Jake Elmhirst from Coller Capital speaks to James Dunn from The Inside Network on what private equity secondaries are. The Inside Adviser
As the biggest ETF provider in Australia, Vanguard has the right to crow about another knockout performance over active equity. But invective commentary is a red flag, especially when it’s based on something as changeable as recent market performance.
Michael Birch’s big rent-roll of the dice
As a high-profile fund manager and corporate adviser, Michael Birch is well aware that you get limited opportunities to bring a wholly new product to market. Accordingly, the investor spent three years and thousands of hours researching property lists leading up to the launch of his latest venture.
But that was only half the battle. Alongside the early mornings and late nights at the laptop, Birch needed to find a corporate partner that could provide not only capital, but the right slate of expertise to get the offer across the line.
The fund in question, called the MDC Trilogy Wholesale Yield Fund I, gives investors exposure to mostly Australian residential property through property management ownership rights known as rent-rolls.
It’s a play that has the potential to be incredibly lucrative for the fund and its wholesale investors – distribution is targeted at 10 per cent net of fees and expenses – but it’s also one that takes an incredible amount of expertise and diligence.
“The risk management work that goes on behind the scenes is significant,” Birch tells The inside Adviser. “We might have three months of due diligence before we can look to acquire a business, and then [start] making sure we’ve got a clear pathway to grow those assets.”
The difference between a property-based fund like this and a typical non-property managed fund, he explains, is that there are an infinite number of intricacies involved in each investment decision when it comes to rent-rolls.
“If I compare running an actively managed long volatility hedge fund to this, the risk management work is much, much more significant,” he says. “You’ve got so many more moving parts.”
On top of the data-based research involved in all fund due diligence, Birch says rent-roll investment requires three key elements; “brand, personal relationships and an ongoing referral network”.
“If you’re doing those three things well there’s sort of a cascading impact,” he adds. “You rely on a lot of people as well, whereas when you’re running a risk management portfolio you rely on data.”
Forging relationships with agents was a big part of the due diligence process, Birch says. Another, more fundamental element, was starting out with the right corporate partners.
The listed Agency Group Australia Limited was the initial tie-up, which gave Birch the national network he was looking for. After that, he needed to find a management partner that could provide the right resources to get the fund rolling.
“I had capital and an idea, but I needed infrastructure around me. And so I went to Trilogy Funds,” he recalls. “When I finally spoke to the management team there, they said, ‘this is exactly what we want to do.'”
Rolling the sleeves up
While the three-year gestation period for the new fund is probably longer than he anticipated, Birch appreciates that the extra run time has probably landed him in a favourable market position. Tumbling markets are taking back some of the kudos passive products have won from investors over the last decade, giving active managers the chance to show their value.
“If I was giving my money to anyone over the next period it would definitely be an active manager, with a lot of experience,” he says.
Active decision making based on fundamental research is a concerted advantage in a market as volatile as this one, he reckons – especially when it comes to real estate asset selection.
“When we look at real estate groups and speak to vendors, they want someone who’s prepared to roll their sleeves up when markets are tough…”
