Perks Capital Conversations Podcast | Markets Moves AI, and Investment Strategies

Welcome back to Capital Conversations. I’m Simon Wotherspoon, head of Perks Private Wealth and I’m joined once again by the man who’s seen more market cycles than most of us have had hot dinners. Christo Hall, welcome.

Thanks, Simon. Good to be with you. Looking forward to today’s podcast. Yeah, well, ⁓ second time we’re sort of back in business again. So, it can’t have been too bad the first episode. Yep. Well, let’s start off like we did last time with a quick market wrap. And of course, there’s been plenty to chew on since we spoke last. Inflation came in a bit hotter than expected. So, the RBA must be feeling like they’re playing a bit of whack-a-mole there with CPI. Interest rates, still the weapon of choice, but…

Maybe we’ve seen the last cut. I don’t know. I’ll get your view on that. We’ve had gold up 20 % in six months or so. So key to get your view on that is that the new safe haven or just a shiny distraction and AI. There’s lots of talk about potentially being a bubble in this circular economy of chips and compute and each of the big players selling to one another and creating something out of nothing, it might seem.

Anyway, lots to talk about and very keen as always to get your views on markets, Christo. Brilliant, Simon. I think my favorite thing that I’ve seen since our last podcast was Donald Trump’s dance when he went to the AIPAC conference. That was outstanding. He’s got a little jiggle going. He’s got it down. Yeah, he’s just got it down pat. Always, always good viewing from the Donald. So going around the grounds, markets. Yeah, pretty interesting, obviously, period. mean, global equities.

continue to, you know, continue to rise higher. If I look at what’s happened in the last, you know, six to eight months, the outlook for equities has actually improved really. I mean the earnings, if you look at, you look at that, and I’m talking really about offshore, we’ll come to Australia in minute, but the earnings have started to base out from just those, you know, magnificent seven tech companies, which again, continue to generate good earnings growth.

But I suppose what is pretty interesting is how much of a percentage they are now of the S&P 500. It’s material and I think they’re now approaching 40% of the market, which is absolutely material so a lot of concentration in those names that we know about, but they are continuing to deliver fundamentally. But we’ll talk more about that in the AI thematic because that has really been what’s been a key driver of markets. But we’re starting to see, you know, some, you know, some profit margins benefiting from the AI revolution just on their cost lines again, which will come to you later on. So global equities look, you know, look okay. If I look at Australia, still a very benign outlook. Earnings of, you know, growth is not that not that exciting. But look, it’s not disastrous either. So that’s hanging there. The valuations, though, are looking at the very at the higher end. There’s no doubt.

even comparing that to global markets. The Aussie market does look expensive given where the earnings growth, the earnings growth trajectory is, but still looks okay, but is definitely at the upper end. And we’re going through AGM season at the moment and there have been a few, you know, few profit downgrades on the back of that season. We’re still going through it. You might pick that up in your spray the day later. Yes. Yeah, we’ll go through that. There’s been some really interesting developments in the last couple of months and some stuff there.

Looking at fixed income, this goes to your question about interest rates. I mean, really interesting where we sit in Australia versus the US. Now, for the listeners, the US cut rates again recently. And the reason for that was that, in a way, the AI benefits them are really starting to impact the labor market, i.e. job losses. And that’s why the Fed cut rates because the labor data was really poor. So the unemployment rate is starting to head up quite sharply in the US. And that is at a complete opposite to what’s happening here in Australia. We had very, very strong inflation numbers here over the last couple of weeks and ⁓ the Reserve Bank didn’t cut rates last time and I don’t think that we’re going to see any rate cuts on Melbourne Cup Day which people are expecting. We could be done for this cycle, and the Reserve Bank government made it very clear that you know once the rebates came off from the government on electricity prices they’ve snapped back. Education, council rates, a lot of essential spending items are still too high.

And so there is some real caution from the Reserve Bank about continuing to cut rates going forward in the markets. Certainly, had three rate cuts pricing before those commence from the Reserve Bank. It’s now one in next May, but I think that’s looking unlikely at this point. So very, very different dynamics in two big economies. If I look across to Europe, they’re almost through their rate cutting cycle as well. So the US, unusually in this cycle is a bit of a laggard with regard to where it is in the cycle. But again, that’s because they are the early beneficiaries of AI because their labor laws just are nowhere near as tough as what they are in Europe and Australia. It’s a lot harder to get rid of people. There’s lots of talk about this potential for an AI bubble and the idea of a circular economy. So one example is AMD was allowed to invest in open AI, $100 million, I think it was.

And so OpenAI has a hundred million dollars to then go and buy chips back from AMD. So AMD looks like they’ve sold a hundred million dollars of chips, but it was funded by their own balance sheet.

What’s your view on whether there’s this bubble or whether it’s real and you’re worried about valuation, particularly in regard to those technology companies at the leading edge of AI? Yeah, so I you’ve got to look at where you sit in the supply chain. And I think those, I it’s a classic example where it’s looking…fluffy when you get that sort of activity, because what’s happened is the markets in giving them credit for that deal, whereas really, it’s not really been that value enhancing. And when you’re getting, you know, stocks, they’re incredible stocks like NVIDIA trading on 30 times, you know, revenue. I mean, they are very, very excessive valuations. But where you are going to see the real benefit of those, you know, even Perks here. I mean, the adoption of AI is real, it’s here to stay. And the cost benefits from that are going to be material. So the productivity for companies is going to be very material over the journey. And I compare it to pretty much the like it was with the introduction of the internet. And you’re going to get lots of failures company wise, but the actual the actual phenomenon is here to stay. And so those companies, you know, which can have agile business models, which can, you know, adopt AI successfully into their businesses and see those productivity benefits are going to really, really excel here.

So the profit acceleration is going to be quite pronounced.

While there might not be excessive valuations, let’s say in the US, when you think about the S&P 500 across the market, may be well at some pointy end, the AMDs and the oracles and the like. That’s right. And we have to be careful there. That’s right. They need the earnings to grow into those valuations because they’re looking, the multiples are looking pretty full. we were talking off air before about, you know, where, at the edges, where the investors put new capital, whether that’s in listed markets that are expensive at the pointy end or slow growth relatively expensive in Australia, or is it more towards real assets, hard assets? Yeah, yeah. And this goes to the inflation question. and this goes to your question around gold at the beginning of the podcast.

Look, essentially, the market conditions are really favoring more of a focus on hard assets. And whether that be infrastructure, whether it be commodities, you know, such as gold, whether it be, you know, cheaper stocks, which are going to benefit from the AI boom, that’s where the focus is going to be. Pockets of private credit, but we have to be very careful there as well. And where that money is coming from, are some of the very lofty growth stock valuations that we talked about before, and just financial assets in general.

So I think there’s been some money taken off some of the equity, the public equity markets. Yeah, CBA is a good example. Reach record highs and surely can’t keep going. That’s right. So you’ve to be very much valuation sensitive here.

I think hard assets are going to do well if inflation is going to is going to win the trough in that globally. You know, these hard assets are going to perform better. That’s certainly where we are in the cycle. And this goes back to gold. A lot of questions around gold, obviously, and it’s had a massive rally, but it’s not just about, you know, its use as an inflation hedge. There’s a lot of factors driving the gold price and I mean, all of that’s around the geopolitical tension we’re seeing at the moment and just the central bank buying as well, which has been material because they’re to diversify the risk away from US financial assets such as the US bond market where they’ve got a lot of exposure. They’re looking to diversify away from that, given all the trade tensions between the rest of the world and the US. They don’t want to have all their…

eggs in the US basket. They want to have some diversity, you know, around that from a risk management standpoint. So, you know, and gold’s finite. You can’t, it’s not like bonds, which you can just print more and more of if you want to, commodities have got a finite base around them. So I think gold has had an exceptional run up in the last, probably, I don’t know, 24 months, but certainly the last six months. Yes. Do you see that continuing or is it going to have a bit of a pullback? It’s come off its peak, it seems. And yeah, it’ll probably have a pullback. But I think structurally, I think gold’s still going to continue to move higher. And dare I mention Bitcoin?

Well, mean, Bitcoin’s driven a lot also by rates. It’s really interesting what drives that. And it’s also highly correlated with the NASDAQ. So if you think some of these really pointy end, you know, tech stocks have a pullback, I would have thought Bitcoin might react with that. But again, Bitcoin is here to stay as a thematic. It’s just the price you pay for it. But it’s gonna be volatile. There’s no doubt about that. It’s gonna be volatile. And those correlations are pretty high with the NASDAQ.

All right, well, Christo, we soon need to get to our special guest of the day. But before we do, this is your time to shine as far as Christo’s spray of the day. So who’s in the firing line this week? Yeah, so who’s in the firing line for this week?

A company that was a has been a market darling historically. It’s a gross stock, but it’s got itself it looks like in a spot of bother and that company is called Corporate Travel Management. Now it was it was suspended by the ASX on the 28th of August. So it’s been suspension for quite some time. And this was after it put itself into a voluntary trading halt and being a trading halt and being suspended are different. So they put themselves in voluntary trading halt. And the catalyst for that was because they changed auditors. And their previous auditor, I think for the past five years up until this year, had been KPMG. And they changed auditors to Deloitte. And essentially, when their accounts were being audited by Deloitte, they’ve spotted some accounting irregularities. Some bad ones. ⁓ Looks like they’re emulating out of Europe.

And so they refuse to sign off on the audit on the account. So from what I can see, those accounts are going to be restated. They’re doing a lot of work to get them right. The company’s said it’s still suspended. It last traded at just over $16. So and the NTA of the company is about 50 cents. Wow. Yeah. So it’s a very much a service orientated company ⁓ in obviously specializing in the corporate travel side.

So they’ve said that they’ll look to come back onto the market in November in this month. So let’s see how they go. But history has taught me that companies that have restatements of accounts that have been suspended don’t tend to fare very well upon their ⁓ relisting. Well, I’m pleased to say that ⁓ our clients portfolios have avoided your spray the day. This time, we don’t hold Corporate Travel Management. hopefully we can continue to evade. That’s great.

Alright, Christo, We’re now on to today’s feature conversation with thrilled to be joined today by David Leslie, portfolio manager at Elliston Capital and the driving force behind the Jade Private Asset Fund. David, welcome to the show. Thanks, Simon. Thanks for having me. Yeah, great to have you over here, David. And David and I used to work together when I was at Elliston as well. So really happy to have you in the hot seat.

It was only yesterday. It does seem like that. It’s just amazing. But you have got a South Australian connection.

Anyway, so you might just give it a touch on there before we get into the fund.
So I came to South Australia in 1995 working for a company called EDS that took over the South Australian government’s IT infrastructure and I moved over as a young financial analyst working on these mega IT outsourcing deals doing sort of discounted cash flow analysis helping with the billing systems and accounting and whatnot. So good experience, worked out pretty well, upcoming over for year and a half, found my now wife. And she was an accountant in the Barossa Valley, so lots of good connections with South Australia. Brilliant, we can claim him as one of our own.

There That’s fantastic.

So Dave, before we kind of get into JAADE and the fund, just interested, what got you interested in markets when you’re looking back at your career? Because you’ve been with Ellison for 20 years, I think, before that with Deutsche Bank. where did you get your passion from?

So out of uni, I did economics and finance at university. And I think the conundrum for me was always, you from a financial market sense, it was trying to find out how you could sort of be relevant and useful. And, you know, obviously the idea of the share market, things going up and down, but probably feeling a little bit more of a connection to try and work out what was the sort of future facing businesses. So I gravitated early on in my career to technology. So EDS I worked for for five years. went for them in South Australia, but also overseas.

And I guess what kind of married everything together for me was, you know, around that dot com bubble time that you and I remember as more mature, investors. Simon won’t be too familiar with it, there was an opportunity with the technology background to be able to translate what technology businesses did in finance. And so I’ve always kind of been as interested in technology as what I have in finance to be frank. So the motivation for me has been always like, I love the thematic side of the investing and then the mechanical part of investments, DCFs, structuring in terms. I enjoy that application.

It’s a true story, David, when he was at Deutsche Bank before joining Ellerston, was coming to gaming sector and was very, very early on the aristocrat story, which I have to say is still in my super fund today. And it has been an absolute multi-bagger as far as returns goes. been a great investment.

So I was a Deutsche from 2000 to 2005. And after the tech sector blew up, Aristocrat had technologies in its name. And so it covered the gaming sector for a while. And then that sort of led to the introduction to CPH, the Packer Family Office at the time, which was effectively the foundation for what is today Ellerston Capital. Yes. Yeah.

So it’s been a good journey. 20 years is a long time to work anyway, but it’s been great.

Yeah. And so if you look across that journey, just people wise, who have been some of the most influential to think on your, on the way you think about investing and obviously you’ve had some really good success stories. Probably in a similar vein and you know, there’s lots of great people you meet on your way. It’s a very privileged position being an investor because you meet smart founders running businesses. But Anthony Clock, who’s one of the original partners with JAADE, he’s probably got 10 years more business experience with me and he’d sat on the boards of Seek and Car Sales when they were private companies. And so Anthony had come at the world as a lawyer doing business development around sort of technology companies. And I think in the early days of wanting to be an investor in technology companies and sit on boards and influence one of the things that’s a really defining attribute of how we work with our portfolio companies is really about that sort of bedside manner. Because enlisted companies, if you don’t like the outcomes, you just sell your shares and you move on. But in a private company, liquidity is obviously, you’re locked in for a much longer period of time. So really working with founders, with managers, having a relationship, being able to tell them the hard news sometimes and encourage them to go in a different path. But if you’re only a minority investor, you can’t tell them what to do. So you’re always trying to, you know, take them on the journey of a bit of education and lose a few battles and hopefully win the big ones with them in terms of where the business is going.

I’m busting to ask you about AI and where we should be putting our money. But can you just give for the listeners a bit of an overview of the JAADE Fund itself and how you approach investing within that strategy? Yeah. So JAADE, having been an investor in listed equities, ⁓ done some small private company investing. What we wanted JAADE to really focus on was the growth stage Australian businesses. So companies that had at least $10 million of revenue, some of them are much bigger than that, especially these days. But we, you know,

If you think of the investment opportunity in private markets in three respects, you’ve got venture capital, which are businesses where you’re doing seed stage investments, the risks are high, but potentially there can be some great rewards. We don’t want to compete with that. You know, we’re looking for businesses that are at a later stage, but we’re also not competing with the leverage by our players. So we’re not competing with the likes of the KKRs or the quadrants in Australia who buy companies, use debt. They’re really focused on more mature businesses where they’ve got cash flows, they apply debt.

They might do M&A. Instead, we’re finding we’re looking for predominantly businesses that operate in the technology sector that have incredibly good unit economics. So they may not be profitable more often than not. They’re around about profitable, but they want more capital to grow faster. So our businesses are growing at 30, 40, 50 percent in annualised growth rates. They’re scalable businesses that have lots of operating leverage.

And we’re looking for the pattern recognition. So when we drill down into the economics of the business, we can see by deploying more capital and supporting them, they can grow for very long periods of time. So the duration of the growth is almost the most important question, because if you’re investing in a business, when we went through COVID, let’s pick on work from home, right? There was a real buzz around tools that would enable people to work from home, but it sort of happened quickly. So we’re not trying to invest in businesses that might solve a problem for here and today.

But really businesses that solve problems over a much longer period of time. Knowing that we’re gonna be investors for three to five to six years, and then when someone buys into our businesses, they’re gonna wanna see future growth as well. always having growth at the forefront of the business’s kind of objectives and that pathway to increasing amounts of profitability is probably two of the overriding factors. Is it always technology businesses? So technologies…I think the greatest way to capture growth and growth economics. So we started to, ⁓ I guess, opportunistically where we see those sort of maths and returns. So we recently invested in a quick service restaurant business, Yochi. We can chat about that. We’ve also invested in an AI infrastructure business, which is again aligned to technology. But the returns ⁓ are obviously very accelerated because it’s a business that will have more debt and leverage in it. So I guess unashamedly as an investor in Australia, you can call out the themes, but we are at the end of the day by global standards, a relatively small market. we’ve just, the most important things for us is to find great people running businesses that have good long-term prospects that we can lean into and deliver sustainably ⁓ attractive outcomes and good growth.

We obviously discussed some features about the way we look investments within the fund and it’s worth mentioning that ⁓ the JAADE Fund’s on the approved product list of Perks.

as it stands now, but let’s just dive into some of those investments which you talked about. And perhaps some which would be familiar with people from South Australia, such as CAMS, which has been a real success story, perhaps the journey of that investment and then, and Mable, which was the other real success story. And then we can start touching on some of the new stuff as well.
Yeah. So let’s do CAMS. CAMS was Joe Collins, family business here in Adelaide. He’d grown the business. It was a company that provided a software solution to manage risk and compliance. So if I’m not mistaken, think Perks might even be a client. Yeah, there you go. But largely government, small government, financial services type clients here in Australia, but in Europe, UK, they were particularly successful. Joe built a really good business, but the thing he did that was incredibly clever was he actually built a technology capability in Sri Lanka, which meant he had low-cost developers who were building a global scalable cloud solution for the market that he operated in. Now, when Joe came to see us, must have been sort of 2019, he was thinking about whether it was time to sell the business or to take some growth capital. And in the end, he probably, you know, is very grateful for the decision not to sell because the offers he was getting for the business, I’m going to say at the time was 70 or $80 million.

We said, well, we’re not going to pay you a takeover premium, but we’ll invest it at say a $60 million valuation. We’ll give you some liquidity for today. So you can, you know, sort of, ⁓ I guess, from a personal ⁓ exposure and asset point of view, you can have some diversification, but we think it’s a great business and we can put, you know, $10 million of growth capital in and drive growth. So fast forward it over the course of four or five years, the business had gone from $10 million of revenue to over 30. They’d improved their footprint internationally including entering into the US market and also the capability the team had grown materially. So then when we went to have an exit, we sold the company for nearly $200 million. So Joe’s, you know, he was his family maintained the majority of the interest. He got two bites of the cherry and ended up having a better experience for us and our investors. We made three times our money ⁓ over a sort of, you know, almost four-year journey. So, we had a really fantastic outcome from an investor’s point of view.

And when you’re looking for prospective investments, how important is the founder in that? And the other part of that is what does JAADE bring to the table outside of capital? Great questions. ⁓ So the founders and the management team, at the end of the day, we’re investing in businesses that are largely technology based. So there’s a lot of due diligence done on the platform. We like to take three or four months around making sure we

get the technical people, the customer insights to work out how sticky and how strong the businesses are. But all of that means nothing unless you’ve got founders who are aligned on what the vision is, what the realisation strategy is going to be and their appetite to work and listen. So when you’re invested in a private company, as we sort of said before, you you’re really building a very long-term relationship as the executive within the JAADE team who makes the decision to sort of pursue an investment with the company, it’s their responsibility to maintain and build those relationships. It is very, very important. And at the end of the day, you know, when if you were to go back and do talk to our portfolio companies, I think our superpower really is about being a minority investor that can work alongside everything, you know, everything that can go wrong with businesses will at some point and time or another. So it’s how you deal with adversity when things are going well. Everyone’s, you know, a rock star, but, know, it’s dealing with adversity.

And what else are we looking for? think was it. Yeah. And what does the JAADE fund bring to the table for founders?

Yeah. So I think it’s a lot about that maturity. It’s about when we buy shares, we’re buying shares alongside the founder. So they might be getting liquidity of growth, but at the end of the day, we’re all wedded to that outcome. So alignment of interest is absolutely fundamental. And then what we bring is, you know, I guess a lot of experience in capital markets, how to manage the process towards an exit.

We’ve also got operating partners who can come and help the management founders focus on maybe they need the CEO to be mentored. Maybe we can bring in a technology expert because there’s a bit of tech debt about how they’re implementing AI or what the sort of thematic might be. There’s a great network of operating partners in our business. You know, we have a team of about a dozen people and we have about 10 investments. So unlike the world of your more familiar listed equity investor who, you know, small teams of people covering a very wide market. We put all of our effort in being highly focused and quite hands on in the companies that we work with.

So looking at a few of the other success stories, and I’m going to ask you about some ones which haven’t worked out so well. Because we’ve all got those. But Mable, let’s talk about that as I think an early on story in the fund. So Mable was the cornerstone asset in the fund.

It’s a business that operates in the home care market. So people get access to funding through either the NDIS for disability or aged home care packages. There are two-sided marketplace. So think of it like Uber. So if someone comes to Mable marketplace and you’re looking for someone to look after your loved one, maybe it’s my parents who live ⁓ in the Barossa Valley and they’re looking for someone of a certain age. Maybe it’s for my dad and he’s getting showered. So he’d rather have a male sort of carer. You then use the platform to find that right type of carer. Mable then facilitates that engagement and charges fees for managing the payments, the time sheets. And importantly, there are notes that are collected through ⁓ those engagements. So then the family can see how ⁓ your loved one is managing. So Mable today, so when we first invested in the business, it might have been turning over a few million dollars a month. Today it turns over $20 million a month. So it’s a large-scale platform.

And it’s going deeper into those two verticals of aged and disability. Now, the world of the NDIS, there’s a lot of scrutiny over how the government’s spending money, but the world of age, there is new aged care packages, which are just being released this month. And everyone will relate to the concept that the government’s making more funding available for people to stay at home for longer and have a better quality of life at that stage. And so Mable’s positioning itself not just as the marketplace but also helping people to manage and to administer those those plans. So Mable today is doing north of 100 million of revenue. It’s now a business that’s profitable every month. And we’re beginning to sort of think about what the exit and realisation. So that’s a story for next year. Yeah. How’s Mable going in managing access to labor itself given the tight labor market?

So one of the superpowers of Mabel is very much having a technology-based platform that allows independent contractors to come to decide who they want to work with, to set their hours, their rates. And economically, it’s a great model for them, but that flexibility. So it might be people who are in the full-time workforce who are looking for something more casual. It just enables people to find their own customers and almost be entrepreneurs and build their own client base and have a better way of working than the equivalent of working for a traditional service provider in those sectors where they’re getting rostered and shift and have no say in who their clients are.

So yeah, they’ve done very well in building out a strong workforce. There’s plenty of growth still to come. There is one thing that’s for sure in Australia. The government is 100 % committed and everyone, know, whatever side of politics you’re on, more support at home is, it’s a one-way trip. And Mable’s investing in all of the features and functionalities to stay ahead of the curve, whether it’s using AI to enable better scheduling, matching, and just using technology in a way that traditional providers don’t have the luxury because they’ve come from a very different platform where Mable’s a technology led business.

Okay, that’s great. And two recent investments and one which has been in the press in a positive way very recently, Yochi and also Thermos. So Yochi I’ll do and then we’ll come to Thermos because it’s sort of, I guess, a magnitude kind of more significant for the portfolio. But Yochi is a business that is a well-loved quick service restaurant. So Frozen Yogurt, the founders of this business or the actual, not the founders, but the first owners of it, Janine and Jeff Ellis, who founded Boost Juice. So back in 2000, when COVID struck, there was a couple of stores, four stores in Melbourne, and they could see the opportunity to roll this frozen yogurt business out nationally. Roll the clock forward to today. It’s got almost 70 stores in Australia. If anyone’s got any family members or is a frozen yogurt connoisseur, I’m sure you’d know the store and you know the lineups that you can see there, whether it’s after school on a Tuesday or on a Friday night, you know, at dessert time.

It’s a super popular business. And the beauties of the business are one, because it’s got a service model means that you self help. So there’s low levels of staff required. There’s very high margins in the business, like the highest ⁓ margins of any quick service restaurant you could find anywhere in the world. And what that means is when they roll out a store, costs some not a million dollars to fit the store out, but they get their money back in less than 12 months.

So the pattern recognition, as someone who loves a technology business, we love them because they have high growth, high return on capital, and they have really high recurring revenue streams. What we see in Yochi is a business that in Australia can go from 70 to 200 stores, and there’s plenty of runway of growth. They’re also now expanding into Asia. They’ve got a store in Singapore, and the partner’s now taking them into the rest of Southeast Asia. And we think this is business that you know, it’s been profitable from day one. It’s already paying dividends. It’s got absolutely fantastic, you know, proven founders. And, you know, we think that there’s a 20% return in just being successful in the Australian market, but there’s a lot of upside if they can succeed overseas.

Do you think they’ll look to list in the next couple of years as opposed to remain private? So they’ve had one other investor on the register with the second. In both cases, they see value in having investors who come along, bring some institutional credibility. They don’t need anyone to tell them what flavorings to put on top of the yogurt, but they are looking for partners who understand capital markets. And by setting a valuation, which we found attractive, but they can see the continued rerating and the pathway to an IPO is a lot easier when you only own, you know, a material chunk of the business. So clearly if you’re going to list as a hundred percent owner going to an IPO, it’s a sort of, it’s a kind of difficult process. So they saw value in having us there today and we see a pathway over the next three, four, five years to having the company listed. yeah, I think it’s not their only option, but a very viable one.

Yes. David, you mentioned that organic rollout, or not organic, but rollout of those stores over the course of the next x number of years, might be 20 % IRR. If you think about the JAADE fund overall, is that essentially close to the target? Or how do you think about returns for investors in the fund?

Yeah, absolutely.

We’ve been going for seven years and since inception, our annualised returns 15%. In the last two or three years, it’s been more like 11 or 12%. And then if you go back to that kind of 2020 period, 2021 in the early days, we did a bit better than that. We’re in a period now where we feel like our returns are accelerating. So our goal is we wanna be as close to 20% as we can. 15% for us is a very solid outcome, but we wanna aim for as close to 20 as we can. So when we do an investment, when we look at an investment case for any new opportunity, we’re underwriting 20% returns for our investors at the base cases of what we do.

Now, with the portfolio having been a little bit more mature now and some of the investments we’ve just invested in, this year we’re very confident that that will be back closer to that 20% number. So we definitely see some acceleration in returns. And we also think the seasonality of our portfolio, the maturity of some of our businesses, you know, we’ve got Nitro in there that’s doing, you know, 120 million US of revenue, but still growing at sort of 20% earnings growth. There’s some companies in the portfolio that are going to look very attractive as we start to lean into the exit processes.

Yeah. So speaking of that, let’s have a chat now about Firmus, talking about outsized returns. Been a lot of news in the press lately about that business. So Firmus is a company that started life trying to work out how to make Bitcoin more cheaply. So what they worked out is bitcoins effectively made through compute. So you needed to have a low-cost compute and they could see the value in green energy. So they went to Tasmania where Tasmania is powered purely by ⁓ hydroelectric power. So there’s a large pool of good clean energy. They low-cost land. And they also had a technology where rather than using air conditioning to cool the chips, they would immerse them. So that means that there’s no water usage, greater energy efficiency.

Now, we met the company back then and we were never going to speculate on the Bitcoin price. That’s not our bag, right? But we stayed in touch. And when the company then got started in Singapore, they stood up their first compute cluster in a Singaporean data center with a group called STT that was backed by the Singapore government, their investment funds. They had a large global hyperscale customer and they turned them on in December last year. And that effectively was a proof point that they could operate an AI data center or an AI factory ⁓ in Singapore and build it at scale. Now, we stayed in touch with the company, but they then came to us ⁓ having it, know, Nvidia, the world’s largest company, the maker of the 90 % of the world’s AI chips. Nvidia effectively tapped firmness on the shoulder and said, we love what you’re doing. We’re building out our cloud network of cloud partners. We want to invest in the company and you can tell your investors that we’re going to invest but we’ll be a certain about 10 % of the round raise. So, you you need to go and find the other investors. Now, when we had our first meeting with the company at this stage with Nvidia in the room, we had to sort of pinch ourselves. Here’s the world’s largest company with a market cap at the time of $4 trillion, writing a small check in this little Australian business that’s got a great proof of concept making $30 million of EBITDA in Singapore. But we had to spend a lot of time with Nvidia to understand what goes into these AI factories. So a data center, you build a shell, you build a premise, that might cost you $100, $150 million. But the chips that you put inside, that can be $2.5, $3 billion of capital. And then you’ve got to run them in a way that gets the lowest cost of energy consumption to get the best outcomes for customers. Putting it into Tasmania, where it’s green energy, then makes it even more widely attractive. So when we invested, we invested on the back of Nvidia coming in. The fact that since then, Nvidia has announced that they’re going to be a client and that they’ve now announced that they’ve got a partnership with CDC, the largest data centre operator in Australia. Now, the fact that CDC is biggest shareholder is the future fund. So they’ve got, you know, sovereign capability and you’ve got Nvidia, the world’s greatest AI chip manufacturer. We feel sort of I guess the opportunity now in front of us, as you’ve got the world’s largest companies who are spending $400 billion a year to build out their AI capability, Firmus is in an incredibly strong position to capture these tailwinds. And we’re already seeing the benefits of that come through.

So, I mean, this goes, I suppose, the way you manage risk in the portfolio, because now it’s obviously a material position in the portfolio and is probably going to become even more so. can you just talk a little bit about how you manage that sizing?

So we invested $45 million into Firmus and we also got some some warrants that effectively gave us at the mark to market another $10 million exposure. So we’ve got a $55 million position. In the coming days it’ll be announced that there’s been a material transaction at nearly three times the valuation right because you’ve got around for hundreds of millions of dollars coming in at a higher price. So it’s a fantastic outcome. We’re going to end up with about a third of our portfolio in this particular asset. So that’s great for investors. That’s going to see some markups to the fund, which is why I’m so confident about the returns in the short term. But what it means is obviously the investors coming in see that there’s greater opportunities and further rewriting opportunities. So from our point of view, you know, we want to continue to stay on the wave. This business, if you asked an average Australian fund manager how they get exposure to AI in an Australian context, they’re buying shares in the property managers, the data centre operators, or maybe a software company. This is an asset that will go to an IPO next year. It will be a $10 billion company by the time that it lists, and it will have the attention of the whole Australian institutional market. And there’s a lot being already written about how it be a hot IPO.

So how are we going to manage our risk? Well, the first thing that we’re going to do is we’re going to first of all, make sure that we stay on this ride to maximise the outcomes. You know, it’s not often that because we were able to get set very early that we’re to make in this case, I think a lot of returns very quickly. So once the company is listed, you know, ⁓ we will then look to maximise our returns. You know, if we hold it for another 6, 12, 18 months after listing, that’s a fairly likely scenario. But when you’re on a good thing, you don’t want to entirely get off the bus. So from our point of view, we’re continuing to raise more capital in the fund. So investors coming into the fund will get exposure to these assets. But equally, we’re actively managing the portfolio. So some of the smaller investments that we don’t think are gonna generate as high a return, we’re gonna be looking for exits and realisations on them. We are going to be absolutely looking for more investments around this AI theme, more businesses that will be beneficiaries of the implementation of AI. And I think you’ll expect to see us making larger first-time investments as we did in the case of firm. So there’ll always be diversification. We’ll always have about eight to 10 active portfolio positions.

and active management, diversification, they’re probably the cornerstones of our managing the risk around those portfolio companies.

David, there’s heaps of discussion about AI in the media. It’s all you hear. And there’s the NVIDIAs and the chipmakers, and then there’s the data centres and so forth, and everyone wants to get exposure. But there’s also this sort of argument to say, there’s a fair bit of hype in there. Nvdia talked about four trillion when you sort of got into firmness now, five trillion dollar company. Do you see hype in the AI space at all? And where do you see that? And the flip side, where do you see the opportunities beside firms?

So let’s break it into a couple of different buckets. So in the infrastructure side, you’ve got the biggest companies in the world spending $400 billion and saying they’ve under invested in their compute capabilities and then doubling down on how much they spend. So at the infrastructure layer,

There is a chase, I don’t think so. So when you sign an infrastructure agreement like firm, you get a four-year contract and there’s a clear payback and a DCF and a clear return on capital. So then we’ll go to the next layer up. So we’ll go to the companies that are trying to build the applications, whether it’s the OpenAI of the world, the likes, language models, or there’s all these other businesses that are sort of now trying to use the compute to build tools.

And some of the valuations like OpenAI’s valuation is at the 30 times revenue. So they have to do a lot of things right in order to justify their valuation. So arguably, if there are bubbles, it’s around some of the… And OpenAI might not be a great example, but there are other companies that are trying to imitate. So OpenAI is a genuine winner and a market leader, but for more emerging players who are trying to imitate, there’s an element maybe of them trying to use OpenAI’s valuation to justify how they raise money.

The one thing I can tell you for sure is I was talking to a US private equity manager. He’s recently invested in a group of businesses to run call centres. Across these businesses, they’ve been able to, so this is a relatively thin margin business. Maybe it’s a 10 or 15% margin business. They’re now using AI to enhance the way the agents sitting there managing the calls are working. And he’s been able to take 20% of his call space on just the head count side, which might be 10 % of his margin. So he’s instantly got a 10% uplift to the profits that he makes by implementing AI and using this technology. So there is no question that there’s economic applications of AI that are being used today. We know what it’s like in our financial services businesses using AI to enhance what we do to do things better, smarter and be more efficient, to analyse more markets, to analyse more opportunities. It’s real.

And if you’re not doing it in our sorts of businesses, then others will come by and march past all of us in how we approach things. So you’re seeing that in that call centre example. There is no doubt that somewhere in the middle, people will over, and there are elements of it today where people are speculating because there are going to be those pure AI technologies that people will try to speculate on. So as an investor, obviously we’ve got exposure to ⁓ the infrastructure level. But I’m equally interested in those businesses that use AI to differentiate, to improve their economics. Because I think we’re to find a lot of new investment opportunities in that application.

So we talked a lot about the success stories in the fund. Everyone’s had some investment disasters along their journey. What have been some of your difficult investments and what are the lessons learned from those experiences? So outside of JAADE, I’ve invested in personally in

enough different businesses to have had some pretty extreme experiences. Most of the ones where they bond to zero have been where you speculate and invest in businesses that are too early stage. So when you go into startups and whatnot, and that’s the nature of investing in that category. Within the JAADE portfolio, the most challenged business we’ve had was a company called Prospection. And Prospection’s a business that when we invested in it, it had, ⁓ and it provides an analytics tool that’s used in pharmaceuticals and healthcare. They have a great product.

And they had one customer who, when we invested, was about a third of their revenues. And that customer then loved them so much that through that early period of COVID, that one third turned into over 50 % of their revenues. And lo and behold, when COVID kind of ended, they spent a lot less. And that basically customer disappeared over a period of time. So we got stuck with a little bit of victims of their success, not being, so having a customer who grew their business tremendously but it wasn’t sustainable, there wasn’t diversification. So there were a lot of lessons learned. Prospection today, the founders have ⁓ changed their roles. We’ve brought in professional CEO. We’ve had to go through a few rounds of recapitalising, but the business today has healthy recurring revenues. It was burning at its worst over $1.5 million a month. It now burns like maybe $300,000 a month. And it has a very clear pathway to getting back to profitability. To try and solve the problem. did what all good investors did. We tried to sell it, you know, and we found that although people were very interested in the product of the technology, the wallet was still burning as much money as it was. They weren’t that interested. So our plan with that business, which is the smallest, one of the smaller positions in our portfolio, is now that we’ve got it on a pathway where it’ll be breakeven around about February, March next year, we’ll use that as our opportunity to revisit selling it back to those strategics.

So, you know, things are going to go wrong.

You got to lean in. Yep. Unfortunately, as an investor and you might relate to this, but you end up putting an outsized amount of effort into the ones that don’t return you the best outcome.

Yeah, that was my next question is how much time did that take away from being able to focus on the other businesses?

So I’m the chairman of that company and you know, there I am. I’ve got ⁓ Mable, which I’m on the board of and I wish I could spend all day every day working on a business that’s flying like that. But yeah, it does take time. But you know, as a team, we get around it. ⁓

And one of the things, having that kind of ⁓ experience is important because when you talk to the founders, when you’re looking to invest in the next company, being able to tell them that we don’t get everything right, because I think it’s, you know, it’s good that you can demonstrate to the companies that you’re going to work with that we’ll deal with problems. We’re not a venture capital investor who goes, oops, didn’t work out. You know, the founders in Prospection, they’ve been in this business for five, six, seven years and they put their own money in. So in the darkest of times in that company they actually went and drew down against their mortgages to put more money back into the business. So we said to them, we will, if you will. And they said, yeah, well, we will. And so when you can work alongside people and, you know, deal with those difficult times together, you’ve got to respect that. And they worked tremendously hard. yeah.

David, we’re coming to a time in the podcast where we like to do a quick fire questions.
Okay.
So we’ve given you no notice, putting you on the spot. I’m going to fire off about six quick fire questions on a Monday afternoon. So, and first answer is usually the right one.

Best investment you’ve ever made? Mable.

One thing you’ll never invest in?
Mining. I don’t understand it. Yeah, too hard.

If you weren’t in investment markets, what would you be doing?

I’d like to think I’d have the courage to be a founder and to start up a technology business. I’d like, know, nothing else I’m sure I would have been in technology businesses, but I admire founders tremendously. Yeah.

Bearing in mind we’re in South Australia now coffee or wine, ⁓ wine, Yeah. Yeah

Other than JAADE, what’s something that’s in your personal portfolio? ⁓ other than Jade, ⁓

So there’s, living in Sydney, there’s Sydney property, but that’s very boring and that’s a necessity. And only one house in Sydney doesn’t mean you’re long, it just means you’re neutral, right? So outside of that, up until recently, and I’m blinking because I’ve sold most of my things to keep doubling down in JAADE, I was a shareholder in SiteMinder. So we had SiteMinder in the fund and I have a few regrets because I sold SiteMinder so I could pile into some of the firmest opportunity.

But SiteMinder is a business that, as a listed company, think it’s a business that I have a very high regard for and there’s a lot of growth to come. Excellent. Excellent.

Well, David, thank you very much for coming in and speaking to us today. It’s been really insightful. So I enjoyed the chat. OK. Thanks, Chris. Thank you. Thanks.