Qualitas Limited (QAL) Earnings Call Transcript & Summary

Good afternoon, everyone. I think we'll -- if you can take a seat, we'll start this afternoon session. Hello, and welcome to the 2023 Qualitas Investor Day. I'm Kathleen Yeung, Global Head of Corporate Development, and I'll be your host for today. We're absolutely delighted to welcome so many of you in the room and extend a warm welcome to those attending virtually. I can see a number of familiar faces as well as many new ones, and we're very thankful to everyone for taking the time to join us here. I would also like to welcome Andrew Fairley, our Chair of the Qualitas Board, who's also here and also Qualitas Director, Brian Delaney, who you'll also be hearing from a bit later. Firstly, I would like to welcome -- acknowledge to the traditional custodians of the lands on presenting from today, the Gadigal people of the Eora Nation. I would also like to acknowledge the traditional custodians of the lands in which those joining virtually are on. We pay our respect to elders past and present. We have an extensive agenda planned for this afternoon with presentations covering the breadth of our business, and you'll have opportunity to ask questions at the end of each session. It's been nearly 2 years since Qualitas listed on the ASX. And since then, we spent a lot of time discussing our business and the market opportunity with existing and potential shareholders. We hope to address some of the common questions we get, asked, but most importantly, to share with you our vision for the future as a leading Australian alternative real asset investment manager. Our aim is for you to leave this room with a better understanding of the strategic growth pathway to help us deliver on that vision. You'll firstly hear from cofounders, Andrew Schwartz and Mark Fischer as they discuss our growth levers and what differentiates us from the market. We are thrilled to have Fiona Reynolds, Ian Woods and Brian Delaney, members of our recently established ESG Advisory Group for a panel discussion on integrating ESG into alternatives. One of our key investment strategies built-to-rent and Ashleigh Macdonald from the GQ BTR platform will join Mark Fischer to discuss our vision for that platform, a joint venture with Gena. And to round up the afternoon to share what we're seeing in opportunities in private credit and to talk us through some investment case studies, we have senior members of our investment team, Mark Power, Gil Norwood and Sam Khalid. But first for some housekeeping. We'll be conducting Q&A at the end of each session through Slido. For those in the room, you will find information on your table with instructions on how to submit questions. And for those virtually, you can scan the QR code on the screen or you can find details or on our event [indiscernible] e-mail that was sent to you. We'll also be taking questions directly from the floor. We will try an answer as many questions as possible. But if we cant, please feel free to put them through an email, and we'll get back to you. And if you do technical issues if you're joining virtually, please e-mail our Investor Relations inbox, at investor.relations@qualitas.com.au. Before we start the first session, I do have a responsibility to advise that the presentation shared today contains general information only, and Qualitas is not licensed to provide financial product advice in relation to Qualitas shares or any other financial products. Today's presentation does not constitute financial tax or legal advice nor it offers invitation or recommendation to apply for or acquire shares in Qualitas or any other financial product. Before making any investment decision, you should consider whether Qualitas is appropriate, given your objectives, financial situation or needs. So before we start, can I please ask you to turn your devices silent, and I am delighted to welcome our Co-Founder and Group Managing Director, Andrew Schwartz, to open our first session of the afternoon to speak about our growth pathway.

Good afternoon, everyone. I'm Andrew Schwartz, Group Managing Director, Co-Founder of the Qualitas Group. It's really a pleasure for me today to present to those in the room. Also, we have about 100 people who have joined us virtually, so welcome to those. And it's great to have so many interested stakeholders in our business. Mark and I commenced the business some 15 years ago. And at the time that we did that, it was already evident that the financing markets were starting to fail to provide capital to those participants, particularly property developers. And I think 15 years later, that thematic has only continued to play itself out. And in fact, I would say, just continues to gain momentum. And really off the back of that together with a very experienced team, Qualitas has continued to enjoy very high growth amongst the tailwinds that we've been experiencing. In many ways, I think Australia continues just to catch up with other parts of the world, particularly places like the U.S. and Europe, where traditional financiers, the banks constitute about 50% in the market. But as we know in Australia, the traditional financiers are the vast majority of the market and groups like ours continue to gain market share year-on-year. In total, we've now done 270 investments since we started the firm 15 years ago. And as of today, we have 69 credit investments looking through all of our portfolios, and we have 10 equity investments. And the reason I highlight those numbers is really to demonstrate that Qualitas is not a high-volume deal shop. We don't strive to do investments for the sake of doing investments. We're careful. We're selective. We know what we're looking for within our funds. We have very specific mandates, and we execute upon those. We really cherish our track record. It means everything to us. It takes a long time to build. And to date, we now have a definition, a 15-year solid track record. And we also really treasure the fact that we've got a long dated capital, which I'll talk more about as I move through the presentation. Just going to go to the next slide. So this is really demonstrating where we've come from and really the underlying growth of our funds under management. And I think that anyone objective would say, Qualitas has really experienced exponential growth in its funds under management. Our current trajectory based upon all of our various assumptions, business plans, strategies, we'd like to think we can get to $18 billion by financial year '28. Currently, committed capital is sitting at $8 billion. You can imagine for a group like Qualitas, who I think has a reputation of being really conservative, that was a hard number for us to put out there and one that we agonized quite substantially. And one that I also need to emphasize for us, it's not a budget. It's not a forecast. It's sharing with you our stakeholders what we believe we can achieve based upon our current initiatives. And as I make my way through these slides, I will talk more about what some of those initiatives are. And why I think? We have the potential to achieve that particular outcome. And in fact, when you analyze the numbers, Qualitas has achieved 38% CAGR on its funds under management since inception of the firm. So in fact, just either we're going to go from $8 billion to $18 billion, assuming we can achieve it, is actually a slowing down of our CAGR from 38% to 18%. So I just want to highlight that particular point on our growth rate, which no doubt will pick up more when we get into the Q&A. I'll just move on to Slide 7. And this is about how we achieve that particular outcome. And really, our growth strategy in my mind is simple, and it revolves around the following: deeply understand what the brand Qualitas stands for in the market. For us, it stands for real asset financing. We've capitalized on what our significant strength is. We're known to be core expertise of real estate finance domestically in Australia. We have significant runway in respect of our current products, and we need to capitalizing in respect of that core level of expertise. In terms of our capital providers, our view in respective institutional capital is not to try and have hundreds of institutional capital investors, but rather have a few investors that provide very deep levels of capital support to our firm. I think we have upside in respect of our business plan by way of both the potential for geographical expansion, take our core expertise into markets that we think are showing very favorable conditions at this present point of time but also I look to product expansion, where we can develop products that meet the market and the thematic that's presenting for our investors. Most importantly, I think Qualitas is a magnet for talent. And since we've listed the company, from December 2021, we certainly haven't been sort of people that are highly skilled and have wanted to work in our firm. And again, I'll talk more about that as I'll make my way through these slides and focus on being a management fee-centric business reoccurring earnings from our funds, highly predictable and expand upon those fee streams. Just moving on to the next slide. I want to talk a bit about the tailwinds that have really underpinned our success for 15 years. And in my mind, that continue to amplify. The traditional capital sources continue to be in decline. And interestingly for those that are an avid reader of the financial stability report is not a plug for the RBA, but they do release it twice a year and they just released their last report. Talks about the role of the banks and the role of the alternative financiers, and basically, in the report, it notes that the banks themselves have reduced their participation in construction, real estate construction and development loans considerably over the period. And in fact, in discussions with our own investment team, they too have noticed the pullback by the traditional financiers in regards to those construction loans, particularly when you're getting into loans that exceed $80 million, $100 million type levels. We're finding that the traditional financiers are not huge active participants in those markets. And that for between the demand for capital and the supply of capital continues to be met by private credit groups like Qualitas who are enjoying the fact that we have base rates increasing as a result of now 400 -- circa 400-basis-point increase in risk-free rates but also the fact that credit spreads have been increasing. And that's not a point particular to Qualitas or Australia. It's actually a global phenomenon, but our investors are really coming to enjoy those aspects, I think in many ways, global investors continue to be underinvested in respect of credit. And what we seeing at the moment as a trend is we have a view that property values will continue to recalibrate for the foreseeable future. In many ways, cap rates have been on property -- this is a generalization, but cap rates on property have been really relatively stable, notwithstanding we're seeing rises in interest rates. We're finding cash flows aren't keeping up with that underlying cost increase and interest rate increase, providing uncertainty in respect of equity valuations. And global investors understand that point, and they understand that on a risk-weighted basis, a risk-adjusted basis the credit is providing a much more attractive entry point into real estate relative to equity at this point of time. And we're seeing that at Qualitas through increasing allocations being made to us from some of the world's largest investors. Lastly, on this slide, I'd point out that some degree of sadness -- the great degree of sadness the geopolitical situation around the world. And Australia we are seeing as a very safe place invest and a haven for those that are looking for the type of investments from thematic that we can offer in the safety and security of a country such as Australia. Just moving over to the next slide. And this is really about our leadership team and the dedication of my executive team who help me steer and execute on our business plan. We meet as a group every week, literally. We talk about the objectives to achieving our outcome under our business plan, and we execute on that plan accordingly. I think that what you can see on this slide, is that the average tenure of my executive team is 8 years. So it means that not only are we attracting best of talent that we're retaining. That talent within the firm, since IPO, we have further in the platform, 13 new hires in Mark Fischer's team, 4 hires in our capital teams so we're building out the origination, but also the capital raising through Dean Winterton's team and also our fiduciary management and continuing to build that out. Now obviously, we're on a mission to take economies of scale, increase our margins. So we're ensuring that overheads are not getting ahead of our revenue, but we are taking this as an opportunity to really capitalize on the market thematic but also the ability to raise further capital. Just moving on to the next slide. And in particular, looking at the real estate asset class and some of the challenges we're seeing more globally. The truth is that real estate is a less liquid asset class relative to listed equities and bonds. It takes time to monetize real estate. It has transaction costs associated with it. And we have seen globally, both debt funds and equity funds have a mismatch between their asset and liability. And you are seeing that, in particular, in some of the offshore markets you're seeing that in some of the office funds where you've got relatively illiquid assets that are supported by funds where investors can redeem on a quarterly basis and fund managers, GPs are unable to keep up with the quantum of those redemptions, particularly in those offshore markets where you've had equity values recalibrate. And having seen that through multiple cycles previously, we've worked hard at Qualitas not to expose ourselves to that risk. Proudly, we can say 92% of all of our capital has a new perfect match between asset and the underlying redemption or liability as we like to call it. So we don't get caught out in that asset liability mismatch, which I think is prevalent in other parts of the market that we're seeing. I think also what that provides for us is really long-dated sticky capital, great certainty in respect of the revenues that we can drive under our various funds. Just moving on to Slide 11. At the time of the IPO, we did say that we think our business platform is highly scalable. And I think that it's interesting to see that if you take 30 June 2023, we announced that we had allocated $3 billion of capital. And of that $3 billion of capital, $1 billion had yet to be deployed. So at the time of balance date, we were earning various fees on the $1 billion that have been allocated. It was predominantly in our construction and development portfolios. But as we move through this year and that money is now deployed our base management fees are increasing. And if I just try to express that in a different way, if hypothetically, we didn't do another transaction all year and my co-founder Mark Fischer is about to get up and tell you how much momentum he's got in the business, I'm sure he's sitting there saying, why is Andrew being hypothetical that we've got no momentum. But if hypothetically, we accept that assumption, our base management fees will continue to increase as we deploy that capital that we allocated in previous periods. And it's should be of interest that taking our -- at the time of our IPO, our base management fee revenue and our principal income of $18 million, in the short time we've been listed, we've tripled that number, and we've also increased our operating margin by 18%. Just on Slide 12, I think in terms of the pathway from $8 billion to $18 billion, we're really focused on 5 key activities. The first one of those in terms of looking for scale is how do we use technology to really provide economies of scale, and we're underway on really deepening technology platform. In terms of existing funds, which is really the main pathway, its larger funds, its deeper commitments from our various investors. We want to further develop product. We're very active later you'll hear about our sustainability, ESG sustainability initiatives. We're active on our tactical credit funds, which were active on capital raising at the current point of time. So it's through greater product development, recognizing where we are in the market, but also penetrating other capital channels outside of institutional capital. And over the last period, we've made further investment into retail, really for the benefit of our listed fund QRI, which we will only do through intermediaries, but also family offers which is a very important part of Qualitas and advised wealth, which is also a very important part of Qualitas. We do think there's a role for inorganic M&A in Qualitas. I don't think we need to do it in order to achieve our $18 billion. So I would say that's on top of achieving that particular firm. We're not rushing out to acquire anything and everything. If we do it, it will be selective, and it will be acquisitions that we could not have otherwise done organically by turning our minds and energy to it. And on the right side of that slide, we highlight some key metrics, which is 50% margins being derived from our funds management business. Base management fees between 90 to 100 basis points. Now ultimately, that's going to depend on the mix of our investor channels. We're -- like everybody else, we received better fees from our family office and distributed wealth as opposed to institutional, but then we get a lot of volume of capital through institutions. So ultimately, that will depend upon the mix of capital. And looking for transaction fees around 30 to 40 basis points on our annual deployment levels. In terms on Slide 13, in terms of our development, it really is about having the right products, the right time to deliver that to market. As I said earlier, Qualitas needs to capitalize on its core strength, real estate financing in Australia, it's a large market, $435 billion market. At $18 billion of fund, we would still be a relatively small participant in the totality of the market that we think exists just capitalize on what we do well and grow our market size and share. Continue to develop out on the new products, which I've spoken about, move deeper into the private and family offers and advised wealth and also to look at over time, over that 5-year period, some real asset adjacencies, where we take our core real estate financing skill that apply to adjacent asset classes. Again, I'm happy to address that later in Q&A. This is my final slide, and then I'm going to hand it over to my co-founder, Mark Fischer. 5 key takeaway messages. Our aspiration is to double our firm to $18 billion by FY '28. Again, I need to emphasize not a budget or forecast, but that is our aspiration, and that is under our business plan and our existing initiatives. We capitalize on the brand that Qualitas has built the trust. We capitalize on the listed status of our company, our ability to use balance sheet to underwrite in respect of our funds. Thirdly, we take advantage of the fact we have multiple growth levers at our disposal and also capitalize on economies of scale. We attract and retain best-in-class talent. I think in many ways, that should have been my first point, which is you're going to have the best capital and the best investments, but more importantly, you need the best talent. And I think Qualitas is poised for that best talent, has the best talent and continue to attract the best talent and show loyalty to its staff and the talent that it has and stay focused on matching our asset and liability and having -- achieving our track record, which is our single biggest asset. So on that very positive note, I will now going to hand over to Mark Fischer. Thank you very much.

Thanks, Andrew, and it was interesting that, as Andrew said, to talk about attracting new talent to the firm, one of our new staff members happened to walking in the back of the room at that exact moment. So welcome, Matt, well done. I want to thank everyone for attending today. I always like these events. One of the exciting things throughout a year. And for those that I haven't met before, I lead the investment team at Qualitas. So what I'm going to talk about is markets. And what we're seeing as well as how we're going on deployment momentum as well. As I reflect on what we achieved during financial year '23, and Andrew touched on this briefly before, we achieved around $3 billion worth of deployment. And what it did was really start to consolidate our market-leading position in the private credit space. At the same time, though, it was obviously a volatile macro environment. And when that happens, you need to focus on asset management. And thankfully, what we have managed to achieve heading into financial year '24 is enter the year not only with significant dry powder that Andrew has touched on, not only with great deployment momentum but also with a well-performing portfolio. And I think that's a very important point when I come to some of the competitive landscape later. Later in the day as well, just before I kick off, you're going to hear from some of my team to talk about more specifics on case studies. And I just want to give thanks to the entire Qualitas team about their efforts during the year. We obviously had some great growth. We had some great momentum. But most importantly, to me, they maintained their discipline as investors during that period of time. And I think that's paramount. So if I get to detail today on what I'm going to talk you through, I'm going to talk about our 3-cycle investment approach and how we think that will continue to serve us well. We're going to touch on the history of Qualitas through cycles and the things we've done historically to manage the cycle. And then I'll give an update on how we're going for FY '24 as it relates to deployment and then as I said, touch on the market landscape. So those who attended Investor Day last year would have heard me talk about what do we look for when devising our investment strategies and what the key ingredients for success. And over the 15-year journey, one of the things I think we've done well is focus on what differentiates us from the competitive set. We think that scalability and being a meaningful player in your strategy is important, not only because of what it means for you as a management platform in relation to execution and management efficiency, but typically, you also find great long-run investment strategies when you do that. But we are cognizant at the same time that whilst we might be in what is known as the golden age for private credit, we do need to keep our eye on the changing cycle and maintain our platform in other areas where we do have a significant track record, and that's the equity strategies, which I'll touch on in a bit. The thing that allows us to remain agile, though, is focusing on what I think of as the client demands and needs. And when I say client, I mean both sides of that coin. Obviously, there are investor clients, investors in our funds and what they are looking for. They are the people that entrust us with capital to manage and deliver returns but then also what we think of as the uses of capital with borrowers and the partners that we have. And in order to have a viable business, we need to make sure we're looking at both sides of that coin at all time. And I think the deployment volumes we've achieved recently as well as the finance growth we've achieved recently speaks to the fact we're doing that well. The next one I'll talk about, and it goes together in a sense, is, to have that market-leading edge is a great asset of the firm, but we do need to consolidate that position while it is a good time for us. The markets are dynamic. They're cyclical, and we might have a great story and position in private credit now, but that can change and it will change, and we've been really doing that recently through some investments in the team you saw in Andrew's presentation in my team in particular, that's about attracting some further talent to the business, specifically in the credit strategies. And I think what that's doing is allowing us to continue to scale the deployment activities as well. But what we've also done of recent times is established teams within the investment team. So we have established a credit team specifically focused on execution of that as well as the equity team specifically focused on those opportunities. And that's important because as I touch on where we're seeing in the market, we are starting to see green shoots in the equity space, and it's important that we keep the team focused on that over time. If I leave you with just a clear point about where, we're at today. We're very clear internally on where we're at on a meaningful market participant in the areas we specialize in. We think it's matched very well to current day client demands and needs. We are conscious of remaining agile and allowing us to pivot the business when we need to into areas that are still our core competency when that market cycle inevitably changes. If I move to the next slide, I'm going to talk about how we have managed the same issues of changing cycles over the history of the firm. And the way I think about this is to break it down into for distinct phases or chapters of the firm. And the initial one, which in a way is the DNA of a lot of the team is to be an opportunistic investor. It's where we got our start. It was the post GFC liquidity crunch we did are investing in equity and mezzanine debt. It was what we call total return style equity investing, looking back how the numbers were incredibly small, but they were some of the most lucrative and profitable transactions that we made as a firm. That was something we did for the first phase. But the catalyst really was around 10 years ago when we brought into the remit to become a private credit investor as well. And the reason we identified that is because of what we were seeing in the equity platform. We were seeing in the platform, the difficulty in obtaining finance on the transactions that we were investing in, and we identified that as a strong opportunity. Initially, we started out in what we call now the total return credit space, construction loans. And that transitioned at the same period of time that we began raising discretionary funds. So we moved the business to start doing private credit and we moved the business to start raising funds. As we started to get momentum in our private credit space, however, and this fund started to really scale, we went to what I think of as the third chapter of the evolution. And that was that period of time. that seems like a long time ago now, but the lower for a longer interest rate cycle. And what we did was we focused on delivering income products to our clients. If you go back to what I said before, we're very focused on what our investor clients demands and needs are. And that was a period of time where they were looking for income. And so we did that through our credit strategies. We've got obvious example being the listing of QRI as an income-based credit vehicle. And then also in the equity strategies as well. And a great example of that is the Food Infrastructure Fund. So that ability to use our skill set, spot value, create income products and that the environment we're in is a great testament to our ability to pivot through cycles. If we move to where we are today, I think we're set up for great growth because this new era defined by rapidly rising base rates has obviously resulted in liquidity dislocation in the market. It's not dissimilar to the first chapter that I talked about. However, where we are today is we are going into that cycle with a great amount of dry powder and a scaled credit platform. This is important for us because it allows us to continue to build and consolidate that position. But also, we still retain that core competency in the equity side of the business as well. And this next period, I anticipate will allow us to build out that part of the business as values start to recalibrate, and we see that lens come back into the market. So just to leave you with the key point here, we've demonstrated 3 to 15 years of the firm innovation in how we go about investment strategies and innovation in how we meet client needs from a capital perspective. I'll move now to the slide that I'm sure some people in the room have been interested in hearing about, which is deployment. Obviously, when we did the full year results, there was some great news around the dry powder capital we had in the business, and I think a fair feedback piece of feedback received was you now need to deploy that and put it to work. And it is very early in the year. So I want to caveat this with the fact that it is a very challenging macro environment, but the momentum is good. Year-to-date, we have line of sight on around $2.3 billion of transactions that we anticipate will close by the half year. If I compare that to this time last year at our Investor Day, and I talked about line of sight on deployment, we then had about $1.7 billion line of sight. So it's up about 35% compared to where we were this time last year. I would like to caveat though with the fact that, and you'll see it on the screen in the dark blue area, a large portion of those deals are what we call mandated and yet to close. We are being incredibly thorough and vigorous in our due diligence. It is a volatile macro environment. So I would expect we may drop some deals, but equally, we have a lot of the origination team out there every day, getting new leads and getting new pipeline. Consistent with what we achieved for the full year '23, the SKU remained in credit strategies. For full year '23, we're around 95% of our deployment in credit as we sit today on that, visible pipeline that we have of $2.3 billion, around 96% of that number is in senior credit. So whilst I'm starting to see the emergence of the new opportunity set in equity, it's clear that the main opportunity for us remains in credit. To my earlier comment around what I described as Chapter 4 and momentum. I want to talk a little bit about the consolidation of our market presence in the credit strategies. We've been very fortunate to attract some experienced and well-connected origination capacity in our 2 core markets, being Sydney and Melbourne. And when I think about FY '23 deployment. Those resources have only just joined the business. There was no output from them being new to the firm. And with those key new hires in the market for FY '24, we are starting to see pipeline from them. So we feel that the investment in the team is starting to show through our pipeline as well. I do want to talk about flexibility as it comes to deployment as well. We will always look to maintain the flexibility to pause or pivot our deployment if we see the market cycle change. We'll remind ourselves of this every single day. We cannot be forgiving a bad investment decisions within the business. It's what built our track record. It's what our fund investors expect of us, and it's important that we don't chase deployment for the sake of us. It's what served us well over the past 15 years. And we need to make sure if we see trouble coming, we can pivot to shelter from it. If we see a great opportunity, we really want to accelerate into that. What I'll talk about now as the final section is the current market landscape. In particular, I'll talk about competition and the things that are driving deal flow. And you've heard a lot about material withdrawal of liquidity in the market and less competition and some, what I call, moderate return expansion. We are not in an environment of lenders such as ourselves, naming our price is what I described moderate return expansion. We're getting higher base rates, and we are getting expanded credit spreads. But there is competition in the market. However, the number of competitors has materially reduced. The theme here often in the market on other sectors generally is around bifurcation. And I think that applies here as well. There are competitors that have capital that, but the second tier have really fallen away. Those competitors are sophisticated. They have dry powder, but there are 2 significant offshore managers. And what we are doing in the business is using our domestic edge to win what we think are the best deals to be there first and to use our local knowledge to get the deals that we want to do. So whilst there is competition, we think we have a competitive advantage there. Beyond that leading path though of ourselves in the 2 large offshore managers that I mentioned, it really has seemed out from a competition perspective. And I understand anecdotally that a lot of the other management platforms are finding it hard to raise capital but also potentially have some issues in their existing portfolios that need to be worked through. So this is the time where we are really looking for the transactions that we want to do. I think this theme of bifurcation continues to borrow a community as well. There are high-quality sponsors, and those high quality sponsors have availability of debt capital are being funded by the likes of ourselves and in many cases, still the banks as well. And then there is the other tier of borrowers who are finding it incredibly tough to access liquidity. Typically, that other tier of borrower was serviced by second-tier alternative financiers who are struggling to raise capital. And so there is a vacuum in that space. If I turn to sectors, similar theme, residential, and you've heard us talk about it before our core capability is incredibly well sought after backed by strong fundamentals. But at the same time, if I move to the office sector, there are a number of assets in that space. that are effectively unbankable. It's an interesting opportunity set. I think it will only change when we see movement in the direct property market. I think that recalibration of asset and values is coming, but there remains more downside risk to that in our view at this point. Touching quickly to finish up on construction costs. Obviously, an interesting issue for us given the exposures in our business. We're not currently seeing significant price increases in construction. The previous period of 20% to 40% construction cost increases appears to be behind us. We expect now just moderate growth in construction costs through new enterprise bargaining agreements with unions and general inflation in materials. That's important because it makes it easier to forecast, but our view is the cost increases that have occurred over the past few years are baked in now. Replacement cost is materially higher. And what that will do is be supportive to asset values, where you have strong fundamentals on the demand/supply side. I'll just touch as well given I've got a little bit of time on the equity space as well given they are seeing green shoots there. We're seeing it both across what we call total return or opportunistic equity as well as income equity. We are starting to see in the opportunistic space to recapitalization deal flow that people will have trouble transactions that need to be recapitalized. The team that we have focused on that are actually busy screening transactions on that at the moment. The way we're accessing that though is using our credit capital that is able to price for risk, and getting great downside protection, but with profit shares and equity kickers to allow us to earn beyond debt style returns. And in the income equity space, the REIT reporting season was incredibly interesting. I think it started to make the disconnect between buyer and seller come closer. We have been incredibly close on a number of off-market acquisition opportunities recently, where I think we just missed pricing by a small amount, and I feel that there was a potential during the next year that we may click on that and potentially make some deployment into that space, too. So before we jump to Q&A with Andrew, I'll just recap for you a few key takeaway points. I think we have flexibility in the platform to pivot our strategies as the cycle changes, and we've shown that over the past 15 years that we can do that. I think we've got great momentum in the deployment side of the business, but we are remaining incredibly vigilant on the macro picture. And finally, I think the competitive landscape has materially changed in our favor over the past little while. So I'll leave it there and pass I think to Kathleen, who is going to come up and conduct a Q&A. Thank you.

Thanks, Mark, a number of key messages there for us. We'll take Q&A now. [Operator Instructions]

David Pobucky from Macquarie. Just in terms of your sum target, would you mind piecing or helping us please other come how you get there by FY '28. I mean how much of that can be deployed. How much transaction activity is required per annum to get there as well, please?

David, so I've just got to get used to Mark and I being on stage together with bright lights.

That one is incredibly bright.

But basically, to get there and assuming we're doing predominantly using existing products means that we've got a near on double our FY '23 deployment is what I basically assumed. So there's effectively, assuming we can raise the capital, which is fundamental assumption is probably your next question, it ultimately revolves around increasing the size of the origination team and larger check sizes in the market. Now interestingly, if you look at real estate as an asset class in Australia, it has been escalating for many, many years now. And so check sizes generally are increasing. Project sizes are increasing. Mark talked about the fact that construction costs are rising in the market, which is really being met through higher in realization values, larger projects. So I think that one of the areas that Qualitas has really made a name for itself is our ability to participate in some of the largest real estate construction and development transactions occurring in Australia. So it's a long way of saying it's a combination of more people, more slightly more volume of transactions. We have in previous periods reported that we do roughly 40 new investments a year of about between $70 million and $80 million per average investment size. So it will be an increase on the 40 and will be an increase in the average investment size as well and really just capitalizing on the existing products. I think some of the opportunities that I noted in overview, was really about upside to our ability to achieve a particular number as well.

And maybe I've said one thing, David, I know as wall, and I touched on it in the phases of how the firm has evolved. I think income products are a key part of it. They generally have longer duration for us than the total return products where we deliver returns for investors through exiting the position. And I think a lot of the opportunity we're seeing, particularly in the credit space is just on expanding universe of income credit opportunities. The banks are retreating even on longer-dated passive commercial real estate financing. And I think that's a big way to maintain the growth in the portfolio, particularly from the deployed capital perspective.

And just one last one, if I may, before I hand it over. Just in terms of potential funding from a co-investment perspective, if you don't mind touching on that, please?

Sorry, the question being the adequacy of capital available for co-investment. Is that the question?

Yes, to reach the target.

Okay. I think. we've got sufficient capital in order to get there. And from our point of view, we did say at the time of the IPO, we're seeking to achieve between 15% to 20% ROE on our own capital that we're actually deploying into co-investment. And we measure that a way of the primary return we earn from the investment in the underlying fund, but also the various management fees and transaction fees that we receive from the fund itself relative to the capital we're deploying. And so if I'm wrong, and I don't think I am, but if I'm wrong on we need to do further capital raise, then I think we're in the world of rating for the right reasons. We're achieving 15% to 20% ROE in that particular environment. We've got more funds and more opportunity that we need to co-investment for. The one thing that we will sacrifice is our underwriting capability as a firm, which we really treasure and we have been extensively using. You can see that in our results coming through is principal income in our revenue line. So the more we continue to put into co-investment, the less capability we'll have in our underwriting. And potentially, that's something Qualitas separately looks at as it looks to achieve its ambitions.

I think draw attention to as well, the [indiscernible] is a great example of this. If you look at our co-investment in the initial capital commitment versus our required co-investment for the second capital commitment, there is a disparity there as the scale of these commitments are getting bigger, there is a view that, that percentage may come down over time as well, and we're starting to see that.

Sholto Maconochie from Jefferies, appreciate it. Just a couple of questions. Your disciplined in your DD and deployment. If you see any distress in your portfolio or been captured in DD already?

As a general process in the portfolio reviews on every single investment between 4 to 6 weeks depending on which strategy it is in, and we run a traffic rating system on how we think about it. And if I take a step back from that and think about, well, how many transactions have we categorized in the [indiscernible] category versus previously, there's no notable increase in that. And we've been, I think, incredibly thorough in [indiscernible] what we call the back book. So going back on existing transactions and almost reunderwriting them. There are instances, particularly on construction projects where there have been cost increases typically, I mean almost without exception, thinking about it right here, right now. Sponsors have funded those. We obviously in underwriting transactions if there is cost expansion, one scenario analysis on it to say what if we have a cost expansion and typically, the mathematics works. So there's no distress there. What we look carefully at is in a world where base rates of 4-and-a-bit percent and everyone has a sense of the types of margins we charge on assets that aren't generating cash flow, how long can borrowers hold on for. So we're very, very focused on that. But typically, in those things, we have interest reserves as additional collateral items. We have prepaid interest, et cetera. So we're not seeing it yet. What we are seeing outside of our portfolio, and this is anecdotal as we are starting to see on some exposures or lenders where interest is not being paid starting to move on that rather than giving growth, but we're not seeing it in our portfolio at this point.

Maybe one thing I'd add and Mark, if you've got a different view, you will express it. We spend a lot of time looking at other markets in other parts of the world. And if you look at places like the U.K. many parts of the U.S. at the moment, there's clearly a fair amount of distress that's happening in those markets. And the office sector would be a great example of where a lot of distress in those markets. And interestingly, in Australia, and this is a general comment, we're not seeing the same level of distress, as others are seeing, our counterparts are seeing over in Europe, U.K. and the U.S. and in our view around it. And it doesn't mean there's no stress because the newspapers are not sort of calling out some very high-profile developers who have got caught short with significant amounts of land at the wrong time of the cycle. So I'm not saying there's no distress, although thankfully, Qualitas has steep clear of those situations. But interestingly, our observation is a lot of capital, a lot of profit was made by developers in the last part of the cycle. And by and large, Australian developers are actually relatively, not generalizing, relatively cashed up, and they've been relatively patient getting themselves through this part of the cycle, allowing land values to adjust if they're going to adjust. We're seeing that in subsidies more than others before they're relaying into the next stage. And what we're not seeing widespread is developers turning around and saying, "Oh, we need to cut this land, and we need someone to rescue us as a general comment. And I think it's because, there's lots of liquidity in the market. There was a lot of profit. We're dealing with a thematic where a short of residential. I mean I think most people know the statistics in the room, but Australia is a country shorter residential, vacancy rates are relatively low, sub-1%, sadly rents are escalating residential rents, significant escalation rates, which I think is a sad fact, but the end result of that is it has kept a stress out largely out of the Australian as a general comment. You shared that for you, Mark?

I do. The exception that I expect to see, and this is some of the transaction flow that our opportunistic equity team are starting to see is where people have completed assets with fixed contracted cash flows. We're now on the wrong side base rates and overlevered on those and need to do a recapitalization of it. That's a very difficult situation for some owners. And I think maybe the last 12 months has been categorized by let's hope we get through this cycle more quickly and maybe we're at peak rates and coming down again, but clearly not the world we are in. And that's why I think we're starting to see some of that recap deal flow. And typically, what it looks like is us putting in preferred equity or mezzanine capital to pay down senior debt in order to deal with that and earning base levels of return with some level of equity kicker on the transaction.

You raised some really good points and issues there in the [indiscernible]. If you look -- you talked about construction costs not going to come down, they're moderating in the escalation, you've got cost of capital up in debt and equity, and there's a big spread to apartments between house prices and apartments at demand not a lot of supply. The affordability is an issue, if I developed today, is find it harder to fund? Does it just about to get squeezed on the margin better than they have you take that you talked about the super problem does it just mean developers hook product with their margin lots theme going forward given you can't push price 30% to cover.

There's a few points in that. One goes to what is the funding model of property development in Australia. And then the second one, I think, goes to affordability and ability to escalate revenue without linked in a major way. If you think about historically how, I'm talking about residential mind here, how residential development was financed historically, it was about acquire the land, get a planning permit, enter into a presale campaign for depending how good the project was, 20 weeks to 18 months to get presales, then hope to build out and then approach your finance here and off you go. If you do that model now, the mathematics does not work. The model is being flipped on its head. They will need to lock in their production costs first and then go procure revenue. If you think about it from just a general business perspective, it was madness to sell your product before you knew what it would cost to produce. So that has changed. But what it means is because they're not pre-selling anymore, and they need to do that in order to have a locked cost base, the banks would not finance that. So in the world of alternative capital, which is higher. And so the developers are having to take a view on revenue escalation in order to justify commencement. We are seeing it across the portfolio on great projects that are well located, well conceived. Revenue is escalating materially, which goes to your second point about affordability. Well, how can that still be affordable? Personal view, and I think it's a house view and this Andrew will correct me in a moment. This is the start of a great transition in the housing mix in Australia. The typical purchase of a 3-bedroom townhouse with a small backyard, it's no longer the reality. That purchase with their budget will buy a 2-bedroom, 2-bathroom apartment because it is the only thing that is affordable. And the reason for that is we've got vacancy below 1%, construction cost is not coming down, cost of capital has gone up. So either we have no supply, which is just unrealistic when we have somewhere between 450,000 to 500,000 net migration into the country in a year, or prices have to go up. And if prices have to go up, it means you purchase a different products to meet your needs. And I think that next decade, probably longer in Australia is about that.

I think we can take one more from the floor and then we've got a number that's come through on the Slido. So Ali.

[indiscernible]from ENP. Just on the office potential financing opportunities, how are you thinking about the LVR? And I guess your collateral that you're lending against there? Is it the credit of the tenant? Or are you actually just looking at the land value or alternative use, et cetera, like how are you thinking about that given the potential long-term secular risk...

First of all, we're not doing a lot of it. We're seeing a lot of potential. And we're actually not doing a lot of it given the views we have on it. And the first part about what LVR might you be, it's not about LVR because I think what the value is an open question until we look at sizing on what we refer to as a debt yield. So what do we think maintainable long-term net income is on that asset and what is that as a percentage of our debt exposure. That's the way we size and think about debt on those sorts of assets because the V is -- I want to add to anyone's guess at the moment, but it is volatile. So that's sort of how we think about debt sizing. But then sort of views on the sector more generally. I used the word bifurcation, about four times in my presentation, but it's the same here that If you look at tenant demand in that market, very strong tenant demand for certain assets, and there is no tenant demand for others. And it really goes to what is the purpose of the office for that tenant? If as a business, you have staff performing high-value tasks that require collaboration and need office space, they are paying very big rents in order to achieve it and vacancy is incredibly tight. If it was processing and administrative type office work, there's no demand for that office space as well. And so the sector will split into 2. We're trying to be, obviously, in the first of those categories. But more interestingly for us as someone who's looking for higher returns in what we do. Transitional use is something we're looking at a lot, what is underlying land value to your point and what else done with this property. We're not taking a general sector view on office.

Just one overlay comment to that, and I agree with everything what Mark has said. But only one comment I'd make about it as well is it also comes down to where you see opportunity and who's your client. And, it's one thing to say opportunistically, there will be a right time to get into office because of valuation adjustments and Australia hasn't suffered anywhere near many other major cities around the world. For Qualitas, the vast majority of our capital comes from offshore, and they are full on office. And if anything, most global investors are trying to offload office at this point in time. So notwithstanding we may think of it as debt and well secured, for a lot of our investors, they aggregate our portfolios with the -- in terms of their reporting, their portfolios. And the last thing they want is Qualitas necessarily turning up and saying, here's a great debt transaction we've put into your portfolio on office. And so what it means is there is some contagion effect between what's going on in other markets around the world in office and what's going on in Australia in our office markets because if you take that to the earth degree, it's liquidity out of the Australian market as well for office. So my -- at some point, it's going to become compelling for everybody, but I think there's a global capital redirection at the moment away from office. So I think it's the most dislike sector globally from institutional investors at this point.

Thanks, Andrew, there are a number of questions on Slido. I can actually categorize these in 2. So heads up to the Qualitas team around construction and resi stock. So we'll address those later on. There are a couple that goes to our growth, Andrew. So the first one is what market share would that size from give us, I presume it's $18 billion.

Yes, it's still relatively small. When I first started presenting the size of the commercial real estate debt market 10 years ago, we were just a touch over $200 billion for the total market. And some 10 years later, that market is more than doubled to $435 billion, I'm guessing is a wild guess, but it escalates at about 3%, 4% per annum, some years, significantly more than that and other years less. But I'd say by the time beginning to 2028, total market is probably close to $500 billion in [indiscernible]. No, that's 4% of the total market. So I think still relatively small. You've got to remember that the banks in Australia command about 85% to 90% of the total market. The banks in the ADIs. So every 1% market share that they give up releases about $4 billion to the alternate sector, and the market grows every year as well. And so we see that through a lot of the numbers where we can look at the underlying portfolios of the banks, how much of it is property versus corporate loans and other receivables. And property has been on the decline for quite some time, the introduction of Basel III earlier in the year, the further capital requirements that, that's put on the banks. I think this has lots of runway. It's a big opportunity. We're not going to swamp the market at $18 billion, so hopefully, that answers the question, Kathleen.

Yes. So great. Probably the last one, which is actually a really good one to finish on. We've spoken a number of things that's going on in the market. But if you could nail down to 3 things that excite you about the current market and 3 things that give you concern. So I'll start with you, Andrew, then move up to Mark.

Was it exciting?

Top 3 and the top 3 that are [indiscernible].

I guess, and some of it I said in my presentation, just on the positive side, actually, let me start on the negative side, and then I'll end on a positive note. The 3 things have probably concern me the most about the market at the moment, is just contagion effect with other parts of the world and whether you just get the withdrawal of capital more generally because people decide to sit on the sidelines. It's hard to ignore what's going on geopolitically, whether that just people say, until the world sorts itself out, notwithstanding, we hear how compelling Australia is, notwithstanding we here how compelling residential is. We just want the world to sort itself out a bit before we start writing sizable checks. To be clear, we haven't seen any of that to date, but it's always something that one factors in. I think that our portfolios are in particularly good shape. We -- I'm not just saying that we asset manage every 6 weeks. I think we've got a very good handle on the relativity of risk with in the portfolio. But if Qualitas was to lose its track record in some sort of way in an unexplained fashion, we are in a risk business, so we should assume some things become more difficult over time just through the inflection of time. But if we were to hurt our track record, I think that would give me cause for concern. I'm struggling on a third Kathleen.

That's fine. We're running out of time.

And then on the really positive things. Look, I think, great brand I'm really on it, we've got the quality and the caliber of the people that we've attracted to our organization. And I think we're really dealing in best of class. And as I said in my overview, the last 3 to 6 months, in particular, are quality of CVs and people who are really wanting to join us has been first rate. And I think that's one of the most significant opportunities for us to capitalize on. And I think that just as I said, the overall market dynamic, we find ourselves in with a shortage of capital, this whole resi story. Sometimes I find myself amazed that I'm still trying to convince people how compelling the residential story, is in Australia on supply. And I'm not sure what they're waiting for when you talk about sub-1% vacancy rates, 10% to 20% rental escalations, 40,000 to 50,000 population growth, what is it that people need to be convinced about in -- I've been investing in real estate for 40 years. And I honestly say hand on heart, I have never seen a better opportunity in that 40 years than residential for Australia, given those set of dynamics. And I think we are poised to play into it, and it's our major pathway to $18 billion.

I'll say there'll be one of this really quickly. It's clearly a great time for private credit and now how specialized and hard this can be and how diligent and across markets you need to be. So I get concerned about other new entrants coming in making a big splash and making lots of mistakes and what that might mean for our industry, but what I get excited about is I know how hard it is and how good our team is, and we're going to do an amazing job of it to stop some of that happening. So the 2 sides of the coin about watching big competition in, trying to capture what we're doing.

Amazing. Thank you. Please join me in thanking Andrew and Mark. Moving right along. I'd like to now welcome our next presenters for our ESG panel. The session will moderated by our Head of ESG, Jason Rackley, who has been with Qualitas for over 6 years, most who was also most recently our Head of Transaction risk. Jason is joined by our ESG advisory group members, and we feel very fortunate that they've chosen to work with us. And I won't be able to do justice to their credentials in the time that we have, but I'll try. Fiona Reynolds, who's the Chair of the ESG advisory group and brings over 25 years' experience. Most recently based in London as Chief Executive of the principals for responsible investment. U.S. supported network of investors representing $121 trillion in assets under management. She additionally, chairs the UN Global Compact Network Australia who seeks to mobilize Australia's leading businesses to create a sustainable future. We welcome Dr. Ian Woods, who is the founding member and Deputy Chair of the Investor Group on Climate Change which aims to raise awareness on the potential positive and negative effects of climate change and encourage best practice investment analysis. He's also a expert sustainability network member. And also joining us is Brian Delaney, who's not only a member of the ESG Advisory Board, he is also, as I mentioned earlier, Qualitas Board Director. He has over 35 years experience in the funds management industry, holding senior roles globally, including member of QIC, ESG Advisory Committee. So please join me in welcoming them to the stage.

Thanks, Kathleen, and good afternoon, everyone. Look, I'm really pleased to be here to moderate this session with our ESG advisory group today. As Kathleen said, Fiona, Ian and Brian have decades of experience in ESG and responsible investment, and we're really fortunate to be able to tap into to help us shape our ESG strategy going forward. Today, we're going to talk a little bit about why we set the group up, a little bit about the work that the group will do, and then we're going to talk a little bit also about the sort of some of the trends and issues that we're going to be facing into as we build our strategies out. We've got about -- I think we've got about half an hour, so there'll be some questions at the end, but we'll get straight to it. So Brian, I'm going to start with you if that's okay. From a Board perspective, so what motivated the Board to set this group up, and how does it sort of fit into the governance structure of Qualitas?

Thanks, Jason, and afternoon, everyone. First, I hate everyone to think that Qualitas started their journey on ESG when we listed back in 2021. As you've heard from Andrew, Qualitas has been going to 2009. I had the benefit of being on the Advisory Board prior to the listing. But having observed the business, Andrew and the team have been on this journey for quite a while. So I want to make sure people don't think we woke up after this, and you said, "Wow, what's this 3 letters meat. At each of ES&G, you say them all together, and people think that they're all one word. There are actually 3 different things. And each of the focus of those 3 different things you need to think about. So obviously, after we listed in late '21, we need to consider a range of factors. For those who are directors in the room, if you go to the AICD ESG Day, which I did a month or so ago. They scare that the [indiscernible] our view, that you need to be all across this. But of course, there's ASX reporting guidelines, there's our own risk appetite which we set as a Board. The shareholder expectations there is our investors' expectations. And as Andrew touched on, to be able to attract and retain quality people, you need to have a story about what you're doing in this space. Because like my daughter, a 28-year-old my 25-year old, they want to know what you're doing to make the world a better place. Of course, they've understood what you're going to pay them as well, but they want to know about that. So all of these factors led to the decision to establish the ESG advisory committee focused on that future road map. And I think it's critical to our long-term sustainability. Andrew shared with Mark some numbers that we put up for 5 years. If we're going to achieve those, this committee is going to have a big impact on how we get there and the way we get there. Without embarrassing some people on the stage, I'm going to, a clear decision about how serious we were was appointing Jason to his role. We took him away from Mark's investment team and said we need a focal point, someone who's going to spend every day, thinking about this and help us develop that road map. And then finally, at the risk of embarrassing my 2 friends here, you don't attract the quality of these 2 people who are both known domestically and globally as subject matter experts, both from an asset owner perspective, and an asset management perspective, and get them to be sitting here, if you don't have a story that they believe in because I do their DD and you're serious about where you're going. So I'm delighted that they both joined. I know them both for a long time. But I think it's important that you, as the audience realize that with the expertise I've got each side of me, I feel really comfortable that we're going to be able to take this journey and make it meaningful for Qualitas.

Thanks, Brian. It's great, great response. Fiona, you are the chair, so can I ask you what drew you to Qualitas? And what does success look like for this group?

Sure. So what interested me in Qualitas was, first of all, yes, I've worked with investors on sustainability issues for a very long time. And I was in London for a long time. When I came back to Australia, I really wanted to continue to work with investors on sustainability, I wanted to work with Australian organizations who -- they didn't have to be the best at everything but they needed to have commitment to what they were wanting to do and to have aspirations in the space. And to me, that means that it really has to start at the top. And what really impressed me was when I met with Andrew, I could see that from the top of the organization, there was great commitment. And then I talked to some of the Board members. I know Andrew Fairley, it is the chair. And I could also tell that the Board was extremely committed. I have worked with lots of organizations and met lots of organizations over my time, where you can have a fantastic ESG person. They can be the little person in the corner near the backdoor, but nobody knows their name. It used to be the case for me years ago.

That's me, Fiona.

Yes. And unless the Board and the Senior Executives are brought into this, that person just struggles, to get anything done. So that was something that really attracted it to me. I could see that there was a commitment, a passion and a desire to get things done and willingness to bring in external people to help that happen, which not everybody wants to do. And I think there was also an honesty to me about where Qualitas was at. As Brian was just saying, it's not the Qualitas hadn't been thinking about these issues, hadn't been doing anything, but there was also a recognition that we don't know what we don't know. And there's still a lot that we need to do if we're actually going to be best in class and a commitment to do that and hence, getting full-time resource or those sorts of things. And I know Qualitas is at the financing end, but I also think obviously that the real estate sector is an extremely important sector if we're thinking about sustainability from the point of view decarbonization, how we go about that. It's an important sector socially from a housing perspective. It's an important sector as well from many other issues that you need to consider, supply chains, modern slavery, et cetera. So there's a lot of interesting issues there. And so from the Advisory Board and chairing the Advisory Board, our role is to really think about all of the issues that are coming our way. And if we think about Australia. Since the -- in a very short space of time, a lot has happened with sustainability in Australia. So we've seen that the government has set a net zero by 2050 target. It's also said that by 2030, we're going to have to reduce emissions by 43% from 2005 levels. Now to do that, there has to be huge changes across the economy, and that's going to affect every single sector of the Australian economy, whether that's agriculture, whether it's real estate, whatever it is, land use, et cetera. Everything is going to have to have big policy changes. So I think some of the things that we're looking at, including what's happening internally about implementation and how we go about it, but what are those changes? How do we stay ahead of those changes? We don't want to sit back and then just find ourselves being victims of regulatory change and being run over by it, we want to know and be planning and be ahead of the game, and that's what we're doing and then working with the team to ensure that we really embed sustainability across the whole organization because you don't have success if it just sits in a little pocket, it really does have to be embedded across the organization, top down, bottom up to make that work. Now we're relatively new. We have had 2 advisory meetings -- advisory committee meetings so far, we've got a lot of work ahead of us, but it's also a great committee, a great team, and we're really excited about the work to come.

Great. And you segue nicely into some of the work we're going to be doing and Ian, I want to talk to you about that. So we've set ourselves as a group, some reasonably ambitious objectives for ESG in the next 12 to sort of 24 months. And a lot of that is focused on improving our reporting and disclosure, but we've also got product development that we're working on trying to work that way so we can channel capital into more sustainable development, particularly in the residential sector. And Mark and Andrew talked strongly about how much conviction we've got in residential. I want to ask you -- what do you see as the most pressing priorities for us in the short term? And also, there's lots and lots of focus on reporting and disclosure. And does that detract from having sort of real-world impact? And how does a firm like us actually have some impact?

Yes. Again, thanks very much for inviting me to be here today. It's good to be here. I think in terms of priorities, I think you sort of started in the right area in terms of focus because there is a lot of change from a regulatory perspective, compliance perspective with regard to reporting for both listed companies but also funds. And so you'll see reporting associated with the International Standard Board, Accounting Standards Board, ISSB, with the sustainability reporting, which most companies will have to address. But there is also some regulations that governments bring in on disclosure on climate change. Some of you may be familiar with Task Force for Climate-Related Financial Disclosure and the government's regulation [ will effectively mean ] both listed companies and funds will need to start reporting against that. So there's some significant reporting requirements. And obviously, reporting is an output, and the key challenge is to get the inputs or the processes in place to make sure the reporting is meaningful. And so that's the other challenge. And there's 2 aspects of those inputs. There's one is just the data that you need and the other one is the skills and capabilities to take the data and create meaningful reports. I think in terms of, as you say, I think you picked up a good point about reporting for reporting's sake. I think the other priority is it isn't just reporting for reporting's sake, is that you use this information to make better investment decisions and better understand the possibilities and the opportunities in your business. I think as soon as reporting is just seen as a compliance mentality, I think you miss a lot of the points. So I think one of the challenges is really getting value out of that reporting. So I think that is absolutely what their key area of challenge. I think the other area is, and Andrew and Mark highlighted this, it's in the property and the residential area, especially, is incredibly interesting position at the moment. And I think as a result of that, even from an environment and social perspective, when we talked about affordability, there's some really interesting opportunities in that space. And you might see is just "well, that's just a business opportunity," but it also comes as a result of social and environmental pressures, which are driving those opportunities. So I think getting the products and funds and positioning that capitalize on those drivers is another really important area.

You touched, Brian, on data, and it's something that I think is really important. I come from a risk background, so data is important. And we're in private markets. So I think data is a real challenge. And I was actually at a meeting this morning with one of our borrower clients, who are trying to do lots and lots of great things, and they own predominantly industrial assets, and they can't even get electricity usage data out of their tenants. So how are we going to measure and track our impact if we can't get good data. You are in a really difficult position here and talk to globally on this issue. Credit card markets and also the size is an incredibly challenging area. I think what you're going to find is that some of the regulatory push and also to some of the market dynamics will create an environment where data will become available. That's not going to happen overnight, so you still need to work in before that. I think what you think about when you think about data is then wait until the data is you feel 100% sure about the data before you start, start with what you can get, absolutely recognizes uncertainty and the challenges associated with it, but use it with understanding their uncertainty. And I think through that process of using that data, you'll understand what the important data is. What data -- I'm uncertain about this area, this particular data area. But to be honest, it doesn't matter. I can be out by a couple of orders of magnitude, and it makes no difference whatsoever. So it helps you really focus on the areas of importance. But to work that out, you have to start by just working out how you answered the question. So I think no data or problems with data is not an answer, so not a response to say, well, I'm not going to do anything. You have to start, work on it and then you'll work out where to prioritize.

I can add to that. I think that we can't make the perfect [indiscernible] meeting of the Board. And over many, many years in this space, I've heard many people saying we can't do this, we can't do that because we don't have the information, we do not have the data. And if we sat back or just waited for everything to be perfect, we'd be so far behind. So as Ian was saying, we just have to get moving, work with the data, it will continue to improve, but it's never going to be hold the answer to every think that you want to know in one piece of data. There is much more work in thinking about building sustainability into what you do than one piece of data on a spreadsheet somewhere or in a computer system somewhere.

Yes. And speaking of being behind, I think we're currently tracking to that 4.5 degrees of warming, so that's not a great outcome. Fiona, I'm going to come back to you because I want to talk about, I don't know with the PRI, you all have experience in this area. I want to talk about the skills gap. Lots of people talk about there being a skill shortage in this space. And I guess I want to ask you how important is education and training in an organization like ours in terms of embedding ESG into the culture of the organization?

Well, it's really important because as you say, there is a huge skill gap growth globally when it comes to sustainability. It's a very -- well it is not new, but it's a very growing area, particularly in the investment space, and you've got a lot of people in the investment space who've been doing things for a certain way for a long time, and now they're having to rethink how they're doing things and you have got to retrain people, and that's not always easy. So one of the key parts of the strategy that we have at Qualitas for the committee, the work that we're doing, is about training across the organization. Obviously, we need the right training for the right people in the organization. You've got the board level where that's an oversight role, and they need to understand certain things, then you've got other staff who might be in sales, et cetera. They need to understand these issues, but at a different level, and then you've got those who are doing this sort of deep implementation, due diligence, et cetera, who really need to understand this in a different way. So making sure that we're getting the right skills to the right people, the right training. But having said that, the whole organization needs to understand the risk to the business, the sustainability risk, what's material, why we're doing this, what the plan is and how we're going to get there, so that we are all from the Board down on the same page and the same journey, basically.

I think the top-down aspect is important. It's not just the investment teams that need to be trained. There's also skills gaps at board level and at senior management level, so that's really critical, I think. I don't think we can have an ESG conversation without talking about regulation. There's lots and lots of acronyms that get tossed around. And I think we're about to get a new one in January with -- in Europe is ESRS, there's something coming out every day. What are the things, and I'm interested in your view, but also Brian, from a Board Director point of view things that -- what are the regulation things that we should be looking out for and expecting to see. Australia is probably a little bit further behind regulatory-wise.

So I think, not that I think, I know in Australia at the moment, one of the key concerns in the investment community, but also in the corporate sector is the greenwashing, focus. So ASIC has really been focusing on greenwashing and it's going to continue to. It's making it one of its priority areas. In the budget, it was given an extra $4.3 million for the next 12 months to focus on its surveillance on greenwashing. It's scaling up, 40 new staff that it's trying to employ in this space. It's already issued 11 infringement notices within the investment space and there's 3 civil proceedings that are going, that ASIC is also proceeding with, 2 of those are to retail super funds, 1 is to an investment manager. So it is very focused on, are you doing what you're saying that you're doing. So this is something that we're trying to have a laser-like focus on because investors need to be very clear that they can state ambitions, but they need to be clear about what their ambitions are. They need to be clear about what they're doing, how they're going to get there, how they're going to measure those things and then how do they report against them. Investors are getting in trouble if from a labeling perspective, if they're out there using language that just is sort of a bit woolly, and it's not really what they're doing or they on the team is not what's in the team. So we have to be very careful about greenwashing. Green hushing also becoming a point of discussion whereby investors are very concerned about, well, maybe if ASIC is so focused on greenwashing, I should say nothing and be safe. But the regulator is also saying, that's not good enough. We need to actually know what you're doing because you need to be disclosing this information to people. So we've got to get that balance right. In Australia, we're also developing our own taxonomy. So that's something that will impact all investors. That's being developed as we speak. It's been out for consultation. Now treasury is working with the finance sector about how what does it finally look like. There's climate-related financial disclosures that are coming our way as well. So a lot is happening in the sustainability space. We're also seeing globally that there's a lot of focus not just on financial related disclosures, but now there's a lot of focus on biodiversity issue. So there's the task force on nature disclosures. This is something we also want to look at Qualitas and making sure that we're ahead of the game, that we know what this framework is going to mean for us. And I think there's a lot of regulation that will come from a sector basis, as I said, as we transition to net zero, every sector of the economy is going to be impacted. And we're looking at sector pathway. So what does it mean for this sector? What does that mean for the property sector? And what changes will be there? So it's not just at this level, it's also at the sector level. And then, of course, there's a lot of regulation happening across the globe and some of those impact us. I think one of the benefits that Australia does have at the moment because we are a little bit behind is that we can look at what's happened in Europe, and we can look at what's happening in other parts of the world. And although people might talk about the fact that Europe is very well ahead in sustainability, it doesn't mean that they get it all right and far from it. And they often bring things in and they don't work. So now they're going through big reviews of things that they're doing, [ FFDR ] which is sort of their labeling system. So we can sit back and look at those things, and have the advantage of saying, well, what worked and what didn't work? How do we avoid doing that in Australia and how do we make sure that we can learn from others as well?

And Brian, you mentioned that the Board, the Directors, institute and being scared. I mean, what's your take on it? Is this focus on greenwashing actually kind of stunting companies' ambitions in this area?

I mean I don't think so although, we do tend to spend a lot of time talking about it to Board members, my chair's in the room, and he is quite passionate about making sure that we, it's every one of the tenet as Fiona said we're doing? But I think that is just good practice. I mean if you're worried about greenwashing, then you should be if that sounds a bit illogical. In other words, you're doing something that you shouldn't be. I've been in this industry a long time, and marketing gets ahead of fact sometimes there I say it. So you just got to make sure they're aligned. I'll just add one thing to Fiona because she's run on top of regulations. One of the other hats off where is Chair of Association with all the big industry funds congregate, and I get the benefit of listening to the CEOs and the CIOs. And not only is regulation changing, but the demands, all of you are members of a super fund, unless you're on your own, and therefore, the people that run those okay, are very cognizant of the risk they're running of your money. So they're expecting and demanding much higher levels of, if you like, reporting and information to make sure on your behalf, we're actually doing the right thing and they're doing what they're saying to you because you're becoming more active, you're becoming more active about what you want to see invested in and what you don't. And there are some legal cases against some of the funds in this country that are played out in the last couple of years, but it's come before. And so I'd just add that aspect. It sounds scary. It's not. But at the end of the day, if you do what you say you are doing and you can prove it, you shouldn't have to worry.

Yes, if we look at the civil proceeding that's happening, one of them in Australia, it is because people who are in a fund were told that it was not, it did not invest in any fossil fuels, for example. Now if you then find out that in actual fact it is, then that's clearly misleading. I think though that there is a big difference between being deliberately misleading with then best efforts. And I do think that with regulation, the regulators need to be careful that they don't stifle innovation because we're in a situation that we haven't been in before, a lot of the sustainability issues are new. We have not decarbonized the global economy before. Investors and companies are setting dual targets for 2050. They're setting shorter-term targets. Do they know everything that's happening in the world right now and how everything is going to impact them and what policy changes are going to happen all the time, some things around their control. So we need to have, without people being dishonest, we need to make sure that we allow for innovation and we allow for trial and error as we're going through huge, huge changes over the next few decades.

Genuine intent.

Yes.

Maybe if I can just pick up Fiona's comment there. I think there are 2 key aspects of avoiding greenwashing. One is just being transparent about the uncertainties. If you're not really sure, that's fine, but just be really clear about what the uncertainty is in terms of what you're putting out there and the quality of the data that you're using. And the other aspect, especially when it comes to targets, of achieving targets over a period, is what are the contingency factors which influence whether you'll be able to achieve that target. So be really clear about what's in your control and maybe what might be out of your control, or for which you're relying external aspects which you're relying on. Just be really clear about that and also how you're trying to influence though do you don't have control, influence those external factors to help you meet the target for whatever you've said you're going to do. So I think they are 2 really key points with regard to avoiding greenwashing. Just as I think just be what you are on the team and be realistic about what you're going to do and how you're going to do it.

I know my clock is flashing red at me, and I've only got one job and it's to bring this thing home on time. So -- but I do want to talk about trends. So lots of focus on climate, which is understandable, but there are other parts to ESG apart from climate change. Maybe I'll start with Ian because -- so what are some of the things that we need to be thinking about in terms of issues going forward, the next big issues in ESG?

Yes. I think issues around biodiversity are definitely the things which are coming forward. It's significantly, certainly globally. A couple of other issues, I would say, are more on the social side of things. I mean, we've got the Modern Slavery Act being revised here in Australia, and there's requirements here. But I think there will be some other social issues, which actually probably provides some opportunity in this space. One is what we're going to do about aged care and provision of aged care, both from just a capital requirement for aged care buildings given the aging population and the other one is the whole issue around affordable housing. And increasingly, people getting older without having paid off their house. I think there are some real interesting social issues there, which is definitely in the property space which I think are going to be growing issues. Brian?

Really quickly. And for those who know me, you would not be surprised I'm going to say this, diversity and inclusion is a massive issue. I've been in funds management for 4 years. I'm the big dinosaur that they're talking about when they say they need to remove them. And so the great thing that I've observed is real, and I'm a big favor of quotas. I know it might be controversial, but frankly, things change in [ glacial ] speed in our industry if we don't put targets on. And so I've seen a huge improvement in that, but we've got to stay the course because as a father of 2 highly successful daughters, you can't be what you can't see it. And so as I said, I've been in this industry for a long time, I'm seeing rapid change, but we've got to stay the course. And on picking on female, male diversity, there are many others that we need to think about, that's the most obvious.

Yes. Fiona?

Well, picking up on that, I think, yes, gender diversity still needs to be something that's focused on, but we need to be looking at many other forms of diversity as well. And I don't think that there is enough focus on other forms of diversity. And I think obviously human rights is a big and growing area, and there's going to be -- there are already is happening around the world a lot more focus on human right due diligence, and that will happen here in Australia as well, getting more into supply chains as well, looking at modern slavery and human trafficking in great detail. So as well as greenwashing a lot of new discussions that are coming up are about blue-hushing and social-hushing and social-washing and a blue-washing as well. So it's not -- it's certainly not just in the green space.

Yes. Great. So I want to bring the audience and I think we've got time for some questions. Okay. That lets me off the hook, easy.

We don't have time for one.

Have we got any from the room? Or are we going to Slide or...

I've actually got the one that's come on Slido, which I haven't released yet, is actually quite interesting, but I will go to any in the room first. I see again. So the one that's come through is around what we are seeing coming through on the U.S. around the negative sentiment towards ESG which seems to also be spreading now to Europe. What are your views on this? And is this more critical rather than actual intent in the target of 2 questions.

Okay. So in the U.S. there is a big backlash against ESG by some of the states and the governors of those states. They're mainly in Republican states, and it is a purely political issue. It's not an investment issue. But in those states, in some instances, they're basically banning you from thinking about ESG issues, which seems a bit bizarre. I mean if you're an investor and you're not considering climate risk, for example, that doesn't seem like a very sensible or obvious good thing to do. It's going to be interesting to see what happens. And I think a lot of what happens will depend on the elections that come up in the U.S. So while U.S. investors are still continuing down their path about ESG issues, a number of them are pulling back and a number of them are being a lot quieter. They're worried about these issues. Some of the U.S. states have said you will not be able to manage money for us for the state, for the state pension fund, if you're talking about ESG issues. It is very difficult for global investment managers because on the one had you manage money in Europe, on the other hand you manage money in the U.S. and you're trying to balance both of these things. So there's a lot to play out. I do think on the flip side, in the U.S., though, and on the positive side, the U.S. 12 months ago implemented their IRA, the Inflation Reduction Act. And that is huge incentives to invest in the new economy and invest in Climate Solutions. And this is a capitalist society where basically incentives works and it's on the market, and it's changing the way people are investing. So I think it's counterbalancing some of the other things that are happening in the U.S.

Let me last in comments from you, Brian or Ian.

I would just say on that aspect that is what happening in U.S. I think it fundamentally shows from my perspective, anyway, a misunderstanding of what drives value in the company, what drives value in the company is an ability to execute a strategy. And as we just heard Mark and Andrew to say it's all about people. And if there is ever a social issue, it's people. So it's how do you get the right people doing the right things with the right counterparties that drives a lot of good businesses. And that's you can put a social issue label on that where you can just say it's a good business. But I think understanding that is something which is really important.