La Trobe Financial CEO, Chris Andrews, recently sat down with Sky News Australia business editor Ross Greenwood to share his insights on the current state of the economy, the measures La Trobe Financial use to manage risk and our latest offering, the La Trobe US Private Credit Fund.
Ross Greenwood:
Well, this week I spoke with La Trobe’s Chief Executive Chris Andrews, to find out who’s taking on these risks, borrowers and investors and why.
Chris Andrews:
Look, it’s a time where we’ve got cost of living pressures, we’ve got a productivity crunch, we’ve got growth slowing, and we’ve still got inflation stubbornly high. So for the economy generally and for a lot of investment strategies, it is a time of elevated risk, there’s no doubt about it.
Ross Greenwood:
So you have to manage that risk given the fact that you are lending to people who are taking on projects, people in small business. How do you manage risk during this cycle?
Chris Andrews:
The perennials of risk and risk management Ross, are always the same. It’s all about being very, very careful with the assets that you select. So what do we look for? We look for borrowers with really good credit quality. We look for really good quality security collateral that we can take to present to protect our investors’ position.
Ross Greenwood:
So in other words, we’re talking property there largely in many cases. Yeah,
Chris Andrews:
Property there. So most of our strategies are Australian real estate private credit. We’ve now launched also a US mid-market corporate credit strategy, but the fundamentals of credit are the same and they’re the same through the cycle. Quality borrowers, really good collateral protection.
Ross Greenwood:
Okay. So your owner is Brookfield. Brookfield of course, famous for having wanted to take over origin, done very big projects in the energy renewable space here in Australia, massive funds manager out of Canada. How does that help you expand this business beyond where it is right now?
Chris Andrews:
Well, what we want to do, Ross, is bring to Australian investors really high quality strategies. And when we partner with an organization like Brookfield, really the world’s at our feet. So what that gives us the opportunity to do is to select the best of the investment strategies around the world and bring them to Australian investors. So it’s an exciting time for us for sure.
Ross Greenwood:
Okay, so your headline fund right now pays about six and three quarter percent, but for you to generate that return for the investor, you’ve got to be lending out at higher rates than that . Roundabout where would the portfolio average in terms of its return to be able to generate six and three quarter percent for the investor?
Chris Andrews:
So on average, the portfolio, our management fees 1.8% Ross, so it’s no secret. You can gross that up. So on average, the portfolio is delivering about 8.5%. What we are doing is lending to a very broad cross section of borrowers, residential borrowers, commercial borrowers, and again, those same fundamental credit principles, high quality borrowers, lots of collateral protection because there’s 11,000 borrowers in that portfolio, Ross, and we know with that number of borrowers from time to time, some of them will experience difficulties. So we want to make sure we can protect our investor capital throughout.
Ross Greenwood:
Okay. So tell me right now the banks we can see are experiencing higher, bad, and doubtful debts just starting to come off all time record lows. Mind you, so what’s your experience given the fact that technically your risk should be higher, mainly because the price you are charging is also higher?
Chris Andrews:
Yeah, interestingly, arrears for us are actually coming down. They’re still, as the rest of Australia are seeing, I think the banks and other lenders are seeing Ross very low levels of arrears, albeit in some parts they are creeping up a little for us. Actually, arrears have been coming down pretty consistently over the last six months. Now, one thing you know about arrears is there’s always a cycle as unemployment goes up, lenders like Latrobe absolutely expect and prepare for the fact that there may be more arrears coming down the pipeline. But so far we’re seeing a really good strong performing borrower cohort.
Ross Greenwood:
So from the economy’s point of view, from the government’s point of view, and from even you and your lender’s point of view, it is really all about employment right now. That’s the thing that preserves your businesses. That’s the thing that preserves asset values. That’s one of the keys for Australia’s economy right now.
Chris Andrews:
Unemployment is fundamental, it’s fundamental to the economy, it’s fundamental to investment strategies all over the market. So the fact that we’ve got such low unemployment is from that perspective good. But economics is the art of trade-offs, Ross and such. Low unemployment does of course sometimes lead to inflation re pressures. So getting the balance between those factors is what’s critical.
Ross Greenwood:
Okay. So you have traditionally also been a lender to the property sector. Now what I’m thinking about here is not the big end of town. It’s going to be to people who are developing in the suburbs and so forth. The prime minister has a target of 1.2 million extra homes over the next five years. Are you a part of that solution?
Chris Andrews:
A hundred percent. Ross, we expect that for the next generation, our business will be providing capital to, if you like, that suburban infill development. We are not really a big fan of the large apartment towers, for example. That’s not a space where we typically play, but the middle ring, the suburban infill is a very active part of the market for us and we expect that will be a wonderful opportunity for our portfolios for the next 20 or 30 years at least.
Ross Greenwood:
So in other words, those people seeking credit for those types of deals where they’re trying to put two or three blocks together and put up a block of flats or some townhouses, whatever it might be, that’s pretty much your lending customer. We
Chris Andrews:
Will be very, very active in that part of the market. Yes, Ross? I mean, we’ve got very diversified portfolios. That’s one thing I should stress. That’s not the only bet we are taking over the next 25 or 30 years. But yeah, that will be a wonderful driver for portfolios and for our investors.
Ross Greenwood:
And we started talking about private equity, but while private equity is now known in taking a SX companies off, it’s also at the smaller end of town and to a certain extent, with the right business, with the right loan to value ratio, that’s what you’ll do.
Chris Andrews:
Yes. So we are now launching a US mid-market corporate credit strategy that’s loans to that real heart of America that really one of the most bipartisan policies in the US now is rebuilding middle America. So we think for Australian investors, that’s a wonderful investment thematic to be participating in. So yeah, we will be a really happy provider. Again, high quality, very careful asset selection. We’ve partnered with Morgan Stanley, one of the largest US financial institutions to deliver the right types of assets for our investors. And we are very excited about what that’ll bring over the next 10 and 15 years
Ross Greenwood:
It’s good to have you on the program today. Many thanks for your time.
