04/05/2017 - WingateRyan Levin talks to The Constant Investor

 

This interview was first published on The Constant Investor.

Here’s an investment that’s unaffected by markets and real estate prices.

Wingate Investment Partners Trust gives you access to senior secured debt investments for an attractive risk-return ratio. WIP3, as it’s known, invests mainly in property debt with a small allocation to consumer debt.

Ryan Levin is Managing Director of Property with Wingate and came to investing as an actuary, so he is proud of their risk-first approach – meaning that risk is priced first, before investing.

WIP3 has a $100,000 minimum investment, has been running for 18 months and returned just under 10% since inception.

Ryan Levin tells James Brandis that WIP1 and WIP2 are still going strong and the need for WIP3 is due to the high demand for access to this type of investment.

Ryan, can you start by telling us a bit about Wingate? How would you describe the business?

Wingate is an investment group that is first and foremost about investing our own capital and then that of our co-investor clients. We have a risk first approach to everything we do and by that I mean, the first thing we consider in any investment opportunity is the inherent risk in an opportunity and understand the mitigants to that risk and whether we can get comfortable with the level of risk. This is driven substantially because we’re investing our own capital and tend to be quite a risk averse bunch. If we don’t get comfortable with the level of risk, we move on and that’s different than many others in this space where they would price the risk and pass it on to someone else. We simply don’t do it. We’d rather not invest than make a bad investment, so we have no issue being uninvested if we’re not seeing good opportunity.

When you say your own capital, are all of the staff at Wingate fully invested in Wingate?

Wingate is owned by its executives and a number of private and a very small number of institutional investors. So Wingate balance sheet is substantially executives funds and in addition to that, many of our executive and directors can invest with Wingate itself in our investment opportunities, so that’s a cornerstone to the way we operate. No Wingate investment proceeds without Wingate balance sheet itself investing.

You’ve just been highly recommended by Australian Property Investment Research for your Wingate Investment Partners Trust or WIP3, I believe. That’s a bit different to the average retail fund, isn’t it? What’s it all about?

WIP3 is a portfolio of proprietary debt investments so Wingate in our various operating businesses originates and structures debt investment opportunities among others. WIP has the first right to co-invest with Wingate balance sheet in those proprietary debt opportunities so that the WIP portfolio currently is around 40 investments. It’s made up of 40 individual debt investments, which includes senior secured property debt, junior property debt, and notes in a portfolio of consumer loans managed by the Wingate Consumer Finance Business.

When you say senior debt, you’re talking about the access to funds or debt above equity, aren’t you? This debt sits first in line above shareholders.

Correct. Senior debts effectively means first ranking secured by a first mortgage of a real property. Junior debt typically is second ranking secured by a second mortgage over a real property.

Is it those sorts of investments that give you that risk return that you’re looking for that you don’t need to price in risk?

We do price in risk. We certainly don’t make risk free investments. Every investment we make does carry risk but we’re very careful about the level of risk and in understanding where the risks are and mitigating those to the extent that we can. To give you a simple example, if a property owner comes to us with a property worth $20 million, we get comfortable with the value, we get comfortable with understanding the property and the property fundamentals, and very importantly, the counterparty. Who it is that we’re doing business with. Those are the first things we look at.

We might lend them, just for arguments sake, $14 million secured with a first mortgage over that property and corporate and personal guarantees. In return for that, we would earn a fixed interest rate, so behaving much like a bank, though we’re not in competition with the banks. We operate in areas of the market where the banks have restrictions that don’t allow them to play effectively. In that example, if the property market were to move such that that $20 million property ended up being worth $16 million, we still get repaid in full with all of our interest. So a 20% market fall in that simple example doesn’t affect us at all. Our return is uncorrelated with the market and obviously there is some market exposure and market risk, but it’s substantially mitigated by the fact that we’re lending to well below 100% of the property value.

Are you always lending directly to the end user business that comes to you or is there sometimes a third party? Are there other investments as well?

Where it’s property debt, we always lend directly to the property owner or property developer, as the case may be. I also mentioned that WIP3 includes notes secured against a portfolio of consumer loans. Those are consumer loans originated by the Wingate Consumer Finance Business which trades as Now Finance and those are really loans to middle Australia, ranging from $5,000 to $50,000 and repayable weekly or fortnightly over 2 to 5 years.

The way those loans are funded is firstly by equity provided by Wingate so the first loss is borne by Wingate and then a notes program and a bank funding loan. That note program, we have the WIP fund, or WIP3 in this instance, invest in or co-invest in and we offer those notes too to our co-investor clients.

Is there any other investments in the fund? It’s a diversified fund, is there other investments beyond those 2?

The funds mandate is first and foremost it can only invest when Wingate itself invests, so it’s a co-investment fund, and secondly, it’s a debt-focused fund. We do on occasion have other types of debt instruments where we’re lending to a counterparty with security. The vast majority of WIP’s activity is of the property and consumer finance debt with property being currently the substantial majority. Around 80% of the fund’s investments are property secured.

Is there many other products on the market like the WIP3?

Not that I know of. There are some property debt funds, not of this scale. There are institutions that manage funds that are in some ways alike. But in our market where we’re lending primarily to the large end, the more sophisticated end, of the private property owner and property developer, I’m not aware of many alternatives to WIP.

Is it in any way similar to a real estate investment trust?

A real estate investment trust is equity in real estate, whereas this is debt. So a real estate investment trust is very much correlated with the real estate markets. This is much less correlated and you’re insulated from the market by the fact that you’re lending to a property owner and therefore, insulated from property movements to the extent that you’re lending to less than 100% of the value of the property.

What about inflation and interest rate rises? What impact does that have on the WIP?

Inflation probably will mean that property values increase and the value of the security increases. Interest rate rises potentially mean the opposite. That puts pressure on property values. One thing we are quite considered about is what the value of the property is and where that might be heading. We’ll never make assumptions about improvements in property values and our underlying security, but rather the opposite. We certainly will never rely on markets climbing and where we see a risk of the market going in the other direction. That does get built into our pricing and our structuring.

How long has WIP3 been running and what sort of results have you been getting, Ryan?

If you don’t mind, James, I’ll take a step back from that question and give you a broader background on WIP, including WIP1 and WIP2, because that will give you the context for WIP3. WIP1 started four and a half years ago and it actually started as a fund for Wingate shareholders. So the original purpose of WIP1, back in November 2012 when we started WIP1, was to allow our shareholders, which is Wingate executives and our non-executive shareholders, to co-invest with our balance sheet.

WIP1 started off at $12 million back in November 2012 and that $12 million was quite quickly deployed. In mid ’13, we decided to open WIP1 up more broadly to our co-investor clients and that was more successful than we expected because our co-investor clients were quite hungry for co-investment in the types of investments we were making and the supply of that investment opportunity was low, so people weren’t getting the access to investment that they would have liked. WIP1 was an opportunity for them to get that access through the fund, which as I mentioned earlier stands first in line for our proprietary debt investments.

WIP1 grew to about $42 million in June ’13. We decided to close that fund at that point, given its substantial growth, and we launched WIP2 later in 2013. That actually started in early ’14. WIP2 has been closed really for a technical reason.  There’s a regulation called TOFA, Taxation of Financial Arrangements, which prescribes the tax structure for a fund and that becomes mandatory when the fund reaches $100 million. WIP2 was not designed to be TOFA compliant and so has been closed at around $95 million before it hit the $100 million mark.

WIP3 on the other hand has been designed to be TOFA compliant, so it doesn’t have that artificial upper limit. The three funds have identical mandates, they co-invest with each other and they currently stand at close to $300 million in aggregate. In answer to your question about performance, WIP1 obviously has the longest track record being four and a half years and that has returned a net 12.85% per annum since inception. WIP3 which commenced in July 2015, so that’s a little over 18 months old, has done a little under 10% per annum since inception and is currently at a run rate of 12% per annum.

You mentioned co-investors a few times, what’s a co-investor? That’s different from people who are just buying units into the WIP?

It’s actually the same thing but we view them as co-investors because they’re co-investing with us, so rather than seeing them as simply an investor client, they’re co-investing with Wingate balance sheet on one hand and many of our executives, myself included, on the other hand. We sit shoulder to shoulder with them effectively in that investment, exactly the same fee structure and risk profile.

In your committee for WIP3, you’ve got a couple of independent members. What’s their role?

Their role is to ensure that things are run in a way that’s in the best interest of unit holders. To be a check and balance on the executives. We think that the fact that we’re managing our own money alongside our co-investor’s money means there’s less requirement for that but the convention is, and we subscribe to this, that having independence is a good thing. At the same time, there’s value add in having people who have experience outside of our business so we’re quite particular about the expertise and experience that those people have and believe that they do add substantial value.

Tell us a bit about yourself, Ryan. Where did your investment career begin?

My background is a little different from most in that I’m an actuary by training, so my background is in insurance with very much a risk focus given my actuarial training. I started off in life insurance, moved into health insurance, and actually started a health insurance business in Chicago. Spent six years building that before I moved to Australia around 12 years ago and it was around then that my career path changed a little, moving out of insurance into investment.

I joined Wingate in the very early days. Wingate has been around for about 13 or 14 years and really have been integral to building the business with a particular focus on our property and other investment activities.

Have you read any books in your actuarial background that have stayed with you that you might recommend to investors from a different perspective?

That’s an interesting question. Actuarial studies often is quite dry and boring. I can’t say that I’ve read any actuarial books that I would recommend that would be of much interest to a layman, but I tend to focus on more traditional investment reading in particular I’m a follower of Warren Buffett and the value style of investing.

What about when you’re not investing? What does an actuary do in their spare time?

I don’t often admit that I am an actuary because that creates certain perceptions (laughs). I’m a father, I have three children that consume a lot of my time and happily so. I run, I have a personal trainer and exercise in the gym, and spend a lot of time working. I love what I do.

That’s great. Well Ryan, thanks for introducing us to the Wingate Investment Partners Trust.

My pleasure. Thank you, James.

 

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