← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Brendan O'Connor – Alpha Opportunities in Australia at Regal Partners (EP.485)
00:57:20
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- [00:00]
Brendan O'Connor
Australia uniquely provides a very idiosyncratic return series that is diversifying to what you'd find elsewhere. If you have a look at the Australian marketplace, financials and materials materials think of resource Companies represent about 55% of the market. That's very different to many other equity markets around the world. The nature of the Australian economy which probably the 15th largest economy in the world, we sit just below South Korea. From an economy size we've got half the population of South Korea as an example. So our GDP per capita is double theirs. There is market structure that means that we're being able to generate alpha from a section of the market that an offshore investor perhaps just is less familiar with. Part of the answer to that is being able to explain some unique structural elements to the Australian market. Australia is an interesting miracle in this regard. Some of those micro and macroeconomic reforms that the government introduced in the late 1980s translated into the introduction of a superannuation guarantee levy in 1992. It first started where 3% of everyone's salary was put aside as pension savings. That rate is now 12% of everyone's salaries. There are three key things that have shaped the pension system in Australia. There is a multi decade trend to internalize asset management capability rather than using third party providers. There's an acceleration of a pre existing trend around passive and ETF fund investing. Obviously that's been a good trade for them but it misses out on some of the positive aspects of active management. It also means there's been a slower adoption to alternative investment strategies which is really Regal's sweet spot. Regal's edge in providing investors not just in Australia but around the world access to the best of Australia's alternative investment strategies inherently or necessarily means that we need to be originating those opportunities foreign.
- [02:21]
Ted Seides
I'm Ted Seides and this is Capital Allocators. My guest on today's show is Brendan o', Connor, the CEO of Regal Partners, a premier alternatives manager in Australia with 21 billion Aussie dollars of funds under management across hedge funds, credit and royalties, real and natural assets and growth equities. Brendan joined the firm in 20002016 and has helped lead its expansion from a billion Aussie dollar long short specialist to a publicly listed multi strategy alternatives firm. Today our conversation traces Regal's evolution from its origins as a founder led hedge fund into an integrated multi strategy platform. We discuss the unique economic and structural dynamics of the Australian market and how Regal leverages its deep sector and cross asset expertise to hunt for alpha. We cover Regal's four step investment analysis, risk process, the integration of investment teams, and perspectives on the exciting future of Australian markets. Before we get going, have you noticed that airline travel takes a lot longer these days? Security lines go on as far as the eye can see, and that's even with precheck Clear or the precheck clear combo, and flights seem to get delayed regularly for no apparent reason. Well, the next time you have even an inkling of a delay, and long before you have to board, deboard, board again and sit on the tarmac for an hour before you leave, might I suggest you fill that idle time with successive episodes of Capital Allocators? By the time your plane leaves, you'll have gotten through at least two or three amazing episodes and probably made friends with your equally frustrated neighbor in the seat next to you, who may not have had the benefit of listening until.
- [04:14]
You tell them to make a new.
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Friend productively pass the time and find your way around the world smarter than you started. Thanks for spreading the word.
- [04:24]
Please enjoy my conversation with Brendan o'.
- [04:27]
Brendan O'Connor
Connor.
- [04:29]
Ted Seides
Brendan, thanks so much for doing this.
- [04:31]
Brendan O'Connor
Thanks very much Ted. Great to be here.
- [04:33]
Ted Seides
Why don't you take me back to your upbringing and the path that led you into this business?
- [04:39]
Brendan O'Connor
I was born in regional Australia in a little town called Lithgow, the other side of the Blue Mountains, the youngest of seven children. Mum stayed home to raise the kids while dad went to work. Dad worked for a government agency that helped families and children that came from broken homes, domestic violence, sort of truancy. We moved around New South Wales, a state in the east coast of Australia, and we ended up in Grafton. I spent my formative childhood up there, having an idyllic childhood. We didn't have much money, but that didn't matter when you were riding around on your bike exploring the quiet streets, exploring the local river, the local beaches. I had a lot of fun. By the time I turned 10, my eldest siblings were going to university down in Sydney. We relocated down to Sydney and we ended up in the western suburbs of Sydney at a place called Toongabbie. That was a big culture shock, but it was there when I finished high school and worked part time jobs through university. I started off at KPMG as my first job. I initially wanted to be an engineer when I was at school, but very much driven by desire to get a job and get a pay packet in my hands. I thought a career in accounting and finance was a surer way to get a job straight out of university. So I started off at KPMG in audit. I really enjoyed My time, because it was like a big business school, I found that it helped round out a lot of the theoretical aspects you learn at university. As an auditor, you go into a range of different businesses. You ultimately get to learn how they work, from oil and gas businesses to manufacturers to banks to asset managers. I've got a deep understanding of how each business worked. I guess the other part of why I enjoyed my time there, I met my wife. We've now been married for 28 years, and we have six children of our own. So it was a very important phase in my life.
- [06:21]
Ted Seides
So before we dive into that part of the career, I'd be remiss if I didn't ask you about growing up with seven kids in your family.
- [06:28]
Brendan O'Connor
It's one of those questions where you don't know what the alternative is, but you piece it together as you grow up. So I had five sisters and one brother. My brother is eight years older than me, and I desperately wanted to have a closer relationship with my brother. Growing up when someone's 8 and then they're 16, that's a big age gap. I used to marvel at those families that would catch up with and they may have one child and they would always come around to our place, have a play in the backyard, and they were just blown away by the size. It would seem like every afternoon would catch up. It was like a party for them where it was just a regular day for me.
- [07:04]
Ted Seides
How about your father doing the work that he did?
- [07:07]
Brendan O'Connor
I found that in the country in particular, maybe it was my age, I didn't notice so much the social aspect of what was occurring. The older I got, and particularly as we moved to Sydney, Sydney being a big city with edgier situations, I could start to see it took a toll on some of the things that he was dealing with that created a degree of stress, but he was pretty good at being able to switch that off and turn around and just be a loving father to the seven children, which is great.
- [07:36]
Ted Seides
And what was it about growing up with seven kids that led you to want to have six?
- [07:42]
Brendan O'Connor
I jokingly say that my wife and I are very compatible and slow learners. We weren't striving for a particular number, it just happened that way. And you can't imagine life any differently. My eldest is 25, my youngest is 16. Four of them in the workforce, one at university and one at school.
- [07:59]
Ted Seides
Take me back through that work experience at KPMG and where that set you out from there.
- [08:07]
Brendan O'Connor
I loved kpmg. I didn't have high conviction as to where I wanted to spend my time from career, I was just really interested in being in the City, working with people of a similar age to myself. There's a big cohort of graduates that have came on through and there's a career path where I could go many different places. So I did my chartered accounting exam and spent my time learning about businesses and understanding the business world. I'd always been curious about businesses, how they operated, and I'd had a admiration for entrepreneurs, people who have actually taken a risk and set up a business themselves, as opposed to administering a business that someone had built many generations before. Perhaps that's the next thread as to where I ultimately moved them, because the more I became interested in the world of business, the more I started to read more about capital markets and particularly capital flows. I looked at Australia and Australia had made some very significant micro and macroeconomic reforms through the 1980s that ultimately spurned a great evolution of the finance industry. In particular through the 90s, the big four banks, it's a bit of an oligopoly, a little bit like the Canadian banking system. They dominated the marketplace. I became increasingly curious about banks and despite a very idiosyncratic event in the early 1990s where we had a bit of a banking crisis, they recovered from that quite well. And by the late 90s 2000s, the big four banks were the dominant part of the Australian financial system. Interestingly, credit growth in Australia was growing at 10% per annum and hadn't been less than 10% for many, many years. And so you had this huge growth in leverage coming into the household sector and it drove the profits of the banks.
- [09:54]
Ted Seides
Where did that take you in terms of the roles that you played? As you got interested in what was happening in the banking system, I became.
- [10:01]
Brendan O'Connor
Increasingly curious about them and I applied for a job at Westpac, one of the big four banks, Australia's oldest bank. The role I went into was called Group Controller. It had the potential to be quite a dry role because its title ultimately meant that you were head of accounting policy. But it gave me great insights to the operations of one of Australia's largest companies. It had over 150 years of history at that stage and there had been some great leaders. The leader of Westpac at the time was a guy called David Morgan. They had survived that banking crisis in the early 1990s when there were hedge funds on the register, came through and it was growing extremely well. I took that as a great learning experience. In a five year period, we sold a very profitable but Low growth finance business called AGC to GE Capital. That was an interesting experience negotiating with a bunch of Americans because that was the peak of their power. We bought one of the asset managers of Bankers Trust. The old Bankers Trust investment bank had a large funds management business in Australia and I finished my time there on the executive committee of the financial markets team of Westpac in 2006. With the world awash with liquidity, I clearly had no idea as to what was about to happen and credit spreads at all time lows. I was thinking that these asset managers I was curious about and I was approached to join a company called Challenger Limited which was a large life insurer selling annuities that had a funds management business as well. So I jumped at the chance to move out of the banking industry into a very fast growing asset management industry in Australia. My reference to little did I know what was about to happen because obviously the global financial crisis bit quite hard in Australia. That was a wild ride in the early days of Challenger.
- [11:56]
Ted Seides
And what did you end up doing?
- [11:58]
Brendan O'Connor
I spent the bulk of my time there as CFO for the asset management business. So the asset management business covered a prudentially regulated life insurance business. On one side it had assets that it invested in across real estate, equities, fixed income infrastructure, private equity. And on the liability side were fixed rate fixed term annuities to Australian retirees. The simple business was that the better the return you could make on each of those assets given you had a fixed rate. On the liability side that was just profit coming to the shareholders. The investment committee process, the asset allocation. Then on the other side of the business was a traditional fiduciary funds management business that allowed portfolio managers to run their own investment strategy. But backed by Challenger Limited I cut my teeth from an asset management perspective.
- [12:49]
Ted Seides
Through that time having seen that model so long ago. And it's a model certainly in the US that's taken over some of the largest public asset managers. Curious what you see as the strengths and weaknesses of the insurance company with fixed annuities managing assets.
- [13:08]
Brendan O'Connor
It's a oil and water culture in many respects. The life insurer is a ruthless IRR investor. It has a bias to its IRR to cash paying on a regular basis because it's trying to match itself cash flows as much as its assets and liabilities. But ultimately it is a investor answer only to itself. A asset management business is built on trust and you're acting in the client's best interest at all times. Your client in this regard being the investor in the Fund is very different to the investment you might make if it's a loan to a corporate, for example. The better analogy might be when I was at a bank, all you cared about was getting your money back on that loan. Today it's about making sure the investor in that fund that may have provided that loan has the right experience. What I mean by that is it has an investment experience that is consistent with the offer document or the fundraising. It was very much a fiduciary experience. Is very different to the bank or life insurance balance sheet experience.
- [14:17]
Ted Seides
How did you end up coming over.
- [14:18]
Brendan O'Connor
To regal after 10 years at Challenger? I was looking for my next challenge, no pun intended. And I met Phil King. Phil is one of the founders of Regal Funds Management. He started the business in 2004 with his brother Andrew. Phil was always the chief investment officer. Andrew on backoffs and distribution. Andrew had retired from the business in early 16. Phil wasn't ready to hang up the boots and turn it into a family office. He wanted to build a business. He was looking for a leader to help him take the business through its next phase of growth. I immediately saw the potential in being able to harness what was an incredible track record of long, short equity investing with a robust technology platform that they'd built to be able to turn that into a diversified alternatives manager that offered a range of investment strategies. That was the potential and I jumped at that.
- [15:17]
Ted Seides
The history is very heavily focused on the Australian market and would love to hear the basic case for why invest in Australia.
- [15:28]
Brendan O'Connor
Australia uniquely provides a very idiosyncratic return series that is diversifying to what you'd find elsewhere. If you have a look at the Australian marketplace, financials and materials. Materials think of resource Companies represent about 55% of the market. That's very different to many other equity markets around the world. The nature of the Australian economy. We're probably the 15th largest economy in the world. We sit just below South Korea. From an economy size, we've got half the population of South Korea as an example. So a GDP per capita is double theirs. Just to sort of frame it, as I said, is dominated by some industries that are unique to Australia. And the best example of that is resources. Resources today represents about 25% of the equity market. If you go back to the late 60s and 70s, resources as a percentage of the Australian market was as much as 65%. I think that is a sign of things to come because from a world perspective, there are perhaps many parallels between the environment we're in today from a commodity and resource perspective. As what occurred in the late 60s and 70s. We're in a world with high for longer sticky inflation. Certainly a breakdown of the free trade agreements that were happening so easily previously. There's a lot of re onshoring. Unfortunately we've seen the best of the geopolitical environment from a security perspective. That all points to being a more inflationary, higher cost security environment, which is very bullish resources. I think you'll find that a offshore investor that doesn't have exposure to Australia can do so in a triple a rated country. Democratic and one of rule of law. Very strong laws in respect of first registered mortgage protections for the lender, very low corruption. It's a safe environment for them to deploy capital that's giving them a return series. Probably very diversifying to the return series they get in the us, Canada, Europe or elsewhere. Further, the big companies in Australia, the big four banks, Telstra, the big telecommunications company, exclude BHP and Rio. Those big companies are ex growth. They are growing very slowly with maybe 2 to 3% EPS growth over the years ahead. The real growth in the Australian marketplace comes from that small and mid cap sector. There is market structure that means that we're being able to generate alpha from a section of the market that an offshore investor perhaps just is less familiar with. Part of the answer to that is being able to explain some unique structural elements to the Australian market. Australia is an interesting miracle in this regard. Some of those micro and macroeconomic reforms that the government introduced in the late 1980s translated into the introduction of a superannuation guarantee levy in 1992. It first started where 3% of everyone's salary was put aside as pension savings. That rate is now 12% of everyone's salaries. Within a 36 year period, Australia has accumulated $4 trillion of superannuation savings, meaning it's the fourth largest pension system in the world. Yet our population is something like the 50th largest in the world. That $4 trillion, if it was a country, it would be equivalent to something like Italy in terms of gdp. You look at that, you say what an enormous amount of savings for that population. But because it's its pension system roots, it doesn't have the same construct as let's say the asset management industry in the US or Europe. There are three key things that have shaped the pension system in Australia. There is a multi decade trend to internalize asset management capability rather than using third party providers. There's an acceleration of a pre existing trend around passive and ETF fund investing. Obviously that's been a good trade for them. But it misses out on some of the positive aspects of active management. It also means there's been a slower adoption to alternative investment strategies, which is really Regal's sweet spot.
- [20:00]
Ted Seides
Given the resource intensity of the economy and sectors, how do you think about the importance of the asset base in driving investment returns over the next several years?
- [20:13]
Brendan O'Connor
Australia has been blessed with an abundance of resources and minerals, including critical minerals. The world needs energy, more so today than any other time in its past. Energy is the critical input to the large AI thematic that is driving a huge amount of capital expenditures across the world. Australia is really well placed to be a beneficiary riding that wave of increased spending. You've seen some of that in terms of some of the deals announced between Australia and the US in terms of getting access to rare critical minerals. With our resource capabilities, the technical capability between mining engineers, geologists, I'd say we would be the first call on the street as being the Australian experts to understand which companies are going to be the winners from a resource perspective. We have been very constructive on the resource sector for a long period of time now because the domestic investors have largely been passive and the resource sector takes some real technical expertise. We find it's a area that we can add value that others struggle to identify value in. And that has been a self fulfilling prophecy because if you think about the 200 staff that Rehaug has now, there are about half of those what I'd call portfolio managers and analysts, so front office people. We would have 25 of those dedicated to a resources strategy in some shape or form, whether it be in debt markets, whether it be equities or royalties. We have a team of five mining engineers, five geologists, we have surveyors, we have staff that have worked at some of the largest mining companies in the world and they're actually picking the stocks, making the investment decisions from a debt perspective, originating royalties. And that puts us in a great position as what I call the original equipment manufacturer, the oem, to originate those best opportunities across the capital structure.
- [22:15]
Ted Seides
You mentioned that when you joined Regal, primarily long short equity shop. What's happened since to where you are today?
- [22:24]
Brendan O'Connor
We had about a billion dollars Aussie in long short equity strategies back in late 2016 when I joined. We're now about 21 billion Aussie. We're diversified across long short equities, credit and royalties, real and natural assets including things like water, agriculture, carbon and growth equity. The fourth category, which is we're the largest pre IPO investor for companies in Australia. There's Been a significant diversification of investment capability and products that we can take to market a little bit like a diversified equity portfolio that is inherently more valuable today than it was when I started as a monoline, long, short equity provider.
- [23:13]
Ted Seides
What is it about having that breadth of products that makes it more valuable as investment strategies?
- [23:21]
Brendan O'Connor
The ability to be able to see pricing in public markets and in private markets, the ability to see pricing in debt markets relative to equity markets in pricing of royalties puts us in a better position to make an informed investment decision for any given investment opportunity. There'll be opportunities where we say I'm not a buyer of the equity at that price, but hey, I could structure a royalty. It won't be dilutive to you and I won't put the same onerous terms around it from a debt package perspective and provide that to them instead. That is increasingly a virtuous circle. The more businesses that we see, the more we can have informed conversations about whether we're a debt provider, equity provider or royalty provider. And then that leads to better returns. That makes us more relevant to companies. They come back and it's a virtuous circle from there.
- [24:14]
Ted Seides
You mentioned getting there with a billion Aussie 20 something today. How do you get from 1 to 20 in a period of time building.
- [24:24]
Brendan O'Connor
Out new products one foot in front of the other. It certainly hasn't been a straight line. Our growth has been three limbs to it. Strong net flows through a coordinated sales effort. That has been helped by what has been great investment performance across a range of strategies. And so obviously that has helped take firm up further. The third aspect is a number of key acquisitions. We have acquired additional investment capability to help expand and develop that capability.
- [24:56]
Ted Seides
We have dating all the way back to your time at Westpac and those early acquisitions. And then some of the things you've been involved with in Regal. What are the things that you found work and don't in acquiring an asset management team?
- [25:11]
Brendan O'Connor
Asset management businesses are inherently people businesses. That sounds simple and trite to say, but I found that the motivations of the key investment professionals, in particular the founders of that business, are the essence as to whether it's going to be a good acquisition or not. At its very simplest level, I seeking great investment, either individuals, teams or businesses that have a proven edge in what they're doing. Then I look to explore as to whether the partnership between them and ourselves can be a one plus one equals three or five scenario. That means that they need to be up for the journey. They need to be moving from a founder led Mentality where they are answerable to themselves to hey, I'm now an employee working as part of an ASX listed business with all the governance that goes with that, they need to be able to buy into that common goal of Regal Partners overall, as opposed to just their own P and L. The single answer to your question is people, their motivations. Once you've been able to demonstrate that they truly do have a proven edge in what they're doing, they haven't just been lucky.
- [26:26]
Ted Seides
Once you have them on the team and you have a series of different teams, how have you thought about bringing that together under one umbrella?
- [26:34]
Brendan O'Connor
After a period of extensive growth over the last three and a half years, in particular since we became listed, that has been an increasing focus as we bring what I'd call that common platform behind each of the investment capabilities. We now operate with one distribution and marketing team right across the business. Whether we have people selling hotels or royalties or debt strategies or equity strategies, they all operate under the one distribution team. That means we can be coordinated, we can communicate well, we can share information. We're not falling over each other walking into a client when the other person's just walking out of that client basic, but it's the element of doing those little things really well. We've also got the common technology and finance and risk and governance platform behind it all. We've got one compliance team, one risk team, one finance team, one technology team that supports the business and then that has been key to making sure that we're approaching opportunities, but also risks with the same lens and therefore fixing things if they need to be fixed once as opposed to multiple times. You're trying to do that all at the same time as leaving the essence of what made the investment capability you're acquiring. You're leaving that intact and you're trying to put that on a pedestal to develop that, to grow.
- [28:00]
Ted Seides
How did you think about finding the talent locally to exploit opportunities?
- [28:07]
Brendan O'Connor
Australia has developed an explosive financial services sector over the last 30, 40 years. Basically the bulk of my career. You've probably seen a diaspora of Australians around the us, Europe, certainly in London, going off in Hong Kong, Singapore, wanting to go and apply their trade and learn and hope to succeed at some of the world's largest financial institutions. One of the nice things about Australia is that it's a long way away from the rest of the world, which is a tyranny of distance at times. But it certainly means that people can return to Australia in a very safe environment, a long way away from some of the conflict that's existing elsewhere in the world. And frankly, it's just a beautiful place to live. We've got lovely beaches, nice weather, good rule of law, et cetera. We often find that when that diaspora is returning because perhaps they're married, they want to start kids, their kids are at an age where they want to go to high school, university, whatever it may be. That's a great pool of talent to come back to Australia early in their career. While we are probably at risk of losing them because they want to travel and go overseas and compete with the biggest in the world, we've got a privileged position to being the first call on the street for talent when they're returning to Australia to say, hey, I really enjoyed my time at some of the biggest companies in the us. That's similar to what you guys are doing back here. I'd like to do that here in Regal Australia and develop my career.
- [29:32]
Ted Seides
When it comes to that assessment of investment performance, what have you found works in the assessing teams?
- [29:41]
Brendan O'Connor
It's one of the benefits of the asset management industry. It's ruthless in its objectivity. It's hard to fudge whether you've performed or underperformed. The scoreboard doesn't lie. Performance is best viewed through a risk adjusted lens. And over the long term, I find that managing people's egos around their performance can be challenging. But making an objective call as to whether they have performed or not is one of the easier aspects of the role. Whether they acknowledge it or not, I think it's pretty clear.
- [30:17]
Ted Seides
And then once they're inside the tent, how do you try to help them improve performance?
- [30:24]
Brendan O'Connor
It touches upon two key roles. As part of the leadership team that I have brought on board over the last three years have been really important to that point. In particular, we need to be expert risk managers to do what we're doing, not just because of the hedge funds and leverage strategies, but the origination of unique products and capabilities and protecting ourselves against the downside that can occur, making sure we're maximizing the investment returns coming out of those opportunities. Risk management needs to be a key capability for the business overall. Three years ago, I hired our very first dedicated chief risk officer. They've been on board. Now they lead a team of five people across the business that are working not only with the portfolio managers to assess their risk, but their key objective is to improve risk adjusted returns. We didn't need someone to come in and say, hey, you're outside or near risk parameters. We needed someone to say, how do we actually Improve your risk adjusted returns in some instance taking more risk for a given return series, whatever it may be. The other key hire that I've made in the last three years, which has been enormously powerful in generating that collaborative team achievement focus direction, is a HR director. Having that constant and consistent message around communication, values, standards as to how we interact with our employees has been helpful to me and the business in advancing that culture.
- [32:04]
Ted Seides
When you bring in these different teams, how do you think about the cooperative nature of the synergies they can get compared to wanting to incent them for their own performance?
- [32:17]
Brendan O'Connor
There's no easy answer to that, particularly where it may have been an acquired capability of brought in place. We try and instill a culture where the individual wins, where the team wins, and that's a great mantra to have as it relates to an individual conversation. One on one it can sometimes break down because they're laser focused on their own performance, being able to structure remuneration outcomes, being able to structure a collaborative environment where staff within the bounds of protecting public private assets and information barriers between the two sides of business are encouraged to hand off opportunities. Hey, just had a look at this company. I'm going to pass from a equity perspective, but happy to provide an introduction if they want to have a chat to the debt side, for example, when we can highlight those to staff through our regular town hall meetings, we're really holding those up. These are great examples of Regal's ability to harness the best of what we do across the range of the business for the benefit of our clients.
- [33:25]
Ted Seides
What have you found is special about the investment teams at Regal?
- [33:29]
Brendan O'Connor
I've never worked in a place where there has been such energy and enthusiasm for the business to succeed. Everyone at Regal from an investment perspective has a buzz, a drive around achieving. This goes back to the origins of the business, a founder led business. That same DNA is it's things achieved by hard work, resilience, laying awake at night worrying about what could go wrong, getting up early, making sure that those little things that you're concerned about are done as opposed to measuring or rewarding effort. As a founder led business, we concentrate and focus on rewarding achievement as opposed to the effort that can just go on in a large business.
- [34:21]
Ted Seides
What's the unifying DNA of the investment strategies at Regal?
- [34:27]
Brendan O'Connor
I'd say looking for an edge in what we're doing. That often leads you to be a contrarian. I'll give you a good example. Paul Moore, who leads our global long short equity capability. He has been running that strategy since 1998. By having a well defined investment process and a capability that lends you to look for opportunities that are off the beaten path. That's been the essence of whether it's been equities within debt. The debt's probably an easy one to explain. The Australian market has a voracious appetite for the providing of debt to property. Australians love property, the big property investors. When we're talking about deploying debt to a lending opportunity, we have no competitive advantage trying to compete against everyone else trying to provide debt to established properties. We're looking to provide debt to agricultural opportunities or to the development of infrastructure. Those opportunities that have a unique and perhaps complicated edge to them, that we can actually do good due diligence and good structuring to generate returns. And it goes back to that mantra of being that original equipment manufacturer. We're not simply intermediary for someone else's originated opportunity where we're clipping the ticket, we're going out, finding those opportunities and backing ourselves with the conviction that if that opportunity wobbles and we need to stabilize it, we've got the investment capability to step into that situation. Stabilize it, turn it around, sell it.
- [36:04]
Ted Seides
How about on the growth equity side?
- [36:06]
Brendan O'Connor
Growth equity side was that dominant position. We started that strategy in November 2016. We had always been a large provider of capital of that last institutional capital raise. About 18 months to 2 years before a company IPO. We decided to create a dedicated strategy around it. It's probably a strategy. We've got about half a billion dollars in now. As one of the largest and longest standing providers of capital to that part of the market in Australia. That company has seen some wonderful investments that have ultimately gone on to create big businesses in the States. You may be familiar with this buy now, pay later thematic that developed and companies like Zip and Quadpay. They were small technology financial institutions that sprung out of Australia are now very large businesses. It puts us at a ground floor advantage being able to be early investors in some of those great opportunities.
- [36:59]
Ted Seides
I'd love to dive into a couple of the different types of strategies that you pursue and how you think about how they stand on themselves and how they benefit from having adjacent strategies under the umbrella.
- [37:13]
Brendan O'Connor
There are two ways to answer that. One is the four asset classes I talk about, whether it be long, short equities, credit and royalties, real and natural assets, and growth equities. Just across that lens, you can talk about being able to make better investment decisions. Because by being a proficient equity investor and understanding the risks and rewards of being Long or short a company. Through your fundamental analysis, you inevitably need to understand the position of the debt provider in that balance sheet and the relative returns they're earning vis a vis your position as equity owner. By being able to say, okay, well, gee, I think the equity's undervalued and I might be attracted to buy that, or I think the equity is overvalued, but have a look at the return that the debt provider is getting for the next three years. They've just locked in a 12% return for something that I'd be happy to own the equity of anyway, that relative risk return. The more interesting aspect though is ultimately on a sector analysis, when I sit back and think about the businesses, I think more about the coming together of the capabilities that we have the ability to say, I can provide for any resource company globally a equity solution, a debt solution or a royalty solution because I've got the technical expertise to truly assess the mine risks, the nature of the resource they're mining, an informed view of what the future prospects for that particular commodity might be, a view as to the sovereign risk we might take as to what country that mine is in, that is a unique expertise. We might be one of three companies globally from an asset management perspective that have the breadth of that capability. The other area which is uniquely Australia is I'd call natural assets in Australia. Natural assets in Australia encompass everything from not only the equities public and private in agricultural in Australia, the debt. We're one of the largest providers outside the big four banks of agricultural debt to the Australian agricultural market. One of the adjacencies to that is where the largest owner of water rights outside the Commonwealth government in Australia. To explain what a water rights is, water in Australia as it relates to large scale farming operations operates under economic cap and trade system. You own a farm, that farm historically may be soldier settler blocks given to soldiers returning from World War II. And over the generations have done a bit of dairy farming, things like that, I. E. Dairy prices are typically low profit margins. And a soldier settler block is typically a subscale for what a modern farming enterprise would look like. We're finding that those farms are being transformed into larger farms and they're typically migrating from dairy farming to higher value use product table grapes, almonds, avocados. The importance of that from a water price perspective is those products that usage have higher profit margins and those therefore can sustain higher prices. As the owner of those water rights, when we're leasing that water out to farmers, we're enjoying the higher lease Return from being able to lease that water out to those farmers as well as the capital appreciation that sits behind an increasingly scarce asset in Australia. Australia is the driest continent on earth and there's a lot less water compared to land. So water is a better way to pay the agricultural exposure.
- [41:03]
Ted Seides
As you've developed this range of strategies and capabilities across alternative assets, all focused in Australia as an investor comes to you and they're interested in getting exposure to the benefits of the Australian economy, the wave of AI derivative, how do you advise them of where to plug in?
- [41:22]
Brendan O'Connor
The best of Regal can be accessed via multi strategy solutions. We have been running a multi strategy capabilities in Regal since 2019. We listed a permanent capital vehicle on the ASX. Subsequent to that we have launched strategies that provide access to get access to the best of our ingredients often represents the first foray for those offshore investors to get access to the best of Regal's alternative investment capability. It explicitly targets high teen returns with high single digit volatility and in that way is a great entree for any investor to first get access to the best of Regal and therefore the best of alternative investments in Australia. They can then broaden that relationship and we often find they'll subsequently dive into some of the individual strategies, whether they be hedge funds, credit royalties or growth equity. So it's a great first start for any offshore investor.
- [42:28]
Ted Seides
How do you think about alpha generation or the opportunity to take advantage of inefficiency in the market?
- [42:35]
Brendan O'Connor
Really important, I use that term. The original equipment manufacturer Regal's edge in providing investors not just in Australia, but around the world access to the best of Australia's alternative investment strategies inherently or necessarily means that we need to be originating those opportunities. If I think about the equities perspective, that means we're the first call on the street to opportunities to be able to deploy capital to new events, IPOs, ECM activity, whatever it may be. That first call on the street means that we're in a position to typically influence the pricing around where some of those transactions get done. That puts us in an important position at Alpha as a large provider of debt capital to the agricultural sector, to increasingly corporates in Australia. It puts us in a better position to command pricing. We're simply not a syndicate of a large debt package that let's say the private equity firms have put together here in Australia. We're originating those opportunities ourselves. Finally, you think about from an agricultural perspective and water, we are the dominant provider of that owner of those water rights. If someone wanted to set up a farm In Australia, of scale, they're not thinking so much as their first question about where they set that farm up, so much as how do I access and secure my water? That means a conversation with Regal as to how do I secure those water rights. Alpha is intrinsically linked to being that first call on the street and that origination capability.
- [44:12]
Ted Seides
Once you have that call, what does the underwriting process look like?
- [44:16]
Brendan O'Connor
As a equity investor, we're a fundamental stock picker. Bottom up. There's not a company, certainly domestically and increasingly from a global perspective that we don't have a view on. We go through a four step selection process. We start with the valuation of the company and the valuation is the cornerstone of our investment papers that we write up. The second one is to understand the macro environment in which that company sits in. What are the macro headwinds or tailwinds that might be unique to that company and the sector they operate within? Thirdly, we look to say, well, what is the catalyst? And by forcing ourselves to identify a catalyst, it forces us to be clear eyed as to when to time the investment for entry, but also to exit potentially. If that catalyst has come and gone and your thesis hasn't played out. The fourth step is the edge. And that is to say if the markets are typically efficient, what is the market missing? What insights do we believe that we have that the market is missing? And by forcing, our team seem to actually address that. It makes us better investors to be wide eyed as to what the opportunity, but also what the risks are. When we're talking about that first call on the street, it's wrapped within that fundamental stock picking capability. There are first calls on the street where you say, use a cricket analogy, you let that ball go through to the keeper, or a baseball analogy, you might not swing at that one, but it allows you to have high conviction and lean into those opportunities where the planets align and you've got a strong fundamental position as well as being the first call on the street.
- [45:50]
Ted Seides
What does that look like?
- [45:51]
Outside of equities in credit, royalties, real.
- [45:54]
Brendan O'Connor
Assets, growth, equity, there's a less homogenous asset class, more heterogeneous opportunities in there. Then it becomes more around relationships. What type of borrowers are you happy to deal with? What type of counterparties are you happy to deal with? Have you had a good relationship with in the past? What type of sector may they be in? What commodity might be there? If you're talking about beef for example, can be highly cyclical, might stay away at this time of the cycle, come back later on and that fundamental expertise in whatever you're doing, whether it be from equity or debt or royalty perspective, is the cornerstone in making that informed decision.
- [46:36]
Ted Seides
As you've grown the firm thus far, why have you selected the particular strategies you did to implement on that opportunity in Australia?
- [46:46]
Brendan O'Connor
It goes back to that mantra around the right to play what right do we have? The same way that I enforce the discipline from a merger and acquisition or inorganic growth discipline. Demonstrate your edge in what you are doing. It's the same for Regal overall. We need to be able to hold ourselves accountable to have a true edge in what we're doing. And that is built around generating great investment returns for our clients. Now the domestic market which we sit in Australia and so we'll start there, is very dominated by a lot of older companies built in another era that provide exposure to long only equities or long only public fixed income. We don't believe we've got a particular edge there. I don't believe that that's the future of for investors looking to achieve growth in their portfolio. Given that backdrop of higher for longer inflation stick inflation, breakdown of some of the free trade agreements that were happening and lowering costs before geopolitical risks and a higher cost of security including defense. That all speaks to a more diversified portfolio of alternative investment strategies. That's the tailwind that Regal has playing into. That's the capability that we're building. Regal is seeking to be that collection of best in class investment strategies that offer alternatives or different investment strategies that can provide growth no matter what the backdrop to the market.
- [48:20]
Ted Seides
What was the thought process about going public?
- [48:22]
Brendan O'Connor
It was a perhaps dual factor. One is as a privately owned business attracting talent. Phil King and I put in place a long term incentive plan that gave employees equity in the business that vested over a period of years. The bulk of that equity was coming in its first tranche to vest. And we say, well, as much as people should take a long term approach and appreciate the dividends coming through, we thought that they probably want to invent where they could liquidate some of that as well. That just happened to coincide with a period of time where our business had recovered well from COVID had probably record performance and at the same time there was a ASX listed hedge fund that had fallen on harder times and was looking for a bit of help, just take it forward. So we engineered a reverse acquisition of that business which basically meant a backdoor listing of Regal Partners onto yasx. That's some of the behind the scenes color as to where we are. So this is June 2022. We ended up as a ASX listed business. The transformational piece that has come from is really three key things. One is a step change in the governance that wraps its arms around the business as an ASX listed business. An independent board, independent chair, our risk committees, compliance committees now answer all to independent board members as opposed to reporting through to executives in the business is point one. Point two is that translates into far easier door opening opportunities, particularly from an offshore perspective when we're talking about marketing in Asia, the US or the Middle east around demonstrating, hey, here's Regal Partners. You can independently look on the ASX website. These are our filings. This is who we are. There's a step change in profile that helps marketing. The third thing surprised me. The third thing was actually the additional spring in the step that happened from a staff perspective by saying, hey, I work for that business and I can see whether the share price is up or down. There is a engagement that comes from being part of a growing listed business. That's been a real thrill.
- [50:35]
Ted Seides
Where do you see some of the drawbacks?
- [50:37]
Brendan O'Connor
The governance of a independent board brings with it, by definition a new set of stakeholders that like any team, need to be brought along the journey, buy into the strategy, be comfortable with both the risks and also the opportunities. Ultimately the strategy of how we take that forward. There's been far more of my time spent working with the board, taking them and helping them understand the strategy. They're prodding and testing the strategy and ultimately agreeing what the strategy is and taking that forward. That's a whole other aspect of it. There is the reverberations, I'll call it from being a public company in respect of news flow by being a large asset management business. In Australia we'd always had a profile. But that profile, particularly through the press, seems to have amplified now that we're also a public company. There are good aspects to that, there are bad aspects to that. You need a steady hand and approach to be able to navigate your way through that and not get unduly distracted on the positives or the negatives. Either way, the benefits being listed ultimately outweigh the negatives. The other benefit, I'd say is that it's given us a currency that is the share price that we can use to help acquire investment capability and that has been powerful in helping us grow.
- [52:00]
Ted Seides
What goals have you espoused for the business over the next several years?
- [52:05]
Brendan O'Connor
That's a challenging one in some respects because I find that a common failure in markets, at least asset Management markets here domestically is for people to fall into the trap of saying flag on the hill. We're going to be $100 billion in the next five years. It's a crude measure, but it's not necessarily the best measure to demonstrate the success or capability of the investment business you're building. So as much as people want you to throw out there, here's a number. We're going to be X billion in five years time. You can set your clock by it and come back in five years time. You'll see us. A better measure is more nuanced than that. Our success will be continuing to develop and acquire additional investment capability where we are generating great investment returns for our clients. If we can do that within our existing product sets in the additional investment capabilities we think naturally sit as part of our platform. I've got no doubt that we'll be over $50 billion over the years ahead. But it's important that I word it around investment returns as opposed to simply asset gathering. Because the thing that makes us unique given that founder led business and alternative focus, is we eat our own cooking. We don't want to be the leader of $100 billion of low margin, underperforming fun. We want to be the leaders of a business that is generating great returns for our clients and therefore ourselves. And be proud of that, whether that's $20 billion or $50 billion or $100 billion. That's the second derivative.
- [53:40]
Ted Seides
Well, Brennan, I want to make sure I get a chance to ask you a couple of fun closing questions. What is your favorite hobby or activity outside of work and family?
- [53:49]
Brendan O'Connor
That's an easy one. Surfing. Our whole family surfs. I picked up surfing probably in the last 15 years. I didn't grow up surfing. I'm particularly proud of the fact that I learned to surf later in life. If I could surf every morning before work, I would. I try and get out surfing as often as I can. It's that great hallmark of a hobby where not only is it incredibly distracting because it's hard to think of anything else when you're popping up on that wave, but it's also got a nice fitness element to it. Less time in the gym, more time. Surfing is my heaven.
- [54:24]
Ted Seides
What was your first paid job and what'd you learn from it?
- [54:27]
Brendan O'Connor
My first regular paid job was paper delivery. This is the local newspaper. The papers were delivered on a Tuesday evening. On a Wednesday morning, I had to go out and start delivering them. I was 13 years old. I had my basket at the front of my bike going around the suburbs doing it. What I learned from it was people were happy to pay me to do things if I could be consistently reliable and be honest in what I'm doing. Because I found that they said, oh Brendan, thank you for doing that. We found other workers do it for a few months and they stop it or they dump the papers into the creek and things like that. Call me naive, that truly surprised me. Hard work, I learned, was a pathway to earning money. I needed money, I wanted money. So it was self fulfilling.
- [55:12]
Ted Seides
What was the best advice you've ever received?
- [55:14]
Brendan O'Connor
I've received a lot of advice over the years. The two pieces that come back to my mother and father. My mum had a great expression, Brendan, if a job's worth doing, it's worth doing really well. I hear myself saying that to my kids a lot, and dad, particularly from a construction perspective, was always Brendan, measure twice, cut once. There are two little truisms that I take with me that can be broadly applied to many aspects of life.
- [55:42]
Ted Seides
What life lessons have you learned that you wish you knew a lot earlier in life?
- [55:46]
Brendan O'Connor
There are no shortcuts at the end of the day to build anything truly successful focused on that achievement as opposed to just the effort around it. There are no shortcuts. Building things properly in a sustainable way is the only sustainable way to build a great business.
- [56:04]
Ted Seides
Brendan Last one if the next five years are a chapter in your life, what's that chapter about?
- [56:09]
Brendan O'Connor
Is the continued evolution of Regal Partners. It will become a far more highly recognized brand of best in class active management capability located in Australia with a much larger non Australian client base than it does today.
- [56:27]
Ted Seides
Great Brendan. Thanks so much for sharing this very regal story.
- [56:32]
Brendan O'Connor
Thank you very much Ted. I really enjoyed it.
- [56:34]
Ted Seides
Thanks for listening to this. Sponsored Insight Sponsored episodes are paid opportunities for another 12 to 18 managers a year to appear on the podcast. If you're interested in telling your story in front of the largest audience of investors in the industry, please email us@teamapitalallocators.com to apply for one of the slots.
- [56:59]
Podcast Disclaimer Voice
All Opinions Opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.