Company Interview / From plain vanilla to more esoteric structures

Key points:

AltX Group launches new investor-centric fund, Alto Credit FundAlto Credit Fund offers six different investment options, catering to various risk levels and liquidity preferencesPrivate debt sector continues to grow, providing a simple and secure option for investors in Australia

Nick Raphaely, co-chief executive of AltX Group, walks us through their newly launched investment fund – Alto Credit Fund. Nick highlights that the fund adopts an 'investor centric' structure, with the aim of simplifying accessibility and administration processes whilst offering investors a variety of choices. He goes on to explain that AltX Group operates as an integrated alternative asset manager, with a focus on private real estate credit. This enables them to originate loan transactions which are secure against mortgages for investors.

The Alto Credit Fund, according to Nick, is the latest evolution of the Group's fund programme. Acknowledging a broad spectrum of investor risk levels and liquidity preferences, the fund offers six different options or share classes. These range from the most conservative investments with returns of 6-7% and monthly liquidity, to more aggressive options that involve more exotic and esoteric structures such as warehouses and securitizations, offering equity-like returns.

Nick also comments on the growth in the private debt sector in Australia and its increase in popularity with investors, from retail level to large institutions. He attributes this to the simplicity and performance of this asset class and the security it offers for investors. Looking forward to the next financial year, Nick predicts the continued growth of this asset class, with increasing choice and longer track records for investors to consider. However, he also emphasises the necessity for diligence amidst potential changes in the property market.

Full unedited transcript below:

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A new investment fund has been launched, the Alto Credit Fund, which adopts what they call an investor centric fund structure, aiming to simplify access, streamline administration and provide more choice for investors. So let's get some more detail. Nick Raphael is the co-chief executive of alt X Group. He joins us now. Nick, welcome. Thanks, Andrew. Nice to be here. All right. Well tell us more about the credit fund. Sure. So I might just back up just for a moment and just recap the alt text business because the credit feature fits into that. So so alt text is an integrated alternative asset manager focused on private real estate credit. We describe ourselves as integrated in the sense that on the one side of the business we originate loan transactions. So we are lending money to borrowers secure against mortgages in transactions which fits slightly outside the bank's criteria on the one side and on the other side through our wealth management business, which includes the credit fund, which we'll be talking about, we we raise and deploy the capital into the opportunities. So it's an end to end integrated business. We

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originate the transactions, we sourced the capital and we put the two together. All right. So you've launched this new credit fund. Why. And what does it offer. Sure. So so we have a background in the business going back to 2012. And we have been deploying our own and our investors capital into these types of deals for for a decade plus. We've had different funds in the business over the years and our fund programme has evolved as a business. Andrew, we originate between 1 billion and 1 billion and a half of transactions per year, and there are various types and nature. So, for example, they'd be in different geographies with different types of borrowers, different security types, different lengths, different risks, etc.. So we see a lot of traffic through the door, a lot of different opportunities. So the way we thought about it is we have all these deals. We have a base of investors. How do we package up the deals into various easy to access options that investors can then tick the box and make the investment. So some investors, for example, might prefer a lower risk type

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investment for a lower return. Other investors might be wanting to push the envelope a bit more. As a business, we see enough traffic to be able to offer a range of different opportunities so investors can really mix and match. So we think that certainty would be one of the leaders in the market in terms of the breadth that we can offer to investors. And our credit fund actually has six different offerings within it which cater for different investor requirements. All right. Just before we get into the six. So essentially what you're doing then is you're offering diversification. Yes. And at the same time offering that portfolio risk management. Absolutely. Those six then what have you split them into. Okay. So think about it like this. Right. You have private real estate credit. Investors view it differently. Some investors like to view it as what we call a cash plus alternative. So think about that is as what you would earn on a term deposit plus a little bit more for the extra risk. So returns in the range of 6 to 7% on the conservative end. On the more aggressive end, you have investors that are looking for an equity like return,

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but with exposure to hard assets secured by real estate debt. So that's the more aggressive end. So we have a structure which whether you want to play this asset class conservatively and with high liquidity at the lower end, or to stretch it a bit more at the more aggressive end, we have different options for you. All right, depending on your risk appetite. Absolutely. And your liquidity preferences. So you know, you pay or you earn a premium as an investor for giving up some liquidity. So our our highest paying share class, you need to have your funds locked up for longer than the lowest paying share class where you can access your capital on a monthly basis. All right. Can you just walk us through those six? Sure. So so on the most conservative end returns in the range of 6 to 7%. And that's really access to vanilla mortgage deals. I think what's really attractive about that share class is that it offers investors monthly liquidity. So, you know, although the underlying your your mortgages are relatively illiquid, we have a mechanism within the business which enables us to deliver that to

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investors. It's been a really popular, really interesting for investors because they like the asset class and the ability to gain access to liquidity. Then in the middle, we have a couple of share classes which which give it access to generally plain vanilla first mortgage transactions. Um, some do only first mortgage, some do a bit of first and a bit of second. Those are classes B, C and D, um or two, three and four. In in the structure, um

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share class number five focuses only on construction. So for investors who only want a construction option, that's loans that fund the construction of houses, townhouses, small apartment blocks, etc. there's that option. And then structured credit right at the end. So that would be things a little bit more exotic and esoteric. Things like, you know, structures, structured credit pieces in warehouses and securitizations etc.. So just think about it. You know, if you like the asset class and you have confidence in the manager, whether you want a lower return with greater liquidity or a higher return, and you prepare to give up some of liquidity. The benefits. We have various options for you. How would you describe the growth you've seen in private debt and the appetite there? You know, it's interesting. When we started the business back in 2012, we were it was kind of a post GFC environment. The landscape was reforming. It was very much pioneering. So as much as we were learning it ourselves, we had to educate it to investors. Today it's it's a multi-billion dollar investment class in Australia, very, very widely understood by

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retail investors all the way through to the biggest institutions. There's been a number of recent M&A transactions, which I think point to what acquirers are seeing as the future for the asset class. And I think most importantly and kind of we see it in some of the stuff that relates to our business.

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Companies that started early now have long track record. So we can point to a ten year plus track record in our business, which makes businesses like ours investable by institutions, which there wouldn't have been two, 3 or 4 years into the game. So it's been an amazing journey to be part of and to have participated in. But I think really it's kind of the asset class has come of age now, and we're at a point where investors from, you know, the biggest institutions in the world all the way down to retail investors are looking at this asset class. And if I can say, Andrew, I think what makes it the most interesting and most appealing is how simple it is. I think through the GFC, people got bamboozled and confused by, you know, investments they made in things that they never really understood this, this investment or this asset class, as we describe it to investors, you get to be the bank in its very simplest form. So you make a loan to a borrower, you have the security of a mortgage, you get a guarantee from the borrower. Borrower pays monthly interest and you get your capital back at the end. You don't need to be a financial person to understand it. I think that is what, as well as the performance obviously is what's made it

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particularly attractive. So, Nick, you're talking about offering there as far as institutional investors down to the retail investors, who are you actually catering for there? So we've evolved this fund in particular targets wholesale investors. So that's as defined by the course acts. There's an income and an asset threshold to be able to invest in our products. That's what our our credit fund caters for. We also have an individual deal program. We investors can actually select a particular the particular deal, Andrew, that they want to invest in, whether it's the mortgage in Bondi or in Hawthorn or wherever it may be, they can actually select the investment on the wholesale side. We also have an institutional funding program which complements what we do on the wealth management side for the investors. As an aside, why that's powerful for our business is the the the more diverse the funding buckets that we have, the more relevant we can be to borrowers. So we can go to the market, say whether you want a 36 month loan or a 30 year loan, all has the solution for you. Because in the background, whether it's through the

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investors or through the institutional funding, we have the programs to be able to match the capital. So what can investors look forward to in the new financial year, particularly given the current financial and economic background? Look, I think, you know, I could talk probably more relevant to our asset class. I think it will continue to to to grow and evolve. I think there's more players to choose from, which always gives investors choice. I think there's longer track records so investors can can discern who they want to price capital with. So I think from an investor point of view, I think there'll be a lot more choice. Um, I think from an operator point of view, obviously, we seem to be coming to the end of a series of of almost a dozen rate rises. So we've got to watch very carefully how the property market responds, because that's that's the assets which support the loans. So we want to make sure we don't get caught. And we're very considerate and diligent in how we're making how we're making our loans. But I think at the heart of it, there's there's a strong future, certainly over the next 12 to 24 months for the asset class. And we're seeing it, you know, in all the investor categories. We're talking to Andrew, whether it's institutional wholesale or

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retail. Nick, thanks for joining us from Altus. Thank you very much.