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Private debt: Many happy returns

This article was originally published in InvestorDaily.

2022 was unusually bad for both bonds and equities as official interest rates and inflation surged, while interest from our clients in private credit and debt funds has continued to skyrocket.

While equities posted one of their worst year since the 2007–2008 global financial crisis and bond market returns were their weakest in a much longer period, private credit funds are targeting returns of 9 to 12 per cent in these market conditions. Even better, expected returns from private credit funds have generally increased as official interest rates and inflation have moved upward as the year has progressed.

This is because private credit structures generally have interest rates based on a floating ‘base rate’ benchmark overlaid by a healthy margin meaning that investor income rises alongside interest rate increases. In addition, innovative private credit managers have come up with equity-like instruments that can be used to improve returns more, making private credit a truly defensive asset class, but more about that later.

While this positive correlation to a rising interest rate environment and low correlation to traditional fixed interest securities is the key attraction for many advisers we partner with, others are attracted by the way the illiquidity premium of credit provides higher returns. Some advisers are also drawn to the asset class’s lower volatility because private credit managers are not forced to mark-to-market their assets daily as they would in tradeable public markets.

Private credit is a broad church covering syndicated corporate loans, securitisation, property debt and infrastructure lending, as well as other more esoteric segments. In Australia, private credit is estimated to be 10 per cent of the corporate loan market but is steadily heading towards the 40 to 50 per cent share of non-bank lending now seen in Europe.

It is a historical anomaly of Australian investment portfolios that they have generally been underweight fixed income at both institutional and individual investor levels compared to global investors. Australian portfolios have a 14 per cent allocation to fixed income which decreases further when analysing Australian Self-Managed Super Funds’ 2 per cent allocation to fixed income. This compares to 36 per cent in the United Kingdom, 22 per cent in the United States and 28 per cent across the world.

Within this underweight fixed income allocation, private credit has also been underrepresented in Australian portfolios, but this has started to change over the past three or four years, particularly with more high-net-wealth investors, and family offices becoming convinced of the case for private credit.

As one seasoned investor noted earlier this year, “at the moment, you can get a net return in private credit of about 8.5 per cent when long-term equity return is 9 per cent to 10 per cent. In other words, you can get about the same return as equities with hypothetically one-tenth of the risk”.

Looking across the $10 billion of portfolios that we administer for private client businesses and family offices, approximately 15 per cent is allocated to fixed interest. Of this, around 23 per cent is allocated to private credit and this allocation is increasing steadily. Our client’s exposure to private credit is spread across various types of credit mandates such as those that focus on property lending (commercial or residential), corporate lending (large, mid-market or SME), thematic-driven, sector-specific or diversified and a range of direct securities.

Comparing forecasted risk and return across asset classes: Russell Investments Strategic Planning Forecasts, March 2022

Australia, like the rest of the western world, has seen a significant decline in bank lending to the Small and Medium Enterprise (SME) market and when coupled with a domestic debt capital market that lacks the scale and depth compared to overseas counterparts there is an SME funding gap here.

This funding gap provides private credit investors with opportunities to deploy capital into the sector through structures that protect capital while exhibiting excellent risk-return profiles and has been increasingly embraced by non-bank lenders eager to serve SMEs.

Innovative and successful managers often approach credit opportunities through a private equity lens prior to moving to credit assessment. They will take the time to have a deep understanding of every investment they make, including the borrower’s key drivers, asset position and funding requirements. As opposed to a traditional credit due diligence process involving a quite passive backward-looking view of historical financials, this new wave of SME lenders aims to fundamentally understand the key growth drivers of the business, its competitive moat, management strength, and whether its industry faces structural or macroeconomic tailwinds.

One of these innovators, Ben Harrison, CIO of Altor Capital said, “given that we are doing equity-level due diligence, it makes sense to have our typical loan structures include warrants or other equity-like instruments, which provide the potential to enhance return through the success of the borrower. Just as any increase in interest rates generally flows directly through to the investor in terms of returns, if the company we lend to prospers as a result of our support, we also get to enjoy a share of the spoils. Given the lower potential losses in an event of default, returns are left skewed towards the ability to generate significant risk-adjusted returns with equity-like instruments.”

This equity-like analysis of the underlying business model of the borrowers can deliver a defensive characteristic to a private debt portfolio. In high inflationary environments, a portfolio of companies that can pass on cost increases to customers and maintain margins can safeguard investors against rising input costs such as wages and raw materials.

Additionally, many managers structure debt instruments that vary from senior secured facilities, equipment financing, acquisition financing, management buyouts or research and development lending. These senior secured loans are rarely a feature in public and government bond markets and offer a new way for investors to diversify.

Mark Papendieck, Chief Growth Officer, Integrated Portfolio Solutions

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Case Study : David Offer & Stropro

“In conjunction with Stropro, our firm has been able to deliver a uniquely tailored investment for our clients” David Offer, Director at Horizon Investment Solutions.

As Integrated’s first ever client, Horizon holds a very special place in our history (and David is of course also a director of Integrated).  When David was talking about when and how to invest in a market plagued with bull traps and bear market rallies, we were delighted to introduce him to Stropro .

Working with Stropro, David was able to rapidly take his investment proposition from concept to reality.  David’s goal was to generate a fixed return close to 8% p.a. which would outperform equities on the downside.

The strategy was composed of 5 individual structured investments, each linked to a pair of ASX-20 companies.

“Even if one of the reference assets falls below the barrier, I’m buying blue-chip ASX 20 stocks that we already own in our portfolios, at a lower price than today.”

By wrapping equities up in a Structured Investment, advisors and self-directed wholesale investors are able to utilise that equity exposure to deliver defined investment outcomes. They aren’t meant to replace stocks, but instead complement both.

The full case study was discussed in episode 4 of the The Integrated Portfolio Solutions podcast and was very eloquently written up by Rory Turner who was the Investment Analyst at Stropro that put together the strategy for David.

Rory’s full case study can be found here: Case Study.

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Portfolio Themes : Private Debt & The Hunt for Yield

In this inflationary environment we are continuing to see an interest from our clients in Private Credit/Debt funds. Some advisers are attracted by the low correlation to traditional fixed interest securities while for others the higher returns (an illiquidity premium) available in private debt are the key attraction. Private credit is a broad church covering syndicated corporate loans, securitisation, property debt and infrastructure lending, as well as other more esoteric segments.

Funds of interest to our clients have a return profile with a positive correlation to the RBA Cash Rate and/or senior secured loans at the top of the capital structure that offer the potential for additional protection.

From a regulatory perspective, APRA is likely to want private debt’s asset allocation classification to fall into “fixed income” for the purposes of the Your Future, Your Super performance test. As private debt is less affected by short-term market volatility and generally provides a higher yield with lower correlation to traditional fixed income asset classes it is likely to enjoy an increasing allocation in institutional super portfolios and increasing exposure in the media (e.g.  this recent AFR article: “QIC’s diversified portfolio – including infrastructure, real estate, private equity and private debt – helped insulate its returns for clients in a “very challenging market”).

The increased profile of private debt is in turn evidenced in increasing exposures in wholesale investors’ portfolios.

Three quite different approaches to investing in different sectors of the  private debt space can be seen highlighted below:

Short term, property backed debt

Generating yield from shorter term, commercial real estate secured debt is a growing market.  Non-bank real estate secured debt, in this case for the purpose of bridging a short term funding gap, can provide exposure to a portfolio of debt facilities across a variety of stages within a commercial property’s lifecycle – from early stage site acquisition, through to completed residual stock and bridging facilities for existing commercial properties.

The GEMI First Mortgage Fund offers the opportunity to invest in a diversified portfolio of first mortgage secured real estate debt, targeting net returns of 8% p.a.

A recent video interview with the portfolio manager can be seen below.

SME Debt Capital

Australia, like the rest of the western world has seen a significant decline in Bank lending to the SME market. Non-bank entities are now the key source of funding for SME’s.

Brett Craig , portfolio manager of the Aura High Yield SME fund takes the approach of funding lenders who provide finance to this space. He says ” to date, the Fund has screened 60+ lenders and invested in 7 of the lenders. We attribute part of our performance to our proprietary due diligence processes and deal structuring / negotiating prior to capital deployment. ”

Capital is provided to those lenders through a bankruptcy remote trust to segregate the funds risk away from the balance sheet of the underlying lender.  At the underlying loan level they will take directors guarantees as well as general security agreements. These senior secured loans are rarely a feature in public and government bond markets.

The Aura High Yield SME Fund aims to provide stable monthly income from a diversified portfolio of debt securities, principally issued by lenders to SME businesses in Australia.

A recent video interview with the portfolio manager can be found below.

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AFR Life & Leisure Featuring Darryl Johnson

This article featuring our co-founder Darryl Johnson appears here in the Australian Financial Review and is reproduced below.

Why neither road nor track running is enough for this exec

Integrated Portfolio Solutions co-founder Darryl Johnson has a thing for mountains and the bush. He answers our Time Out Q&A.

Darryl Johnson is executive director of Integrated Portfolio Solutions. He lives in the Blue Mountains.

Why running?
I loved short-distance running when I was younger but gave it up to focus on study – big mistake. Later, out of the blue, my boss at one of my former jobs challenged me to join his team for the corporate triathlon. I accepted (it was a time when you wouldn’t say no to the boss), got into training and got shin splints on my first run three months out from the race. But I was determined to get to the triathlon – and I did. I nailed the running leg and haven’t looked back.

“I’m a trail burner at heart,” says Johnson. “Big hills, single track, nature – nothing better.” 

Road or track?
Both but neither. I’m a trail burner at heart and am lured to the trails, mountains and the bush. Big hills, single track, nature – nothing better.

Do you race?
I do, but I was in racing exile for a while due to the pandemic. Now that racing is well and truly back, I’ve ticked off some half-marathons to get the mojo back and am eyeing some 50‑kilometre-plus ultra-marathons in the next 12 months.

Favourite distance?
All of them. Every distance brings a different challenge. A 5 km race is hard and fast and gives you that lactic burn. Road marathons reveal your tenacity. Half-marathons test your endurance. Trail ultras, where you’re out in nature battling the elements and your own demons for at least five hours, test everything – physical and mental fortitude, will, desire, determination.

How often do you train?
At my peak, I’m running five or six days a week, sometimes seven. Off peak, I aim for a minimum of three or four runs a week.

Johnson in marathon mode: “I’ve only ever run two road marathons”. 

Morning or night runner?
Morning. Early morning was my go-to pre-pandemic, but I now often go for one or two solo mid-morning runs in the Sydney CBD each week.

Social or solo runner?
I was once very much an antisocial runner. I would turn up to training sessions, get straight into my warm-up, finish, go home, shower and go to work. My mindset was that I was there to train hard and improve and that meant no time for socialising. But there are benefits to both. If I want a hard, gut‑busting hit-out I will generally go solo or hit up someone who will challenge me. Long runs, two hours or more, can be a real grind on your own, so if I can join a friend or jump into a group for a long run, then I will.

What motivates you to run?
To beat people and win stuff, of course. No, that’s a joke – kind of. The mental gains I get from the endorphin release are the primary reason I run, but I always have been competitive, so I am always trying to best myself or meet some predefined goal.

What about marathons?
I thought you’d never ask. I’ve only ever run two road marathons, one off the back of a block of training for a trail ultra and the other after racing the trail ultra. My best was three hours and six minutes. The coveted sub-three-hour goal is there, and I am certain I will get there one day. I’ve run well over 10 ultras but am yet to get beyond 50 km. My best was a sub-four-hour Six Foot Track [a 45-km trail run in the Blue Mountains]. After a long time not racing due to injury, I nailed my rehab and had the race of my life. That was probably the most elated I’ve ever been at the end of a race. The 100 km goal is also there: I will tick that off very soon.

Johnson runs five or six times a week when he’s at his peak. 

Do you travel to run and if so, where?
My wife, Linda, and I often book holidays around running or an event of some sort. We don’t holiday anywhere that’s not near a park run. Apollo Bay to Port Campbell, finishing at sunset over the Twelve Apostles – that was special. Crewing for a mate who ran 240 km from Eden to Mount Kosciuszko, twice, was one of the best experiences of my life. Being in Cairns to support my wife in her first Half Ironman was amazing.

How do you feel about travelling overseas for running events?
I am champing at the bit to go to more overseas events. For some strange reason, Marathon des Sables has huge appeal. Starting in Morocco, it’s six days and 251 km across the Sahara Desert, ending at the Dead Sea. They call it the toughest footrace on earth. I don’t believe it, so I need to see for myself.

Dream running buddy?
If we’re thinking about the personality and mindset of my ultimate running buddy, I’d say someone who knows when to keep the chat going and knows when to zip it – big hills, hard surges. Honestly, though, a good running buddy is anyone who shares a love of running, especially the trails, and runs around my pace.

lifeandleisure@afr.com

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The Inexorable Shift from Public to Private Markets: Capital and Debt

This article originally appeared in the SIAA Monthly .

Will public market assets still form a core part of our clients’ portfolios in ten years time? Absolutely. Will private market assets form a significantly bigger part of client’s portfolios then compared to now? Undoubtedly!

A fair question to then ask about the increase in the relative size of private markets is whether it is only a trend that will fade or whether it is a systemic long-term shift? Just as importantly, we need to know the implications for how we structure our wealth advisory businesses.

We have a maturing Venture Capital (VC) ecosystem in Australia that saw $10 billion deployed by VC companies in 2021 – and that is just capital deployed to start ups. That was almost as much as the $13 billion capital raised through ASX IPOs that same year. When you then also consider that the value of the private equity/ private capital involvement in public mergers and acquisitions  hit +$40 billion in 2022 to date (over 90% of the M&A deals were private deals) you begin to see the size of the shift. Figure 1 shows that PE-backed deals are accelerating.

Figure 1. Private equity-backed M&A targeting Australian companies. Source: AFR & Refinitiv.

One of the key reasons that companies choose to list is to access growth capital.  The reality of today is that many successful companies are accessing growth capital from VC and PE investors (think Canva and SafetyCulture in Australia)  and international billion-dollar tech companies like Discord and TikTok parent company ByteDance.

As large institutional investors seek to deploy ever increasing amounts of capital the necessity of taking larger stakes in assets or businesses without the short-term volatility or scrutiny of public markets (or at least a reduced correlation to public markets) will continue to move institutional asset allocation toward private markets.

Additionally, whereas exits for VC firms used to be via an IPO, the rapid increase in VC funds (and later stage private growth capital) and the necessity for these funds to continue to deploy capital raised (dry powder) into the future means that capital is readily available to fund a company’s future raisings. Exits for buyouts are more frequently dominated by strategic sales to other companies and there has been rapid growth in sales from PE to other PE firms.

So while there will no doubt continue to be quality investment opportunities available on public markets, the drop in listings globally means that public companies today are much larger and older on average than in the past . Access to the higher growth opportunities in a portfolio will necessarily rely more on private capital opportunities in years to come.

While these trends drive the growing conversation around the more glamorous rapid growth of private capital markets, less discussed is the shift of key segments of the debt and credit markets from public to private.

More private capital means more private debt…

This systemic trend towards more economic activity occurring in private companies at the expense of public capital markets has also led to a rapid expansion of the direct lending opportunity set. Australian private debt is estimated to be 10% of the corporate loan market, but heading towards the 40-50% share of non-bank lending now seen in Europe. In the US, the banks’ share of lending to small and medium business has shrunk to around 20%.

In Australia, there are underlying regulatory and macro-economic drivers of the growth of private debt. As in the US and Europe, strengthened lending guidelines and requirements for additional capital to be held in the wake of the global financial crisis of 2007-2008 led banks to reduce their exposures to mid-tier borrowers. In turn, this provided opportunities for non-bank financial institutions to expand their footprints in the private debt market.

From a regulatory perspective, APRA is likely to want private debt’s asset allocation classification to fall into “fixed income” for the purposes of the Your Future, Your Super performance test. As private debt is less affected by short-term market volatility and generally provides a higher yield with lower correlation to traditional fixed income asset classes it is likely to enjoy an increasing allocation in institutional super portfolios.

More tactically, the floating rate structure of Australian private debt protects against inflation and will likely be an attractive investment thematic in the current inflationary environment. Private debt in the form of corporate loans offers protection against inflation because they earn their returns from interest that is generally charged at a floating rate.

The takeaway:

The shift from public to private markets is structural and can’t be ignored. From the perspective of a wealth adviser, the ability to cater for these types of assets and the structures that they are paired with is critical. The increasing usage of private market assets will cause more advisers to question whether they are running an administration business, or an advice business, as the old tool sets of wrap accounts and spreadsheets struggle with investments that include capital calls, syndicates and other esoteric structures.

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Alternatives – having the whole world in your hands

This article originally appeared in the Investor Daily.

Interest in alternatives is growing. In the US, ultra-high-net-worth portfolios have exposure of between 37 to 52 per cent to alternative assets, but here in Australia, we typically see exposure of 20 to 30 per cent to alternatives. Why the difference?

Before I delve into this, it is important to note that when we talk about alternatives, we need to not only talk about alternative investments, but also traditional investments held in alternative structures. From a definitional perspective, each family office or investor has a different view on what an alternative asset is and how to classify them. Today’s world demands flexibility and the recognition that decisions around assets and classifications of those assets should be owned by the portfolio constructors – not gatekeepers, portfolio administrators, or any other third party.

At a high level, there are probably two key factors that account for much of the relative underuse of alternatives in Australian portfolios: accessibility and ‘artificial’ constraints.

To invest successfully, family offices need an unencumbered investment process that is free to consider, analyse and access their entire desired investment universe. Investment decisions are too often unnecessarily constrained by non-market-related factors or ‘artificial constraints’. We see some high-net-worth individuals (HNWI) and private client businesses shy away from certain structures such as investments with capital calls because of the administrative burden of trying to manage, administer and report on these alongside traditional assets.

The bull market is over. It is now time to be making well-informed portfolio construction decisions and to have flexibility and efficiency to action those investment decisions no matter what they are. To achieve this, there is of course a need for data and information to be both in-depth, which allows for precise decisioning, as well as wholistic to enable whole of portfolio decisions and consolidated reporting. Having the capability to administer, manage and report on alternative investments in the same way as the rest of your portfolio allows for more informed decision making around cash flows and asset allocation decisions as well as allowing for other functions such as compliance, risk, and tax to be fulfilled more efficiently and effectively.

Ultimately, if something is too hard to administer and report on, then the efficiency to return ratio doesn’t add up and it becomes too hard to invest in. If it’s hard to hold as a direct investment, HNWI prefer to steer clear.

Accessibility – the investment game changer

The realisation that you no longer need to rely on traditional investment product manufacturing providers when you have an unconstrained administration environment and investment universe is a game-changer. We are seeing the traditional investment value chain being flipped on its head and that many of these alternative investment propositions are now being driven from the bottom-up by family offices and private client businesses.

Accessibility is a key theme in this respect. To put this into context, access to some investments and investment capabilities has, in the past, been limited to large institutional investors. But this is changing rapidly and these capabilities and investment propositions are well within the reach of family offices and private client businesses.

One of the trends that we’ve been noticing is an increasing desire by private client businesses and family offices to access and harness capabilities to manufacture investment propositions in conjunction with specialist partners.

Over the last few years, we have seen a real hunt for yield driving the popularity of alternatives and the proliferation of debt capital market and commercial/industrial property syndication (both capital and debt).

Now, with surging inflation and rising interest rates driving a simultaneous decline in most asset classes, investors of all shapes and sizes are pivoting their usage of alternatives to risk management.

In addition to seeing portfolios moving to more defensive instruments such as floating-rate notes and market neutral hedge funds, we are also seeing increased interest in structured investments, which are at par with ETFs in terms of having a global market size of circa US$10 trillion.

Don’t leave out digital assets

With the artificial boundaries and accessibility issues out of the way, the conversation can turn to the role of alternatives in portfolios. Clearly, their role as flexible tools to solve risk and return problems is well established. Another role is to meet the varying appetites and tastes of investors old and young. This is especially important in the wealth transfer context where younger generations, who are the ultimate ‘heirs’ of their family’s wealth, might have more of an interest in digital assets like cryptocurrencies. Family offices and private client businesses don’t necessarily need to have an investment view on these types of assets, but to remain relevant and be able to facilitate consolidated reporting across a family’s entire wealth, all asset types need to be catered for.

While crypto is still considered a fringe alternative asset (of the $10 billion we administer for HNWI, less than 0.2 per cent is held in crypto-assets) other asset classes such as private equity are increasingly a long-term component of many portfolios. Five years ago, many HNWI would have looked to small and mid-cap listed companies for exposure to high-growth equity plays. However, with the burgeoning accessibility of venture capital and private equity, many of the companies that would have previously listed to access growth capital no longer need to do so and are remaining private. Because of this, we are increasingly seeing HNWI achieving their exposure through funds and also taking advantage of co-investment opportunities that the more progressive private equity companies are providing to their clients.

How can technology help?

The proliferation of alternative asset marketplaces is helping to solve the accessibility issue but at the same time, it is exacerbating the problem of data being siloed. Investors need to bring all their data together to make decisions on the portfolio as a whole, rather than dealing with the composite parts on a stand-alone basis.

This is where technology needs to come into play. In that context, the role of a portfolio administration and reporting service is to remove the artificial barriers around investing and portfolio construction and facilitate information flow and partnerships. In basic terms, this means that the more tech can assist here, the easier it is for the investment managers and the portfolio decision makers to focus on what they do best.

However, it is important to note that while tech is a critical enabler in aggregating all portfolio data and opening up the investible universe for investors and their advisors, it is only a part of the solution. The world of alternatives is so broad and relationships and networks so important that tech alone is never going to be the answer.

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Financial Standard Feature Profile : Darryl Johnson

FINANCIAL STANDARD recently featured a profile of our very own CEO and Co-Founder, DARRYL JOHNSON.  The article provides a ‘behind the scenes’ look into what makes  Darryl tick and explains how the lessons learnt from training and competing in ultramarathons have set him up for success in the finance world.

The ORIGINAL ARTICLE, is reproduced in full below.
Running the gamut
 
Darryl Johnson was conned into running by a manager 15 years ago. Little did Johnson know, running would soon become his life’s passion, and the lessons learnt from training and competing in ultramarathons would set him up for success in the finance world. Chloe Walker writes.

Darryl Johnson knows a thing or two about running. He also knows a thing or two about running a business.

As founder and chief executive of Integrated Portfolio Solutions (IPS), Johnson is always “training hard to race easy” and encourages the teams he leads in both running and business to always “find a better way of doing things”.

From humble beginnings in Sydney’s west, as a child Johnson enjoyed sports, and often took part in Little Athletics alongside his siblings. His true passion for running, however, would not come until much later in life.

“I was always interested in sport as a child,” Johnson recalls.

“Mum would drag us down on a Saturday morning to Little Athletics and I was the only one who really wanted to be there. But I gave up sports and everything else except school to ensure I did well on my HSC, which, in hindsight, I probably regret – but thankfully I did quite well.”

Armoured with good marks, Johnson took on a degree in maths and finance at the University of Technology Sydney.

“Numbers are really something that I just talk to, so my career was always going to be related to that,” he says.

From university, Johnson landed his first role at Bankers Trust (BT) working through multiple operational roles such as custody, margin lending, and general operations.

“It was always operations that I was drawn to because it gives you the opportunity to challenge yourself and come up with better ways of doing things,” Johnson says.

“It’s generally not the sexy part of a business, but it’s the engine room where you’ve got to keep things moving and make sure you’re operating efficiently. And that’s challenging.”

From BT, Johnson progressed to several different operational roles at Deutsche Bank and HSBC both in Sydney and the UK.

Later, he accepted a role in the Wrap division of Macquarie Bank.

“Everything you hear about Macquarie from 10-20 years ago is true,” Johnson laughs.

“They work you really hard. If you work hard, you get rewarded and if you put your hand up for more work, you’ll continue to get rewarded.

“The experience I gained at Macquarie was second to none and I had exposure to some really great operators.”

A stint in financial planning followed and,  although short, would lay the groundwork for what he does today.

Johnson says: “I completed the Diploma of Financial Planning, which was the requirement at the time to be a qualified financial planner. I worked in a business where you had your client base on a platter, so it was a private financial planning business, but they had a preferred client base from state government.”

It was great, but if Johnson wanted to start his own business or join another, he knew it would come with a large element of sales.

“I didn’t really like where that fit with financial planning at the time,” he said.

So, Johnson decided to go back to what he knew and loved: Operations.

“I wanted to go back to Operations but on the other side of financial planning, and that’s where Macquarie and some of my experience in other roles came into play,” he explains.

“This is squarely where I am now; on the other side of the financial planning fence and helping financial advisers get better outcomes for their clients.”

Inspired by successful founder-led businesses around him, Johnson decided to run the gauntlet himself.

“I would always follow colleagues and former managers to other roles. Quite simply, they would leave their business and go to another one, and then a few months later, they would contact me and see what I was up to, and sure enough, I’d end up following them to the same company,” he says.

“Again, I gained a tremendous amount of experience from doing that. But along the way I’d hear stories about the guy who sat on the milk crate and created a business which went from four staff to 4000 staff. I’d hear those stories and think ‘I want to be that guy. I want to have a story’.”

He decided he was no longer going to follow anybody or “take the easy way and get tapped on the shoulder”. Instead, he started looking for a start-up role.

And Johnson found what he was looking for in IPS.

“We had a little bit of a leg up in the fact that the other co-founder of the business is a financial adviser, so we already had a client base. But still  it was that milk crate story, where it was just us,” Johnson says.

Fast forward to today and IPS has just over 50 staff and boasts $10 billion in funds under administration.

“We’re dealing with advisers from all walks of life: retail advisers, family offices, ultra high-net-worths. That universe is untapped for us, even though it’s $10 billion, the sky’s the limit,” Johnson says.

Now in a position of growth, Johnson’s day-to-day role at IPS has shifted from doing “anything and everything” to focusing solely on plans for the future.

“It’s taken a long time to get to where we are, but now we’ve got a really good team and a great leadership team as well. Those guys take on a lot of the high-level stuff that I might have been doing before… . I’m constantly looking at key business metrics to make sure the business health is where it needs to be and exploring many different opportunities,” Johnson says.

Drawing comparisons to running in marathons, Johnson says preparation is crucial for any business’ success.

“In running there are setbacks and injuries, both mental and physical, and you get that in business too,” he says.

“You could be preparing or building for something, whether it be new technology, or a new team, and suddenly there’ll be a setback. For example, you get an email from an angry adviser because you’ve made a mistake.

“You get that with running as well and mentally, you’ve just got to overcome it and know that you’re in a position where you can move forward, because you’ve done the hard work, in training and in business, to deal with this.

In business, the key is to build loyalty and fix your mistakes, he says.

“With running, races are the reward for all the hard training. So, “train hard to race easy” is something I say all the time,” Johnson says.

In business, it’s the same, he adds:  “If we’ve trained hard, built a good team and prepared well, when we start winning more business and becoming more and more successful it comes easy because we’ve done the prep.”

In an ever-changing economic environment, Johnson says IPS is ahead of the game. Without giving too much away on the IPS pipeline, he says that “the world of finance is ever changing”.

“We have a view that the world’s going to look very, very different, particularly in finance in five years’ time, and then in another five years’ time, so we’re working on products and services that ensure we stay ahead of that change,” he explains.

“I also think, after 11 years, we’re in a place where we can be part of the change and not just go with the change.” fs

 
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The Rise of Alternative Assets

The rise in the use of alternative assets is demanding a rethink of ownership models by financial advisers and their higher net worth clients. This article written by our own Mark Papendieck was published in the May edition of the Stockbrokers and Investment Advisers Association newsletter.

Read the article below, and the full edition of the monthly magazine can be found here.

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IFA : Ignore Innovation at Your Own Peril

The IFA Magazine has published an in-depth interview with several industry figures including our own CRO, Mark Papendieck, discussing innovation and how the pandemic has altered or accelerated the trajectory of some of our industry’s biggest trends. Read the full article below.
 
 
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Platforms & Advisers Best Interests

Platforms and advisers best interests

Platforms were devised to relieve the portfolio administration headaches of financial planners and investment advisers. They were meant to be an administration tool that enhanced your efficiency and relieved you of non-core (but critical) parts of your business.

Last century, to make back-office portfolio administration and reporting more efficient, client investment portfolios started to shift away from directly held assets towards ‘Platforms’. First it was ‘Masterfunds’ that were hailed as back-office efficiency drivers and then earlier this century, Investor Directed Portfolio Services’ started to take the limelight.

Fast forward to today. ASIC treats platforms as financial products; the best interests’ duty applies equally to platform recommendations and investment strategy; pages in your SoA are filled with explanations of why the features and services of the recommended platform are suitable for your clients and how the available investments were selected by your platform operator.

Counter-intuitively, and adding to the rapidly mounting compliance burden that comes with using a financial product, advisers are most commonly using three or more platforms in their practices. Platforms – originally designed to make advisers more efficient – are now actually creating inefficiencies as businesses lose the benefits of a single back office solution.

Oh, and now to remain compliant with the Design and Distribution Obligations your platform may require you to attest to the fact that your clients received personal advice in relation to a platform recommendation and/or that the advice is current and consistent with the platforms stated Target Market Determination.

As they say, ‘history doesn’t repeat itself, but it often rhymes’.

Technology, our industry, and portfolio construction have come a long way since the early days of platforms. In a post-walkman, post-MySpace and post-Hayne environment, If the aim of using a platform was to simplify your portfolio administration it’s not only worth asking if using platforms is in the clients’ best interests, but it’s timely to ask if using platforms is also still in your best interests.

We know that private client advisers are seeking out more alternative investment solutions for their clients’ portfolios and want to look beyond the confines of a platforms ‘approved product list’.

Imagine a future where you had all the benefits of a platform but without the complications, restrictions, and headaches of a product structure.

Imagine if constructing investment portfolios wasn’t dependent upon a product provider’s menu or if you didn’t have to provide financial product advice for an administration and reporting solution.

For over 10 years, Integrated Portfolio Solutions has been helping investment advisers and private client businesses to focus on what they do best: delivering quality client investment experiences and service excellence – without a product wrapper. We replace the headache of managing back-office portfolio administration with the pleasure of knowing that wherever you choose to invest your clients’ portfolios, we’ve got you covered.

Portfolio administration, tax and consolidated reporting on whatever asset you want to invest in? The future looks a lot like the past – just without the product wrapper.