Flexibility comes at a cost, says GCI's Gavin Solsky
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Australia’s booming private credit market is a symptom of the growing need for flexible funding solutions that traditional lenders often won’t touch with a 10-foot pole.
According to EY, the size of the private debt market in Australia was around $188 billion in assets under management (AUM) at the end of 2023, of which $76 billion comprised commercial real estate loans, or 16% of that total lending segment.
This growth, which has attracted the scrutinous eye of the financial watchdog, has naturally enticed new players and boutiques into the market, giving borrowers new means of accessing funds to support their growth ambitions.
But making deals with the growing number of private credit shops on the market can be a wildly different ball game than hitting up a Big Four bank. And the broker channel does not always get it right.
The art of managing risk
Established by Gavin Solsky (pictured) and business partner Steven Sher, GCI deals in asset-backed finance, real estate finance and what Solsky calls “strategic capital”.
It has invested some $1.5 billion in credit deals across its 10 years in existence, putting it very much in the boutique category of private credit. For comparison, a heavyweight like La Trobe Financial can deploy up to $1 billion in a single month.
The firm has between 500 and 600 investors (compared to La Trobe’s 100,000-plus pool of investors, predominantly family offices, which typically expect returns of around 100% above the risk-free rate from GCI.
GCI is all about “managing risk” and expanding the business at a manageable rate, a strategy that Solsky said not all private credit players are known for.
“The secret sauce, if you like, is coming up with a structure that's going to create value for the borrower but also manage risk for the investor,” Solsky told MPA.
“I don't want to name names, but if you read the Australian Financial Review, there's a lot of private credit shops that have grown very quickly, and now they're starting to kind of run into some challenges.”
Pricing transparency and skin in the game also helps to instil confidence, Solsky said.
As a smaller firm less beholden to the oft-times rigid structures of the lending giants, GCI believes it can tailor highly specialised solutions – the aforementioned strategic capital – to its borrowers.
This could be music to the ears of brokers with clients that don’t fit the mould, although it comes at a price.
We don't have the cheapest cost of capital, so we can't win against a bank or someone like La Trobe; they've got much cheaper capital than we d,” Solsky said. “So why would a borrower come to us? A borrower would come to us because they don't fit within the criteria of one of these more institutional lenders.
“They need a much more sculpted financial solution. They need someone who they can work with. And that's really at the core of what we do and how we are different.”
Recent examples include securing finance against non-real estate assets “that a more institutional real estate lender wouldn't be prepared to do” and a deal that took into account a developer’s accounts receivables. It was “a whole load of work” to validate that these pre-sales were real, Solsky said, but that comes with the territory of being a boutique.
Advice for brokers
Solsky has noted an increasing trend of seasoned accounting experts leaving the Big Four accounting firms – KPMG got a specific mention – to establish themselves as debt advisors.
Solsky put his diplomacy hat on again to state that, without being disparaging, people who have grown up as finance brokers “are not as sophisticated as these accounting guys”.
Debt advisers have significantly more stringent fiduciary duties to their clients. Meanwhile, Solsky noted that he regularly sees a “tick-and-flick” attitude from the broker channel where they “see a deal, take a commission and move on”.
This does not always work in the interests of the borrower, but this is where the opportunity lies for brokers that go the extra mile.
The brokers that GCI likes to deal with, Solsky said, “are the more sophisticated ones who can actually structure a deal that is quite bespoke that very much understands what the client needs.”
“What we focus on is coming up with a solution that’s not cookie cutter, that’s how we win.”
Regarding leverage
A sensible lender, non-bank or otherwise, is unlikely to sign off on a deal that will lead to the borrower being overleveraged. This has been a particularly prevalent issue in Australia’s post-Covid economy.
As everyone knows, soaring interest rates have battered borrowers over the past couple of years. Yet, as Solsky explained, valuations have remained unexpectedly high “because the property market had such a run.”
Borrowers were thus able to capitalise these higher interest expenses, but as property valuations have steadily returned to earth, so has reality.
This has left some borrowers who haven’t sold their properties with their pants down, so to speak, as their loan-to-value ratios have soared at a time when they need to refinance.
GCI, with its propensity for managing risk, is less inclined to fund an over-leveraged borrower but, Solsky said, “will work with brokers to try and find borrowers a solution where the borrower may be able to contribute other collateral, including non-real estate assets, to achieve a refinance.”