elsewhere?

[11:29] Frank

Of course, you're not going to do it.

[11:30] Frank

You're in the business of charging fees on capital.

[11:32] Frank

Yeah.

[11:33] Frank

So we think you need this really a wide ambit.

[11:34] Frank

You need a ecosystem, an ecosystem of proprietary origination where you're seeing lots and lots of deal flow and we've invested very heavily in building that.

[11:44] Frank

That's why the arts that I said at MA, not only do we have the funds management business with a large experienced team, lots of relationships in the market, but we also benefit from the broader MA platform, our non bank lending platforms, our Finch or Ecosis infrastructure, which as I said, has over $180 billion of managed loans on the platform.

[12:06] Frank

A lot of data and intelligence about the market touches 350,000 customers.

[12:11] Frank

And we do these in addition to that strategic partnerships with banks and non banks to give us exclusive access to deal flow.

[12:17] Frank

So we're, we're, we built this funnel.

[12:19] Frank

It's been a, a, a long journey, but the funnel allows us to see 10s of billions of dollars a year of lending opportunities.

[12:25] Frank

And then we can filter that out to maybe 5 to 10% of that opportunity set that we actually want to do.

[12:31] Frank

And the key as we are growing is making sure you're investing in that source of origination.

[12:38] Frank

You still need to have good credit process for when the loans come in to filter them properly.

[12:43] Frank

And I think the other thing you really need to do to demonstrate to your clients that you're operating with the right set of standards is that you need to be aligned.

[12:53] Frank

The way we're aligned is that not only have we invested capital in building that ecosystem, we actually significant investors in the funds ourselves.

[13:02] Frank

Today in MA we have I think the figures about $240 million invested by the firm and staff, you know, credit funds along our side, our clients.

[13:10] Frank

And that ethos of being aligned being that we call it Co creative value, Co investing with clients.

[13:17] Frank

It's, it's not just a the firm's balance sheet and a few senior people, it's actually widespread.

[13:21] Frank

We have structures to to, to encourage people to be participating in these firms.

[13:26] Frank

So when they're making their day-to-day decisions, they're they're doing it not only as a manager, but as an investor too.

[13:33] David

When you're constructing a, say, a wholesale fund, would the credit within that fund be referable to the different verticals that you spoke about?

[13:45] David

So there might be some real estate credits and corporate loans, but or do you have separate funds for different kinds of debt?

[13:55] Frank

For our what we call our flags, it is both for our flagship vehicles and some of our funds are, are public.

[14:00] Frank

It's easy to talk about.

[14:01] Frank

We have some listed funds actually this is on the ASX, which are easy to talk about because they're out there.

[14:06] Frank

MA one and MA 2, you know these vehicles, these flagship funds, they have lots of things within them.

[14:10] Frank

MA one is across all those verticals of lending.

[14:13] Frank

It has today 245 positions within it about it's over $7 billion in terms of the underlying portfolio there.

[14:22] Frank

So it's across lots of different things.

[14:25] Frank

And the idea of that is that it's it's almost like a one stop shop for people to be able to say, OK, here's here's a participation of broad based portfolio.

[14:35] Frank

I think for most investors, honestly, whether it was an institutional investor, it's very a high net worth of family office wholesale investor or even a retail investor by a wealth platform or something like that.

[14:47] Frank

I actually think that that that model is the better model because it really leans into this idea that private credit is not trying to get equity returns through the debt or something very nuanced and crazy.

[14:59] Frank

It's actually a fixed income replacement product and that's what fixed income is.

[15:04] Frank

You know, you wouldn't invest in a bond fund that just said I only buy the bonds of CBA or it was I so they would not that CBA bonds are bad.

[15:12] Frank

You know, it's one of the best capitalized banks in the world, but you want diversification for it.

[15:16] Frank

It's not the, it's a growth, you know, do that in your equity portfolio.

[15:20] Frank

That said, you know, for the, for certain institutional clients or very sophisticated clients, we, we, we, then we, we sometimes do offer those more bespoke strategies.

[15:31] Frank

But for the vast majority of clients, I actually think the board based strategy is better.

[15:36] David

And when you're making a real estate loan compared to say a corporate loan, the, the process of assessing and pricing risk is a quite a different exercise.

[15:46] David

And do you have specialists in those different verticals that price net risk?

[15:51] Frank

We do in, in each vertical you need specialists who are across the intricacies of the structures, the underlying asset classes of of course the principles of credit don't change that much.

[16:03] Frank

I think about them very much through the analogy of your checklist and the checklists are really, what are all the things that we've observed that correlate with credit going wrong and are they in place?

[16:18] Frank

So we now checklist, we have things that come up as amber flags, red flags and, and bright lines.

[16:23] Frank

The bright lines are we just can't do them.

[16:25] Frank

They, we don't do the bright line things, but sometimes a, a red or an amber flag, depending on the circumstance, you might sort of a deal, but it's a signifier of risk.

[16:32] David

The point of the whole of the sorry, is that about the structure of the loan or the nature of the borrower or, or can it be about both?

[16:40] Frank

It's about both those things.

[16:41] Frank

It's really about three things.

[16:42] Frank

So we think about it through the lens of credit risk, structure risk and fraud risk.

[16:47] Frank

Credit risk is to be managed.

[16:49] Frank

It's the qualitative and quantitative factors of credit.

[16:52] Frank

What's the basically the probability you get paid back and the the downside risk if you if you don't, the structure is there to be controlled.

[17:02] Frank

That is to say, the structure of the loan should give you proper exposure of the credit.

[17:07] Frank

You know, if it's got holes in it, you might have that structure pulled apart and even though the credit performs, you don't really get the benefit.

[17:13] Frank

That's not a great scenario.

[17:14] Frank

So the structure's there to protect you.

[17:15] Frank

It's also there to make sure that you've got the right leverage vis a vis the borrower.

[17:20] Frank

That is, you're the lender.

[17:22] Frank

And the principles of a capital structure is the lender has a capped return their their interest rate, but they also get their money first.

[17:31] Frank

You know, equities loses first and you need to make sure those principles are on base.

[17:36] Frank

The final risk of fraud, risk fraud is a spectrum.

[17:39] Frank

Fraud is a spectrum of egregious behaviour, You know, someone actually making up financials or making up assets.

[17:48] Frank

And unfortunately out there in the world that does happen.

[17:50] Frank

There's there's a couple of high profile examples that occurred last year globally where some very brand name banks and institutions got exposed.

[17:59] Frank

But the the spectrum goes from that egregious, which you simply must avoid and look for the red flags to avoid them, to misrepresentation, overstating earnings, representing things to be rosier than they actually are, things like that.

[18:12] Frank

So you've got to look for those things.

[18:13] Frank

So our our checklist processes are about making sure that we're, we're in each of those elements of risk that we're, we're not doing things that would put us in a really difficult position that we should have avoided.

[18:28] David

How do you those checklists must have been built up over time.

[18:32] David

How how do you capture the learnings within an organization that's growing so quickly?

[18:38] Frank

Yeah, they they've been built up over time, not only through the work we've done in the credit business itself, but also through the experience of the team members.

[18:47] Frank

Beyond that, we actually just spend a lot of time studying examples of credit gone wrong, even when they don't relate to us.

[18:55] Frank

If you would go and ask one of the associates at, at MA in our credit team and you said what was the first AAA securitization to default?

[19:03] Frank

I I hope they'd be able to tell you it was healing Myers in 2000.

[19:07] Frank

And what happened was XYZ And the check we have for that is this.

[19:12] Frank

And that's because we, we talk about these things.

[19:14] Frank

We, we often talk about the, the lessons that we learned in some of the restructures that we did.

[19:22] Frank

You know what, what actually went wrong with bought long gear?

[19:26] Frank

You know, what was wrong with that capital structure feel about Centro Properties Group?

[19:29] Frank

What were the learnings from this and how can we apply that in other areas?

[19:34] Frank

And so it, it, it has to evolve.

[19:36] Frank

It has to evolve for what you see out there in the market as well.

[19:40] Frank

You know, today, obviously one of the big risks is around AI disruption.

[19:46] Frank

And so that was something that 10 years ago, we started to create business that wasn't on, we, we weren't thinking about it anyway.

[19:53] Frank

And that has evolved.

[19:54] Frank

So I'm sure in another five years, there'll be many more things we add to the chat quiz.

[19:59] David

That concludes part one of our conversation with Frank Danieli of MA Financial.

[20:05] David

Please join us next time as we dive into the remainder of our conversation with Frank.