How has inflation impacted views on credit and lending?

Kylie: [00:00:22] Welcome to MPA TV. Joining me today is Larry Zhou, managing partner of Link Capital Finance. Larry is one of MPA's top 20 commercial brokers for 2022. Congratulations to you, Larry, on this exceptional achievement. It's great to talk to you. 

Larry: [00:00:39] Thank you for having me. Absolute pleasure to be here. 

Kylie: [00:00:42] Thanks, Larry. I'll start by asking you to tell us a little bit about capital finance. How did you start the business and what were the inspirations behind it? 

Larry: [00:00:53] We founded link capital in 2015, which now seems like a lifetime ago, and I guess everything prior to covid just seemed like it was from a different era. As a business, we run on a pretty flat structure. We're not a corporate size broking business, and we never intended to be and probably never will be. The business was started by myself and my long time friend and business partner, Jeremy. Our inspiration at that time was actually very simple. We wanted to create a business environment where we can have customers for life. Prior to that, we were colleagues in one of the major banks lending divisions. When our clients grew bigger and bigger, we often had to pass on the relationship to a different segment within the bank. And we felt very strongly about this. We felt we were missing out on the most exciting part of the business, which is seeing our clients grow and prosper. Now in our capacity as finance brokers, we never have to be bound by the bank segmentation rules. We can retain and work through a client's whole business lifecycle. 

Kylie: [00:02:03] Thanks for that, Larry. What's unique about your commercial finance service proposition? 

Larry: [00:02:09] I think every business is unique in its own way. So to call ourselves unique above and beyond others. And it's probably in some ways disrespectful to some of the other great businesses out there in our industry. However, a lot to talk about, a couple of things that we do feel that we excel in. Firstly, we have an excellent track record and help our clients grow quickly and sustainably. We identify with our clients core values and long term strategies very early in the business cycle. We're a young business with seven years into the business, and many of our clients who started in the small banking division of the banks are now verging near corporate sized businesses, with debt size between 20 to 50 mil and much higher revenue. Our clients cut across multi sectors. Property development is a is a great sector for us in terms of how many wins we've had. Medical industries been great for us construction, manufacturing and lately professional services. In the same philosophy extends to our commercial and residential investors. Going from owning 2 to 3 properties to now a sizeable property portfolio. Link Capital as a business. A growth strategy has always been a very simple one. It is to understand and be a part of our clients growth strategy. Another thing we feel we have excelled in is the way we deliver credit advice. In today's world. There's so much information out there, so much information overload. I see way too often that advisors and that includes accountants, planners, lawyers, brokers trying to cover too much. In fear of not presenting all the facts and options. However, a lot of times the outcome is you're left with a client who's confused and frustrated. At Link Capital. We pride ourselves on giving advice that is succinct, digestible and commercially practical. For us. Less is often more. 

Kylie: [00:04:11] Thanks. Great answer. Inflation has been such a hot topic lately. How has strong inflation affected customer views on credit and lending? 

Larry: [00:04:22] And the issue of inflation, strong inflation, I should say, cut across so many areas of what we encounter and what we see in our business. In my opinion, the world has changed over the last couple of years. Global inflation through printing of money, shortage of resources and through monetary fiscal policy are now a real concern for all investors. From what I've observed and the information that I've gathered from speaking to customers. There is definitely a structural change in terms of how investors and businesses view inflation. And specifically its relationship with debt and assets. Look, inflation is nothing new. We have always understood inflation. It's something that ticks along in the background. But people just accept it and it doesn't really change how people make decisions. But now people are much more aware that strong inflation is eroding the real value of their cash holdings. There's also been said in the media out there, the famous Ray Dalio, quote, Cash is trash. Investors now that I feel that much prefer to hold alternative assets other than cash. But then again, it wasn't that long ago when you could be annual inflation at 2 to 3% by investing in safe fixed income assets like term deposits. I remember ten years ago, it wasn't it wasn't difficult to get your two, three, four or 5% on a term deposit and inflation was still sitting around 2 to 3%, but we now have inflation at around five six and potentially go much higher locally and globally. And and most fixed income products are returning sub one. So the risk free yield has now shifted far below the rate of inflation. So in the current environment, you can't you can't play 100% safe and still expect to beat the impact of inflation. So investors and businesses now are showing much stronger preference to hold asset classes like equities and property. And as a result, much less cash. And when a property transaction takes place, credit leverage is often the key consideration. And what we have seen over the last couple of years is that customers are much more willing to take on more debt. And I can break that down into a few reasons. One most commercial properties that clients purchase. It's cash flow positive from day one because the yield exceeds the current low rates. Secondly, the return on equity works out better on a leverage basis. Lastly and I think also most importantly is that investors and businesses no longer see cash as an asset on the balance sheet, but a liability due to the right that it is depreciating. So the reverse of that statement becomes if if cash is a liability and debt becomes an asset. As long as you structure and manage your debt correctly. Inflation in the long term will diminish the real value of that debt. And a good example would be I speak to one of my clients who's 70 years old, and when he bought his commercial property, he spent 110,000. The debt was 70,000. That same debt in today's terms is worth much less. He could pay that off with one over one with less than one year's rent. So in summary, investors and businesses are much more willing to take on debt in a low interest rate, low inflation environment. 

Kylie: [00:07:54] Thanks, Larry. And finally, interest rate rises are on the move. What's your advice to investors and businesses wanting to borrow, to invest and expand their business? 

Larry: [00:08:07] Probably no different to any other environment you're in. Structure debts correctly and sustainably build a safety margin for rate rises. So, you know, you can manage. Investors in businesses must understand that interest rate is not a constant in any economic equation and asset prices also fluctuate. I feel too many people try to predict the direction of the market in the short term and don't and perhaps don't focus enough on the quality of the underlying assets they're acquiring and the long term play. Ultimately building a portfolio of solid assets through the right vehicles and making good investment decisions long term will beat any short term gain from speculating in the market. 

Kylie: [00:08:49] Right. Well, thanks so much once again for your time today, Larry. And thank you to our viewers for watching the latest edition of MPA TV. We look forward to seeing you again soon.