Hello, and welcome to The Australian's Money Puzzle podcast.

I'm James Kirkby.

Welcome aboard everybody.

The biggest boom area in investment now, believe it or not, it's not the share market.

It's the private market on listed investments, private credit, private equity.

And in the recent past, you know, wealthy investors and big institutions like the Future Fund or universities made a lot of money here.

The issue is it for you?

What you need to know.

My guest today is top rated financial advisor Charlie Viola of Viola Private Wealth.

All Ai, Charlie, good times.

I mean, broadly from what I gather, what I read, what we've talked about in the past, I mean, you're broadly enthusiastic about this private if I can call it a privatizer of investment, where there's much more than there used to be on the private markets for everybody.

Look, we're probably more than enthusiastic about it.

We were probably a very early mover in terms of using private market investments and unlisted investments for our client portfolios.

And what we're very well known for in the market is making sure that we find those good quality, diverse assets for investors to allocate too.

And you know, like we sort of always say we're big ones for diversity, we're big ones for the right type of asset allocation, and where we're big ones for asset quality.

But I guess what's probably happened over the last I don't know, call it fifteen years, is this private market stuff has been democratized in a lot of ways.

So once upon a time, this was only an area that you could get to if you were a large family office, you know, an institutional investor or a big super fund, whereas or a very high netwealth individual where you could hand or the significant lock up of the capital.

What's happened over the last number of years is a lot of the funds have sort of seen the demand and the need for these types of investors, these types of investments in normal investment portfolios, and therefore they've created what we call evergreen vehicles where money can kind of go in all the time, where your money has invested straight away, and it gives normal investors access to those private markets.

So we like it, you know, we think it gives investors a great way of diversifying.

You know, most investors in Australia have had lots of kind of CBA and BAGP shares over their lifetime.

You know, they've taken lots of kind of equity risk within their portfolios and ultimately that's done pretty well.

Right Like since GFC, equity markets have basically done nothing but go up.

But what we've seen is with the democratization of these private markets is now investors are getting access to all the things that they couldn't before.

And as you said, before private equity, private debt, private credit, access to markets that generally were only available to really high night wealth individuals, family offices, institutional investors.

Have we any reason to believe that there's better value in these markets that are understed compared to the share market.

Now about it being better value, I don't think it's about diversity, and it's about it's about sort of having an uncorrelated level of risk compared to equity markets.

I think lots of people will argue and their arguments are probably not that wrong that if you actually look at the last four or five years, public markets have done a heap of the heavy lifting.

So you know, in the last three or four years you could have done nothing but invested you know, megacap US stocks and large cap domestic stocks in your returns would have been more than acceptable, right, they would have been ten or fifteen percent a year.

It's about ensuring that you don't have all of your money is exposed to the exact same risks.

It's about ensuring that you're generating your revenue flows in different ways.

So in lots of ways, it's about reducing the risk in your portfolio.

Some people think that when you go and invest in alternatives, and we hate the use of the word alternative, right, these are just normal assets packaged in a different way.

But when you go and invest in private markets, you're taking more risk.

In fact, you're reducing your risk profile because you're starting to allocate your moneys to different types of investments that perform differently at different times.

So, you know, we talk to investors a lot about we will have normal public market exposures.

You know, they're there to do a job in terms of producing earnings growth, producing us a bit of revenue over time, and giving us some growth.

But we want other assets too.

You know, we want infrastructure in our portfolio because it's a hedge to inflation.

We want good quality private debt or private credit in the portfolio because it generates really good quality cash flow.

I don't doubt you with your connections with your career in financial advice at the level you have been at.

And folks, if you're not familiar with Charlie, he has been a long time a veteran at the operank so off the Barons Top one fifty advisors list the youngest veteran that that might actually be true.

But what I want to ask you is, for most people, right this is all new and their financial advisor is flooding them with this stuff, and the market is flooding the advisors with this stuff, and I wonder, how does an advisor what are the dangers here?

Like for instance, just let's just look locally.

For instance, we're not most people wouldn't be used to even knowing what's going on in private equity.

There was mezzanine finance and that was that kind of stuff, but it was marginal and it was, as you say, for very wealthy people.

Now we have we're getting When a major private credit group like Metrics Credit Partners gets there, some of their products downgraded, it's front page news.

This is because this is the early days in our market for private credit, and we're not used to seeing the ups and downs of private credit.

How do you navigate that as as an investor when it's all new to you.

So I think a couple of things are still really important in how you build out portfolios.

Asset our location and diversity is really important.

Yeah, So making sure that not all the eggs are in the same basket and making sure that you slice the pie up and you've built your portfolio out of different types of investments is really important.

So the second piece is when you look at those individual sleeves that belong with your portfolios, and you have a sleeve for the private credit or private debt section, you have to understand that with that sleeve there are different types of things that make that up.

So in the private credit space, it is an entire spectrum.

Like it's an entire sphere of investments all the way from as you say, mezzanine secondary construction debt and then first more eage type stuff.

We in our business very much use private debt private credit as a defensive end of the portfolio.

We use it to producing comfort clients.

So we use it.

We only invest in the really defensive stuff.

When you think about something like metrics, for instance, it's important you kind of look at the signals and not the noise.

So the noise around it is that they that they've gone and taken over a business and suddenly they run restaurants.

Yeah, they're stock with stuff, they're stop with stuff they didn't intend to hold it.

And what they've done is they've had to have the debt step into the shoes at equity.

But fundamentally, that process of debt becoming equity is how they actually protect their investor's capital.

So Andrew Lockhart, the guy who runs Metrics, is probably one of the smartest guys in the market, does an incredibly good job in understanding how that credit actually gets put together and how he protects the investor capital.

Every good private credit manager, every good private debt manager, over time we'll understand their equity, we'll understand what they're securing their debt against.

It becomes incumbent upon the manager.

And this is why we're big ones around manager selection.

We're big ones around making sure you know who you're giving your clients money to or who you're giving you money to, because ultimately, the security that is provided becomes really important.

There is this question out there that what's a higher risk investment, private credit or private equity.

Private equity by nature is always going to be a higher risk investment than private credit because private credit is generally going to be asset backed.

There is generally something behind it that can falled upon to actually get you your money back, or you will own something at the other end private equity again, and remember private equity is a whole other sleeve of the portfolio and it is broken up into different pieces.

Is investing in something that you hope will do well over a period of time.

So my message to investors and my message to advisors is make sure you are putting these in the right parts of your portfolio, and you're only holding the right amount of it, and you're asking that part of the portfolio to do a very specific job within the portfolio.

Okay, Can I ask you what question with the Lemon's question really about private credit?

But it comes up every time, It's very simple question.

If it's so good, why does the banks do it?

Do you mean, why are they non banked lenders?

Why do the banks withdraw from certain businesses and private credit go in there and it's unlisted and this is a hot area now, But why do the banks retreat from this in the first piece if it's so good.

Because of the regulations.

So the capital required on the bank's balance sheet for the lending that they make is very different to the non bank lenders.

So there isn't there isn't a space for the major banks to be investing.

And what you tend to find is the non bank lenders will generally do the stuff at the beginning, and then the majors will come along afterwards when the capital requirement isn't as high.

So remembering that lots of the projects that we see, you know, lots of the kind of land subdivision, is all done by non baked lending.

Non bank lending is not something that's new.

People have even lending other people money for you know, virtually effect hundreds of years.

Right.

The banks will only ever come along where their regulatory restraints and constraints are absolutely met.

Okay.

So it was the capital adequacy rules basically that titans what banks could do, which open this opportunity.

Okay, I hear you.

Now on the private equity here's the thing again.

So someone saying, okay, I'm used to the share market.

You know, I've always had shares.

I see this area.

It looks very interesting.

But are you concerned?

You must be, I imagine about what goes on.

It's not as transparent, right, private equity as the share market.

By definition, we can find out everything in the share market, we can find out the salaries of the executives.

Everything in private equity we can't.

And so there is this risk that they will play games behind the scenes.

And I read reports all the time about what goes on and buyout funds and how buyout funds can can these days, for instance, go on forever without actually floating the asset off on the share market because they can't get them off so that they can come up with new tricks basically continuation vehicles and that sort of thing.

I mean, you have to stay across all that.

I'm sure what are the risks and the private equity space, which you have said in the first part of the show, is riskier anyway.

Yeah, So remembering what you're wanting your private equity portion of your portfolio to do.

It's your highest portion of the portfolio.

You want it to generate the biggest outsized returns within the portfolio.

My answer to all that is manager selection.

So different managers do different things and different managers will live best money and by portfolio companies across different sectors.

So we do you know, certainly in our business we have a reasonable sleeve.

In the private equity sector, we work really hard around the due diligence on the managers, making sure we understand, you know, who's looking after our client money.

So you are ultimately exactly right.

You are backing the jockey.

You're backing that manager to do a good job and make the right decisions with the capital that they've got.

And remembering that private equity is kind of a homogeneous term that goes all the way from kind of seed VC, you know, buyout and pre IPO.

You just need to and as you sort of go up that curve, you're effectively taking less risk.

Right, So the closer you get to pro IPO, the less risk because the companies are more well known.

Just make sure you understand what you're investing in, where you're investing, and generally speaking, what your line of sight to liquidity actually is, so you know, if you're investing in a VC fund that has a period like a fund where you make a capital commitment.

They'll call it over three years, and they'll use it over five years, and you might not get your money back for ten or twelve.

You have to be very comfortable with that.

You've got to be really comfortable that your money is out being harvested for eight or ten years.

If you want that capital back, you've made a bad decision in terms of the investment that you've made.

Yeah, so you have to feel really comfortable with the risk that you're taking.

So it's eyes wide open.

But it's also about understanding, like try not to get intoxic by the returns that managers tell you they're going to produce, and understand what it is that they're investing in.

We've met lots of private equity managers.

In fact, we probably see a deck, you know, every other day.

You've never met a dumb one.

You've never met a dumb fund manager.

They're all the smartest blokes of the room.

So you know, understanding what you're investing, how long they're going to have your capital for, you know what sector of the market, what the risks are, and what the liquidity constraints will be is like so super important.

And remember these these are intended to be Remember these are intended to be small parts of big portfolios.

Okay, yeah, very good, put it in proportion.

Folks.

See you as part of diversification.

I suppose it's a new charity to most people.

Is it's a new diversification, it's a new avenue.

And it's interesting that, of course your access, the access in your case at least, is strictly through managers rather than direct Okay, we'll take a short break.

We'll be back in a moment.

Hello, Welcome back to the Australians Money Puzzle podcast.

James Kirby here with a guest, Charlie Viola, who has often been on the show.

In fact, the last time he was on the show, he was so close to starting his new operation Viola Private Wealth, but he couldn't tell me.

I remember, because it was literally I think it was weeks, wasn't it before you started?

How long are you up and about now as a new entity?

A year?

Yes, yeah, so we completed on the management buyer about October last year, so we still getting you brand, you know, almost a year ago we did a management buyer though, so it was very much sort of same shop, new sign.

But yeah, it's been sniting, it's been great.

We're doing really well.

So yes, well, of course you're unleashed.

Tell me, speaking of unleashed, unleashing oneself into the world of new age investments, where do you stand on crypto?

So you know, I'm probably quoted on this before that once upon a time, crypto was probably the place for you know, people that are lawned the money or it felt like a bit like a game, et cetera.

The reality is that crypto probably carries a bunch of the underlying fundamentals that all currency carries.

You know, it's separable, it's rare, you know, it can be used as an exchange for goods, et cetera.

I think one of the I think one of the concerns with you know, crypto generally is that there's still no kind of logical use case, or at least we haven't kind of got to the answer in terms of it being a logical use case.

So the thing that's driven its price over time has just been the demand, like the supply versus demand or the scarcity of it over time, so we kind of see it, you know, like I think over time it's probably started to act a bit more like a sort of digital gold proxy.

You know, we still don't put it as a specific piece into client folios.

We don't put gold in the client portfolios generally either unless they ask for it.

You know, we're big ones for hold really good, normal traditional assets that generate revenue.

And you know I said before about diversity, but you know, what we've seen is that you know, probably for the first time in the last four or five years, bitcoin and gold probably traded in lockstep over the past sort of few years, over the fast past few months.

But remember that big cooin was meant to be the kind of ultimate kind of decorrelation from markets.

Bgcoin really has just correlated itself to the NASDAK over the last number of years.

So you know, when risk assets have gone up, it's gone up.

When risk assets have gone down, it's gone down.

So in your reviewer doesn't have what gould has, which is the ability to be non correlated to go up when basically when everything goes after eels God will go up.

Do you think bitgoin will go down with the market basically.

Yeah, correct, because it still feels like a scas set in our view.

So do I think that crypto like and you know, I'm going to preserve my comments to bitcoin.

Do I think bitcoin is going to disappear?

No, I don't.

Like.

I think that it's been around for long enough.

Now there's enough investors, there's enough institutional support for it.

You know, we've obviously seen a bunch of these kind of exchange traded funds and kind of access vehicles created, especially in the US.

The inflows into those vehicles have been just you know, off the planet over a period of time.

So I don't think it'll disappear.

Do I think it is what people say it is, where it is this kind of protection mechanism of your capital.

I don't think that at all.

Are we putting it into client portfolios as you know, the same way we would with you know, private debt or private equity or you know, public market equities, where they absolutely have to have that as part of a good diverse portfolio.

We're not because we can't track the fundamentals of that class, so we don't want to expose client moneys to it.

Just one nase thing which I'm deeply intrigued by.

At least there is now crypto going back into gold.

There is, for instance, gold backed crypto there is deeply intriguing Teather, which is one of the very biggest so stable coin groups buying gold miners.

So it's like they are, well, what do you think they're doing?

Yeah, I don't know.

I mean, I think in reality what you're seeing is just sort of an increase in relevance because of the size of the crypto market.

So I think I've read somewhere the other day that the crypto market and bitcoin alone is the eighth largest global asset by market cap.

So now what you've got is you've got a number of really smart people, you know, these kind of beautiful mind type people who are putting together derivative style arrangements to try and back the underlying growth and bad asset class over time.

And you know, whenever it it's momentum, you find that it continues to grow quite quickly.

And you know, the bitcoin market cap is bigger than better right now, right, So there's obviously a level of relevance.

There's a level of relevance there.

So in terms of kind of you know, are we a picks and shovels or should we be buying the asset itself.

Look, I think we've probably swayed over time on that.

You know, we were at picks and shovels type business where we like those operating businesses that we're generating revenue as a result of going in mining the bitcoin.

You now, I think if you want the exposure to it, because you believe it's going you know, if you believe the harving theory, you believe it's going to keep going up, they just go and buy it and you kind of hope for the best.

But again, make sure it's very small parts of your overall wealth position.

So and don't forget those people who got really rich off this stuff.

They are the absolute exception.

They're not the rule.

Like, just because one blow boarded at four dollars and now it's one hundred and sixteen thousand or whatever the price is, that's not going to generally happen for most people.

Right, You've got to get away from the noise associated with that.

Okay, very interesting, Charlie, And there is that theory of course that the paradox for a lot of investors is that as it does become mainstream, its volatility lessons and the days of it doubling overnight are probably gone.

Where that was happening, you know easily in the early days.

All right, okay, terrific.

Now I've got some great questions that kept for you.

Stay with us.

We'll be back in a second.

Hello, Welcome back to The Australian's Money Puzzle podcast, James Kirkby with Charlie Viola.

A couple of questions.

Carl, I was watching the news.

I noticed PHP shares fell after going ex dividend.

It makes me wonder whether there's a broader pattern of shares losing value after going X dividends.

Do you know if there's any research on this phenomenon, Carl, there's buckets of research on it.

It's probably not a phenomenon.

Cal Simply what's happening is, obviously all of the profits have been banked up in the company and then they've paid them out, so naturally it's going to go down in value when you obviously pay those out.

So it's the theory of kind of you know, the company breathes in, it creates all the profit.

It then has a dividend policy to pay that out to investors.

It pays it out, and naturally the share price goes down as a result of the dividend being paid out.

So and that's why you'll find that generally, you know, we talk about cumulative share price and then X ex dividend ex dividend price being the share price after the dividends being paid.

So yes, so that's basically it's simple maths.

And remember this is not advice information only, but if HP was worth X plus five and they had a dividend payout and it was five, well then they've dropped the five.

So you can see that's how it goes.

Do you have this team?

Was it a common dividend ex dividend?

Wasn't that it?

You don't hear it very often anymore.

But basically it's it's simple match.

There's less money in the company than there was because they've paid out the dividends, so so the value drop.

It's no mystery and no dok secots.

Basically, it's entirely conventional but has been happening for a lot.

A lot always happens.

It's just worth knowing how it happens.

Thank you, Carl.

Very good question.

Okay, Steve, I have a quick question.

If you were aiming to buy the five best run, best value stocks across five industries, and you'd already identified them, would you also apply financially, What would you apply financial ratios to gain a deeper understanding, and if so, what are the key ratios you would want to apply.

Well, it's interesting, we were talking most of the show about unlisted investments, but I imagine the key ratios are nearly they are universal really in some respects to all businesses.

But generally speaking, the way that you value an unlisted investment or an unlisted company is the exact same way that you would value a listed company.

To come up with what is kind of a fair valuation offered.

Market sentiment, you know, drives the prices outside of those fair valuations, but you know, Steam's right.

Ratio analysis in our should be part of any good company specific due diligence that you do, because it gives you that ability to sort of do the like for like.

So I don't think any analyst in the market, and you know I'm not an analyst, but the way our CEO sort of talks all the time is, you know, looking at the EBADA margin or EBADA to revenue or the price to earnings ratio, et cetera.

Is used in the valuation of every company, and really it's the only way that you can get a like for like if you're comparing I don't know, Woolworth's to d HP or Woolworths, BHP and CBA, three stocks that are probably in everybody's They've got different drivers of revenue, but the thing that's the same is what is their their revenue to their profit?

What is their profit to their price?

And that'll give you an indication as to how expensive that company is when you're going in and buying it.

And the managers you use in the private equity space and the on list, can they get those numbers as easy as they can from a stock.

You would think that, and certainly the private equity managers that we talk to, you know, obviously they're looking at they're looking at profit and loss statements, they're looking at balance sheets, they're having a look at earnings, they're normalizing those earnings over time, and therefore they're coming up with what the EBIDA numbers are and then they're applying a multiple to that.

And generally speaking, the private market multiples are lower than the public market multiples will be.

Which is why ultimately the theory is a value in going and being becoming a listed company because in the unlisted market.

You know, depending upon what it is, it might have a eight to twelve times multiple where in the listed market because generally capital is there for a lot longer, it'll trade at you know, eighteen to twenty two times, for instance.

So that's the ascendency basically into the blue sky of the wider public markets.

And that's the game, really, isn't it to move them through.

You make the point before about opacity or the opaque nature of private equity.

It's the manager's job to understand the p and L and the balance sheet of the company that they're buying and making sure that everything there is real and true, because the regulatory and compliance overlay for a for a private company is not the same as it is for a public company.

You lie with the you live with the p and L and the earnings numbers.

On a public company, you go to jail, you lie on a private company, and you know the reality is that the outcomes probably aren't that bad.

So you know, it is innate in the managers and the private equity guy's job to actually understand what they're looking at and really interrogate where those earnings are coming from and who the customer base is, and what the subscription numbers are and whatever else it is that sort of drives that company.

Okay, very good, really interesting, deep down over there into the unlisted market space.

Thanks very much Charlie Bila for coming on the show today.

Always lovely to be here.

Great to talk to you again, and we'll have you on again soon.

That was Charlie Vierl of the Ola Private Wealth, who is of course a financial advisor, now leading a financial advice group of his own.

Okay, folks, let's have some more emails the money puzzle at the Australian dot com dot au.

Talk to you soon,