Episode Transcript
[00:00:00] Speaker A: The markets. We just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts, the finance Ghost and Mohammed Nallah.
[00:00:13] Speaker B: Together we have more than 25 years of combined experience in the markets.
[00:00:17] Speaker A: For those looking to take their market and business knowledge to the next level, we offer Magic markets premium. Our recent research reports have included Costco and Walmart as retail giants, Airbnb and Meta as platform businesses. Take two interactive and Crowdstrike as examples of technology companies that may not be near the top of your list and unusual players like a Cushnet in the golf industry. For just 99 reals a month, you get access to the entire library of our research. Visit magicdashmarkets.com today and go Premium welcome to episode 197 of Magic Markets. I'm sitting in a very, very, very windy Cape Town. Everyone on the show today is sitting somewhere a little bit different, hopefully not being blown away. Mo, you're all the way up in Canada. As always, it's a holiday there today. So thanks for making the time to do this. And it's because we have such esteemed guests and we're very happy to welcome them back to magic markets. We've learned so much from the team at Westbrook over the past couple of years, and it's always great to check in with them on what's happening out there in the world of alternative investments and private deals and all the rest. Dino Zukula, John T. Osha, joining us today. Thank you guys both very much. But before we welcome you formally, mo, thanks for joining on, I think you said Thanksgiving. I can barely keep track of south african public holidays, so it's hard enough to keep, you know, I can't keep track of yours as well.
[00:01:38] Speaker B: Yeah, ghost, I mean, the downside of living up here is that I tend to work on canadian holidays because South Africa's working. And when you guys are enjoying a nice holiday down in South Africa, well, I tend to work as well because Canada's not on holiday. So that's the downside of living up here. And again, just as you know, a shout out in terms of my level of commitment to magic markets and the team that we're about to welcome you on Westbrook. Dino and John T. Today is not just a holiday, it's also my wife's birthday. So I can tell you the fact that I'm working and doing this podcast rather than taking her out for a nice fancy lunch that might not go down as well as the show might go down, but it's testament to what we are discussing today because I'm really excited about the topic we're jumping into and I'll tell you why. As a South African sitting abroad, I read a lot of the headlines around this government of national unity and all of the optimism that South Africa is now feeling. And it's very different to the South Africa that I left, call it five years ago then thereabouts, where there was a lot of negativity. And so what we want to really get into today is let's look at that, let's see if there's any substance behind that. What is this gnu meaning for investors? What's it meaning for businesses on the ground? And this is very important because it's going to inform whether we actually see a sustained uptick in terms of the investment climate in South Africa. What does that look like and what does that mean for consumers and just the overall risk appetite. So with that as the primer, welcome to magic markets. Dino and John T. From Westbrook.
[00:03:00] Speaker C: Thanks very much guys. It's a pleasure to be a happy birthday misses Mo. You're doing a great job of selling Canada by the way. Especially the listeners can't see the size of the thick jacket that you're wearing inside your house as well.
[00:03:13] Speaker A: And Mo likes to put the hard in hard currency. This is basically just a reality for him.
[00:03:18] Speaker B: This show started out as the blue hoodie show, right? So today I decided to go with a black hoodie. The weather certainly turning its fall. So everything's nice and orange outside. But on that basis, yes, it's getting colder. And I can tell you it's not cold by canadian standards, but by south african standards it's about eleven degrees outside right now. So not too bad. But yeah, it's going to get a lot worse. So if we record one of these closer towards the tail end of the year, I'm hoping to do that from a nice sunny South Africa.
[00:03:43] Speaker A: Speaking of which, let's dive into that sentiment here. So I think I chanti, let's start with you because you're speaking to a lot of the borrowers out there. Effectively, you are speaking to the business owners who are looking for capital, who are out there taking risk, making decisions. You know, we read about a business confidence index and how people feel about the place. This should in theory drive them to want to take risk and borrow money and, you know, look for growth and all of the wonderful things that grow our GDP. You know, if that is not happening out there, then things are not going to improve for South Africa. So, you know, the million dollar or million rand question to you is, are you seeing some improvements in the past few months? Are South Africans feeling better out there and are they borrowing money?
[00:04:22] Speaker D: Ghost and MO it's great to be here. I think from that perspective, sentiment is what we're talking about at the moment. And we've definitely seen a shift in sentiment from, call it at the beginning of the year where the businesses we were speaking to, their objectives then were either not invest capital because it's uncertain, the political environment specifically, and the economic environment, but also not even that. How can I get as much capital out of my business to take offshore to hedge me against that? And that conversation has quickly moved from how do I get efficient capital now to take advantage of what many people believe is going to be a positive economic cycle driven by a few things, but really to kind of take the positive sentiment and convert that into opportunity. And I think it's very important from our perspective, we've noted the sentiment change, which obviously brings about a lot of discussion, opportunities, ideas. I think what we obviously have to wait for is how that converts into, call it business growth and cash flow. And I think what's very important there is it actually does take some time for that sentiment to work its way through the system. And for us as capital providers, we can provide capital against cash flow, current cash flow at a cost of capital, or capital against future cash flow, different risk profile, but it can unlock those future cash flow kind of forecasts that we talk about. And I think we're in the environment now. Historically we were providing funding against historic cash flow, and now we're moving into an environment of let's us as the capital provider also go on a level of risk with our partners and provide capital to unlock that future cash flow. And that's a form of hybrid capital that I'm sure we'll speak about more on the show. But it just shows the sentiment around the risk environment and some of the factors at play that are giving entrepreneurs and sponsors and investment holding companies the confidence to start to deploying capital world.
[00:06:26] Speaker B: Chanti, I think that's fantastic because you've almost preempted the question I was going to ask, which is the mix of demand that you're seeing following this government of national unity, is that really replacement capex, for example, is that new projects coming on stream? Is it complete greenfields or is it really brownfields types of investment? Because you've partially answered that to a degree, because you've said that there is a mix of that coming through, could you maybe indicate just in terms of anecdotally what you're seeing on the ground, what is the proportion of that mix look like? How much of it is actually just playing catch up with years and years of negative sentiment, just replacement capex, let's put some of this capacity back on stream. And how much of that is new business? How much of that is actual growth that is coming or stemming from this? Let's call it renewed optimism. I'd like to maybe just get a bit of an understanding of what that mix looks like.
[00:07:14] Speaker D: Yeah, so it's a challenging question, ro, because the types of borrowers we speak to kind of are diverse in what they are. So on one hand, we provide capital to entrepreneurs who have a base of business, but are looking to grow that quite significantly. I think they have been entrepreneurs within the sector over the last few years, so have actually allocated capital and believed in their thesis around what they're doing as a business. So for them, it's less about replacement capex and more about opportunistic capital. Maybe some acquisitions, because valuation still, from what we've seen, haven't significantly adjusted, or it's around growing off the base. They already have new product lines, new product offerings, et cetera. Then you get to call it the more financial investors like investment holdcos and private equity sponsors there might be in their underlying portfolios, businesses that they've withheld capex to be more kind of cash flow generating businesses over the uncertain period and pay divis, where now the balance sheet is very illiquid. But they do believe it's the right cycle to invest and they'll deploy that into more efficient manufacturing, new facilities, higher working capital levels, etcetera. So we're seeing it as both. I think what business confidence does holistically, it just increases capital flow requirements across the sector for transactional kind of business that's taking place. And that transactional business is both a replacement or delayed capex. New opportunities as well as acquisition opportunities.
[00:08:51] Speaker A: Tonti, it's so interesting that you say valuations haven't moved too much, because if you look at the JSE and public equities obviously move instantly and sentiment just went crazy there. And I was worried that the local market ran a bit too hard, too fast. And some of those share price gains have already started to wash away in some places, as I think people have realized it's going to take longer. So one of the ones I looked at was PPC, for example, on the construction side, that doesn't magically just become a way more exciting story in a month or two. So that talks directly to your point, which is that, yes, the minds are changing and people are cautiously optimistic about this, but it's still going to take a while to actually really genuinely filter through. And Dino, you spend a lot of time talking to the investors rather than the borrowers. And obviously, from a Westbrook perspective, you guys are also ultimately taking risk, because I understand much of your model is investing alongside your investors effectively. So how much has this political landscape changed? The way you're thinking about the world, the risk you guys are willing to take, the investors that you're chatting to? Do you think that there's been quite a strong shift there? Is there almost frustration that it's taking longer for the assets to become available now that there's this positive move?
[00:10:06] Speaker C: Yeah. First of all, ghost, I think the point you made around what you've seen in the listed markets, to me, illustrates one of the reasons for an investment into an alternative, which is it's just a nice way of demonstrating it in the sense that we've seen equity valuations move quite sharply in the listed markets recently on the back of optimism and then realism, all of which are things that may or may not have any real a reflection of what the inherent value is of an underlying business. Right. And it's for that reason that you come into a private market asset, because in our world, the value that you derive from an investment is much more closely linked to what the actual value is of that investment. I definitely think that the game has changed to a certain degree. Ghosts. In all of my years at Westbrook, it's always been a conversation with high net worths around how much money can we get offshore? And then generally some kind of slight at the Saab around how difficult they are in allowing people to get money offshore. Whereas now, for the first time, I think if I think back to sort of June, July, I remember for the first time in pretty much my time at Westbrook, having conversations with investors around certain of the offshore investments that we were offering, with them saying, no thanks, we're pretty fully invested offshore. We like to keep some money to allocate locally, which certainly, to my mind, is a change. I mean, jaunty and I were debating this earlier, which is, which comes first? Does the investor sentiment to invest locally shift before the deals come? Or is it the other way around? I mean, if you look at the Westbrook case now, you got to be careful to use anecdotal evidence as the rule. Right. But we certainly in the south african business have much more capital available from clients to invest than what we have deals available. And that's actually interestingly ghost pre gnu construct. We kind of at the moment do three things. We've got a senior credit fund then like a mere pref offering. And then we do some stuff in the twelve B space which is a tax deductible investment offering. All three of which are running extensive waiting lists. So I think the situation where we find ourselves as a business and bear in mind again that our access to deal flow is much more constrained than what you might find in like a listed equity investment. But we have much more money than we have deals at the moment across the board.
[00:12:27] Speaker B: I think that's so fascinating because that's really the flywheel, right? If you've got this wait list of capital, it's just waiting for the right opportunities. And ties into what jaunty is saying is if that pipeline starts to develop, you then start to really build pretty compelling investment pipeline for your customers. At the end of the day, do you know, I want to ask one additional question with regards to the investor side of this entire equation is that I've seen this time and time again. You know, South Africa goes through these phases of renewed optimism. Then I call it capitulation and extrapolation at the same time. You know, you go from the depths of despair to hey, everything's fantastic. And then you think it's going to be fantastic for the long time. And unfortunately, you know, the track record's been poor, it's reversed. We see that capitulation and extrapolation in the other direction. And so what I'm really trying to get to, and I'll pose this first to Dino, but I'd like Johnty to come in as well because I think there's an investor leg and there's also the business leg as well, is how much of this move in your view, in your estimation in the conversations you're having, how much of this is tactical, you know, how much of this is going to last maybe a couple of quarters and then reality starts to bite again. And how much of it in your view is actually structural. Because that for me is the real defining characteristic of whether we turn the page on South Africa. Whether those discussions you're having with your investors structurally changes from hey, let's get money offshore to hey, we might actually be bullish enough to, to bring some of that offshore money back into South Africa. I think it's probably premature for those kinds of discussions. But when it becomes structural, you start to see those discussions. So let's maybe start off with that question to Dino and then John T. I'd like to hear your views on that as well.
[00:14:04] Speaker A: Basically, Mo just wants to know if he should be booking a return ticket from his pending trip back to South Africa. That's the TLDR there is like, you know, he's, he's tired of the weather. Should he come home?
[00:14:14] Speaker C: Look, it's, this is a, this is a very, very nuanced question with, with a very nuanced answer. Look, I think one of the reasons that people globally find South Africa to be as complex an investment jurisdiction as it is is because so much of our macroeconomic success as a country is predicated on politics, where, I mean, you know, there are investment jurisdictions like America where politics is a huge thing. But, you know, arguably America is in attractive investment jurisdiction. In either event, here it has, I would argue, a much bigger implication on whether or not someone wants to come in. So the angle around politics is probably something that I'm not best equipped to comment on. I suppose the question that I will pose is this, which is that for as long as the politics remains better.
And bear in mind, by the way, South Africa went from probably one of the worst places we've been in in Q four last year, Q one this year with load shedding and government where it was, and just like everything was a disaster to now being in one of the best places, 1994, people saying off, we haven't felt this way since then. And by the way, the Springboks are winning, which makes everybody feel good, too. So I suppose it's not that difficult to feel great, given where we've come from. Right? The question I'll ask is whether, provided the politics stays as is, does it really matter? Because if sentiment is there, capital flows come. If capital flows come, people get more and more, the asset prices go up, people become more comfortable to invest, and so the flywheel begins to turn. Now, if you look at our ecosystem, while I say that the amount of money that we have available to invest is a lot, in both instances, what does change is where that money wants to go. So as an example, we have not had any confidence in raising money from investors for anything even remotely linked to private equity in South Africa, anything remotely linked to the swear word in our industry called lock ins, or anything remotely linked to something that doesn't produce a cash return, because heaven forbid, you need to get your money out tomorrow because there's a big drama, whereas now the money is still there. Because, remember, a lot of south african investment capital is tied into pension funds and all sorts of different vehicles that you can't exit. But where that money wants to go, I've definitely seen a change and I'll see John T. Nodding his head. So maybe I'll, maybe I'll let him chip in there.
[00:16:43] Speaker D: Yeah. I think from our perspective, investing in alternative marketing, especially at Westbrook, we believe we can unlock asymmetry in both environments, right. In uncertainty and chaos there's opportunity that where assets are mispriced and where opportunities are mispriced. And that's what we've been focusing on the last few years. Now, to Dino's point, that is generally more in a secure, lower down the risk curve, capital stack type of deal. And that also then meets the investors requirements of how they want to allocate that capital. I think in the more stable environment where there is business confidence and we haven't mentioned it yet, but there's been gnu and political stability, there's been no load shedding. And we entering a lower interest rate in environment is all recipe for growth. And even if you listen to the government of national unity, theres a growth agenda. So you kind of put that all in the mix. It still means, we believe were going to unlock asymmetric investment opportunities, but now that bucket will be more in hybrid and preferred equity where returns will be higher.
But we believe this sort of environment caters to that. And obviously well partner in line with what we do from a risk philosophy perspective is the right entrepreneurial sponsors and investment holding companies to unlock those opportunities alongside. But to Dinos point, I think we as capital allocators to the market will shift where that asymmetry is.
And a more stable environment means kind of go up the risk curve slightly, but therefore we expect to earn kind of higher returns over the kind of the period that we're looking at.
[00:18:23] Speaker A: It's when the language changes from an investor perspective, that's when asset values really start to move. Right when we're not talking cash payback period anymore, like some kind of high risk mining transaction and you're talking terminal value and growth. The american language, the language of this thing's going to work and it's going to be here forever. And there's that incredible optimism that drives the way american entrepreneurs think. They just believe so completely in what they're doing. They believe their country will just keep going. You know, south african brow beaten investors over the past few years, especially with roadshed. I mean that was, you're absolutely right. You know, coming into this year, it was, I think, the worst it's ever been. And now suddenly it just doesn't happen anymore, which is, you know, remarkable, actually. Now everyone's used to the fact that it's gone. I think if it returns, I'll be right. But, you know, let's hope it. Let's hope it doesn't. So you've got to see that language change, the way people are building their investment models, putting more weighting on terminal values, you know, longer duration cash flows, and then you can start to see asset values start to really go. And then people realize more value. They believe in the next opportunity. And so that flywheel spins, and it just needs to start right from our.
[00:19:31] Speaker D: Perspective, that even kind of provides more efficient capital to the market. Because in uncertainty, there's more margin of safety and as you say, less view or risk share on the upside, where now there's, you could build in a more stable environment, less margin of safety, and more risk sharing, meaning the top of capital is more flexible, more efficient, and can actually unlock opportunities alongside the sentiment. And that's really what we excited about at Westbrook is this kind of, we provide capital across the capital stack, senior mayors, preferred equity. We can actually facilitate not only the sentiment, but the capital that can unlock it in a more efficient manner, which obviously we here not, and I guess part of the podcast, not just to talk about kind of theory, it's actually practically what happens. And I think we talk about sentiment, but that's got to convert into deals and opportunity, and there's capital to flow, and that's what we really excited about. It's changed from like this theoretical kind of discussion more to kind of how do we do it and how do entrepreneurs access capital and where their opportunities, etcetera, which is obviously very exciting. And it's probably not a mindset we've seen in the south african environment for a very long time.
[00:20:45] Speaker B: Yeah, I think it's very powerful. You know, the power of capital markets are exactly why we're having this discussion. And I know we've kind of touched on, you know, where we sit in the capital stack, how the risk appetite is kind of bounced around the type of capital deployment. But I want to go into a specific sector because again, it was a success story. You know, early days, private capital was really instrumental in mobilizing investment in clean energy, renewables in South Africa. And that arguably has helped us get to the position we're in today, where load shedding hasn't really been a story for the last two quarters. Now, the reason I asked this question I actually want your views in terms of what's happening in that particular sector is I know Westbrook was quite involved. I know a lot of the projects you were doing were on the commercial side of things. But a lot of stories I've seen, certainly over the last quarter or two, is that there's been massive compression in terms of the types of returns you can get in that space. The returns don't look fantastic anymore. And so naturally, as capital flows there chokes off the type of growth you're getting there. Maybe just a quick comment, Jonty, this is probably one for you. A quick comment on what's happened in that renewable energy space. We saw a couple of large players go into business rescue in South Africa as well. So clearly the economics have moved past that inflection point where it's not attractive anymore and that capital, as you correctly say, is probably flowing elsewhere. So it's not an aggregate, a bad story, but what's happening specifically in renewables, because there's still a lot of people out there trying to raise funding. What's Westbrook's position and appetite in that space, just given where the market's gone? You were in there quite early on and I believe quite successfully as well.
[00:22:18] Speaker D: Yeah. So mo, that's quite a layered question, I guess with many aspects. I think the first point to address, I think part of Westbrook's risk philosophy and approach is to view fundamentals and cash flow and how that pans out and not to invest in the IT sector necessarily, because that's where all the capital is going. And I think that's what happened to some extent in the renewable sector. I think returns on paper, the emotion of being in load shedding and not seeing the end of it led lots of capital providers to maybe overestimate kind of business cases and assumptions in downside scenarios. And I think from us, from a Westbrook perspective, we still focus on that. And that's why in maybe certain environments we won't be deploying as much capital because we believe that the case doesn't require that. And I think where we've seen that materialize is more on the residential side of solar because you guys will know and anyone listening who, when you're sitting at home and there's load shedding and you don't have a solution, it takes an emotional toll, frustration. So that turns on and off quite quickly when, when there is load shedding. I think in the commercial and industrial sector where we focusing and we focusing on investing in the long term cash generating projects that produce electricity, and there's a contractual arrangement for that. Offtake still makes economical sense. And why? Because the actual fundamentals of that project is that it provides cheaper electricity to the offtaker. It doesn't have necessarily provide a load shedding solution. And that's the difference here. There's a business case and economic case for that system. And we've seen with some of the electricity tariff increases, Eskom wants that that's only going to grow. And the other side of it, given the residential market slowdown, there's a lot of stock in the sector. So the price of systems is effectively coming down. So it plays quite well into investing in the types of projects we investing into, but ultimately we just investing in long term cash flows that are to quality end users, where the economic case for that is there.
[00:24:31] Speaker C: It's something mo, that a lot of our investors miss is everyone sees load shedding as this emotional decision, which if it goes away, it means it's bad for the sector. But when Eskom are asking for 30% plus increase this year, solar system still makes a lot of commercial sense if you can bake in inflation plus two increase for 20 years for them.
[00:24:57] Speaker A: Yeah, it reminds me of one of my favorite quotes, which is, well, it's attributed to Bill Gates. I don't know if you came up with it, but it's basically that we overestimate the rate of change and underestimate the extent. I'm paraphrasing it now. We think solar is going to go a lot faster, but then people forget exactly as you say. What is the real long term story here? It's actually more about costs than just replacing electricity. Hence solar slas that place, even if it maybe goes a bit slower because load shedding has gone away. Now, I think we've got a couple of minutes left and where I really would like to finish is just understanding. I hear you saying you've got a lot of money looking for deals. That sounds wonderful. There will be people listening to this podcast whose ears hopefully pricked up at the thought either they have businesses or they have friends who have businesses, or they are advisors. So what do those, what do those deals look like? What assets do you wish were walking through the door?
[00:25:48] Speaker D: Yeah. So its less around the type of asset and more around the opportunity and the entrepreneur and sponsor behind it. We obviously pride ourselves on understanding risk and businesses quite well. So we will assess any sector opportunity that has the dynamics we look for. And I think what makes us unique as well is that we do provide capital across the capital stack. So that allows us to work with the potential borrower in a solution that really makes sense for that opportunity or that requirement for growth. And we still not seeing banks, they still are conservative and generally provide capital in a little way. So we do believe kind of working with the rights sponsor entrepreneur in the mid market segment, we can unlock deals alongside of them. That makes sense. And we touched on it earlier. I think this hybrid capital form of capital that we talk about is going to be very useful for this segment, this mid market segment, because we can lend more capital than a typical lender would and share in the risk upside. So it allows us not have to look only historically at cash flow and say, this is the leverage levels that make sense. We could do that and then add another layer of capital to unlock the opportunity, but then share that risk upside with our potential borrower. And it's great for them because they kind of want to take the risk and now don't have to dilute as much as they would if they went to raise equity. And another, I think we mentioned it earlier, another key thing is what it does is it provides for flexible structuring security packages and gives more efficient capital, which obviously, for example, we can now structure a facility because of that margin of safety benefit where maybe there's a roll up of interest, and that free cash flow that's generated from not paying the additional interest could be reinvested at a higher Roe or return of capital. So, yeah, from a Westbrook perspective, we're very excited to find transactions with partners that we can grow alongside and essentially share in the risk upside and the.
[00:27:59] Speaker B: Opportunity chanted, you know, I think that's been a fantastic show. You know, unfortunately, that's where we've got to leave it. I think we've touched on a whole bunch of stuff, this government of national unity. That might just be the theme, but I think what's really come out of the show for me is that there's opportunity regardless of where you look. It just depends, you know, where you want to play in that value chain, whether you're someone looking to actually raise funding in your business. If you are, you know, reach out to the team at Westbrook. If you're an investor interested in alternative assets, reach out to the team at Westbrook, regardless of which side of that coin you fall. And again, if you're looking for the team at Westbrook, it's www.westbrook.com. that's where you'll be able to find the team. Both Dino Zuccolo and John T. Osha you'll find their details on there. Reach out. The team is very accessible. They are happy to answer your questions. And again, I would urge you, like I say, if you're a business looking for funding, reach out to the team. If you're an investor and you think some of this is interesting, reach out to the team as well. This is really what we do at magic markets. It's not just about talking about the big themes. It's about how you can actually operationalize that. Where can you actually go out there and find the opportunities? Dino, John T. It's been fantastic having you on the show, and I hope we get to do one of these soon again, because there's still, I still always come out of these shows feeling like there's so much more we can discuss. I hope that you actually share that sentiment, but this has been fun, and I appreciate it. Thank you so much.
[00:29:14] Speaker D: Thanks, guy.
[00:29:15] Speaker C: Happy Thanksgiving.
[00:29:16] Speaker D: Thanks, guys.
[00:29:17] Speaker A: This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
