Qualitas Limited ($QAL)

Good morning, and thank you for joining us today. Before we begin, I'd like to acknowledge the traditional custodians of the land from which I'm presenting, the Wurundjeri people of the Kulin Nation. I also acknowledge the traditional custodians of the lands from where you are participating today, and we pay our respects to their elders, past and present. We're here to share a development that marks a milestone in the execution of the Qualitas long-term growth strategy, one that we've been building toward deliberately and that we believe positions the firm for a larger future. Today, we are announcing the establishment of the Qualitas European office and the acquisition of Starz, a London-based commercial real estate private credit manager founded in 2018. This is not a pivot. It's not a departure from what Qualitas does best. It's the natural extension of a playbook that has generated strong, consistent returns for our investors in Australia, applied to a market that is structurally larger, institutionally sophisticated and currently experiencing exactly the kind of dislocation in which Qualitas has demonstrated it can operate with confidence. Before I walk you through the detail, let me give you 3 numbers that frame the scale of what we are announcing today. A GBP 376 million commercial real estate loan portfolio already under active management; an AUD 36.5 million in total acquisition consideration, I think one you would consider to be modest and disciplined relative to the opportunity; a EUR 2.2 trillion combined U.K. and European commercial real estate credit market and a market that is more than 5x the size of Australia. With that context set, let me take you through the transaction itself. The decision to acquire rather than build from scratch was deliberate. Entering a new market of this sophistication without an existing team, portfolio and institutional relationships would have been a slower, more capital-intensive and higher-risk path. By acquiring Starz, we arrived in Europe with a functioning platform from day 1. Let me walk you through the transaction structure. Total acquisition consideration is AUD 36.5 million. Of this, $28 million represents a co-investment into the Starz portfolio. So the majority of our consideration is directly deployed into credit assets, generating returns from day 1. The remaining $8.5 million was the purchase consideration attributable to their positive working capital. Most of this working capital position is represented by cash at bank held by Starz as of the date of acquisition. The full transaction consideration will be funded from the Qualitas existing cash reserves. Importantly, this transaction closed simultaneously with signing. There was no conditional period, no regulatory gaps, no execution lag. We are live from the moment this announcement was made. Starz operates with a pan-European mandate backed by sovereign wealth and institutional pension fund investors. The platform currently manages GBP 376 million commercial real estate loan portfolio across 11 investments, supported by a 10-person team spanning origination, asset management and operations. That team, those relationships and that portfolio became part of Qualitas today. On current expectations, the establishment of the European office is not expected to have a material impact on the Qualitas FY '26 or FY '27 earnings. The Starz GBP 376 million portfolio is currently in capital repatriation phase. Therefore, fee-earning FUM, FUM and earnings from the European division will be reported separately from the Australian business. In short, we've opened a significant new front for Qualitas at a cost that is carefully disciplined with separate reporting so investors can track the European business independently as it grows. I'd like to take a moment just to step back from the transaction mechanics and speak to why we are doing this because the strategic logic here, in our view, is compelling on multiple dimensions. Offshore expansion has been a stated pillar of the Qualitas long-term strategy. This is not a new idea surfacing opportunistically. We've been patient, we've been disciplined and we've been deliberate in identifying the right market, the right partner and the right moment. And we believe all 3 of those align with Starz. The U.K. and the European commercial real estate credit market at approximately EUR 2.2 trillion, is one of the world's most institutionally evolved. Even a modest share of this market would represent a step change in the scale of the Qualitas addressable opportunity. We're entering this market at a point of dislocation where refinancing pressures, valuation resets and the retreat of capital-constrained incumbents have left a gap in the mid-market. Those who have followed the Qualitas history will recognize these conditions immediately. They're the same conditions under which we built the Australian platform during and after the GFC. By acquiring Starz, we secure an established and fully integrated team with a track record, existing institutional LP relationships that are complementary to our own and a live portfolio. We are a fee-generating platform from day 1 with immediate co-investment return. This is a far lower risk entry than building a team organically. $36.5 million is a modest capital outlay relative to the scale of what we are accessing. We view this transaction as a hybrid, more commercially and financially compelling than a pure-play acquisition and more derisked than an organic build that requires years of sunk cost before generating return. It's the right structure at the right price for the right market. One of the most exciting aspects of this transaction is the LP network which it creates. New institutional investors introduced through Starz, sovereign wealth and pension funds with a European orientation can now be targeted for the Qualitas Australian strategies. And our existing Australian LP base, which has grown substantially over more than 18 years, provides a natural foundation to scale the European business. Mark Fisher, my Co-Founder, and I will provide direct strategic oversight of the European platform while remaining focused on the core Australian business. Our intention is that 2 senior Qualitas staff will relocate to the London office, ensuring that the Qualitas culture, our investment discipline and our operating standards, what we call the Qualitas Way, are embedded from the first day of operation. We are in every sense, building this business the right way. Let me now bring to life the scale of the opportunity we are entering because the numbers here are genuinely significant and the structural dynamics driving them are not cyclical, they are durable. The combined U.K. and European credit market is approximately EUR 2.2 trillion. To put that in context, it's more than 5x the size of the Australian market. We're not incrementally expanding our addressable universe. We're stepping into a market of an entirely different order of magnitude. Even just a modest or disciplined market share would translate into a large opportunity for Qualitas. Today, banks remain the dominant source of commercial real estate financing in Europe, controlling 80% of the market in key economies, including Germany, France and Spain. That structural dominance mirrors exactly what we're seeing in Australia. But just as we saw in Australia, that dominance of the banks is eroding. Basel III capital requirements and balance sheet constraints are forcing European banks to structurally reduce their commercial real estate lending exposure. This is not a short-term pullback. It's a multi-year regulatory-driven retrenchment that's creating a sustained and growing gap between the borrower demand and available supply. And coinciding with this bank retrenchment is a significant refinancing wall building across the market. Assets originated between 2017 and 2024, predominantly in a lower interest rate environment, are now facing valuation recalibration. As values have reset, traditional lenders are pulling back further. Precisely at the moment, borrowers need capital the most, and this is creating a substantial funding gap in the market. The estimated debt funding gap across 20 European countries and 6 sectors is over EUR 70 billion and over the next 3 years. And that figure reflects only the portion of the capital stack and cannot be covered by existing financiers due to asset devaluation. Total refinancing demand is a multiple of this number. Critically, this gap is expected to play out over multiple years. This is not a one-cycle opportunity that we need to race to capture. It's a structural dislocation that will provide a sustained and durable origination pipeline, the kind of environment in which Qualitas is at its best. We've demonstrated over 18 years in Australia that we can identify, originate and manage commercial real estate private credit with discipline and consistency through exactly these conditions. We are entering Europe at precisely the right moment with precisely the right platform to do it again. Let me close by bringing this back into a historical context. Qualitas was built in a period of market dislocation. We identified a structural funding gap, assembled a disciplined team and built a platform organically that has now grown to approximately $12.9 billion in capital deployed and available capital for deployment, and we did that over 18 years. We didn't do it by taking excessive risk. We did it by being patient, rigorous and deliberate in our intent and by entering markets at the right point in the cycle with the right structure. The European expansion strategy reflects exactly that same approach. We have acquired a live revenue-generating platform for a modest $36.5 million outlay. We have access to a EUR 2.2 trillion market that is structurally underserved and entering a period of dislocation. We have an established team now on the ground, a GBP 376 million portfolio already in place, institutional LP relationships on both sides of the world that creates a genuine two-way opportunity. We're not speculating on Europe. We're not -- we are executing a strategy, one that follows the same logic and the same rigor that built this firm. We look forward to reporting the progress of the European platform, and that concludes the formal part of my presentation. Thank you.

[Operator Instructions] Your first question comes from Elizabeth Miliatis with Macquarie.

Just the first one is just around the historical fundraises of Starz. I think they've raised 3 funds in the past. If you could sort of give us a bit of color on the performance of those funds relative to the industry, potentially also the size and also who were the key LPs through that process?

Sure. That is correct. They have raised 3 funds through a period of time. And the funds -- these funds generally target between 12% to 14% returns. Fund 1, they achieved a return at the top end of their target return. Ultimately, that resulted in a second fund where they undertook a securitization of the underlying loans themselves through a follow-on vehicle, which wound itself out over the last 12 months or so. And they're currently on their next fund, which they've -- I think in total, they've got approximately 16 investments, 5 of which have already realized with another 11 investments yet to realize. It's very similar return to their very initial fund, and they're working their way through that portfolio at the moment.

And just their investors, what kind of investors have they secured? And is it quite -- are there many? Or is it just focused on 1 or 2?

Look, it is -- they've had 3 significant investors since their formation over their various funds. And as at current date, they've got 2 very significant investors. One is one of the world's largest sovereign funds. It's a new sovereign fund to Qualitas. As you know, Liz, we already have a number of sovereign funds who serve our business well, but this is a new name to our firm, and they have one of the world's largest pension funds who have also got behind them as well and who we do know exceptionally well at Qualitas. And I think what is fair to say is that I do see the revenue synergy opportunity here in terms of certainly introducing their sovereign wealth fund to greater aspects of Qualitas over time. I'd like to think, certainly as they get to know us better, that there'll be opportunities there to focus them on credit in Australia as much as they're one of Europe's most active participants in private credit markets, but not as active in the Australian market. But also, I think that in my experience, the large institutional investors, the LP investors are looking to consolidate managers. And I think that in that sense, we can really bring across some of our existing investors where we've had great performance and track record across into the London business of Qualitas now. So I do think there's that two-way revenue opportunity that exists and was probably one of the aspects that really excited me the most about this opportunity.

Okay. And then just around sort of the transaction structure. Just curious who is selling, I presume it's mostly all staff or founders. And then also what kind of arrangements or are there any arrangements to sort of secure the staff and ensure they don't leave the business?

Yes. So the vendor was not the staff. It was substantially an institutional investor who for their own reasons made a decision. I think it had little to do -- you need to ask them to be honest, but I think it had very little to do with the opportunity and the platform. It was situational in respect of their own outlook and their own strategy. And so they had made a decision to divest the platform. And in respect -- and I think what that resulted in from the Qualitas perspective was an ability to take a very disciplined approach to how we got set on this particular opportunity. I think that effectively, all of our consideration is reflected in the co-investment position of the firm and also the working capital, most of which is [ with ] acquired cash in the underlying vehicle itself. So I don't -- honestly, I don't think it could have been a more disciplined entry price in that regard. And I think Qualitas has demonstrated a really strong track record of making sure we retain the staff that are most valuable and add the most enterprise value to an ongoing business. And so I think putting all of the staff that -- particularly the key performers under the Qualitas way of remuneration, but particularly retention was something that we were really focused on in this acquisition, and we've made sure that's the case prior to buying the business.

Okay. And if I can sneak in one more and then I'll go back in the queue. At our conference, you had a great presentation where you compared the Australian private credit market with the U.S. and just highlighted some of the stark differences between the two. Where would you sort of characterize the European market on that spectrum? Is it similar to Australia, similar to the U.S., somewhere in between?

That's a really good question. I think it's more similar to the U.S. in some aspects than it is Australia. And again, I think it's the opportunity here. It's fair to say that for a start, the existing Starz business focuses less on development finance, which, as you know, represents quite a sizable proportion of the Qualitas business. They're really more focused on longer duration investment, real estate investment loans. And that's a very notable feature. But one of the things I like about that is that it brings duration into their portfolio, which I think is very positive. The second one is that these markets, particularly as you get into the U.K. and I would say the same about the U.S. as well, are very sophisticated capital markets. And unlike Australia today, I think that the banks in the U.K., as similar to the U.S., have worked out how to collaborate with the private credit market. And therefore, back leverage is a much greater feature of their market relative to the Australian market, which is a much greater whole loan market. And so there's a very active back leverage market. It's something that the LP investors very much accept and like because it enhances their return profile. The company has shown that it's got a good track record in its ability to structure those back leverage arrangements in place in respect of the underlying assets. I think it's as I've said, and I know I made this point, Liz, at the Macquarie conference, I think it is only a matter of time before Australian funds have a greater level of bank cooperation and back leverage that comes into our funds. And I think that looking at the experience in the U.K. in particular and how they're using the back leverage is something that no doubt we'll gain a great deal of experience to bring back into the Australian market over some years of time in the future. So I think that's a real fundamental difference. The other thing I'd say is there's no doubt that as I speak to institutional investors all over the world that Europe and the U.K. is very much favored destinations. Again, I think I did make that point in the Macquarie conference that LP investors really look to Australia, Japan, U.K. and Europe as favored areas for investment. And in fact, looking at the statistics of where LP investors are investing, it was approximately 46% of all LP investments made in private credit over the last 12 months was actually directed into European markets, and that number was double on the previous year. So that really showed to us through just looking at the capital flows that there is a really favored regime for capital flowing into those markets, and I think -- the European markets. And I think it's exactly for the reason that I outlined in my presentation, which is when you've got some volatility in markets and capital is repricing, it very much excites the institutional investor because you see an improvement on your credit margins and improvement on the quality of your loan underwriting. And so you start to see the weight of capital flow into those markets. And I think that for that reason, it's the right time for Qualitas to have been given this opportunity.

Your next question comes from Olivier Coulon with E&P Financial.

Andrew, can you hear me okay?

I can.

I was doubtful of your ability to not pay goodwill to an international acquisition, but it actually looks like quite an interesting opportunity. So congrats on that. I was just going to say in terms of, I suppose, the repatriation, what's the rate at which that is expected to come down, as in, how quickly do you need to be originating assets on the other side to kind of maintain the deployment fee and base fee income so that this doesn't become loss-making on the actual funds management side of the business.

I think -- thanks for the question, Oli. I think we've got 24 months of leeway, runway on the existing portfolio. And one of the things that we've had to take a view on here is how long do we think it would take to get the next fund up in respect of this business. And one of the comfort points, I obviously met the existing investors, one of whom I know extremely well through the Qualitas business and another I've met over the years but is not yet currently an investor of the Qualitas Australian business. And obviously, I took a fair amount of comfort as much as a big institutional investor is prepared to give to you about a future outlook. But they regard this team highly. I gave them every opportunity to give me a contrary view, but they only came back and confirmed to me that they view the business highly, the opportunity highly. They hadn't wavered in what they saw as the opportunity for private credit through U.K. and Europe. And therefore, I was able to take a calculated view on with the Qualitas machine behind this business, how long do I think it will take to basically seek re-ups from the existing investors. But also, I think the other level of safety for us is just the fact that I do think our existing Australian LP investors, some of whom are European, I should really make that point as well. One of our largest commitments in Australia is from a European pension fund. I would like to think would get right behind Qualitas in this initiative. So we've really got a good couple of years in order to put that into effect. And I think maybe I'll just -- the other point, Oli, I'll make is that when we talk about this being earnings neutral, it's fair to say we also -- I'm sure this won't shock or surprise you, but we also took a very calculated view on the co-investments that we were purchasing with a view to not necessarily paying full par value for those co-investments. And so I think that there's an ability for Qualitas to write up the level of co-investments over the next couple of years as well to a modest amount and that ultimately, the reward is there on that existing portfolio. So -- and when we talk about it being neutral to FY '27 and FY '28, it makes no assumption in regards to either the performance fees that could be earned within the fund or the fact that we have bought these co-investments subpar, and there's an ability to recoup those -- a good ability to recoup the co-investments at par. So I think that's a further opportunity for Qualitas in respect of its earnings outlook. But net-net, taking a conservative view, we've given ourselves a good couple of years.

Yes. Okay. Sorry, can I just clarify that? So you haven't actually assumed the generation of performance fees as that third fund winds down?

That is absolutely correct. Yes. When I say we're neutral, what we're doing is saying let's look at the incremental base management fees. We've taken the principal income into effect less employee costs and other operating overhead and therefore, said we think on that basis, it's neutral. But what I'm not doing -- because I'm trying to steer it in a conservative and disciplined manner is I haven't said, why don't we take a view on performance fees, and we've got quite a lot of upside directly on the co-investment positions themselves. We've not taken that into account either. So I think on that basis, I feel we've got really good runway here.

Yes. Sorry, I may have missed it. I know that the existing staff were part-investors. How much was whoever was backing the business from an ownership perspective, presumably it was like a private equity fund, et cetera...

That's correct. It was a private equity fund. And one that -- I don't think private credit was really a mainstay focus for them in any way. But again, as I said, you need -- you'd really need to ask them directly those questions. But they were the vast, vast majority owner. I'd have to get the exact number for you, but it was well in excess of 95%.

Yes. Okay. So this isn't like you're buying an employee-run business. It was already a corporate-run business where the vast majority of their incentivization was what they were earning on the top effectively, not the profitability of the business.

Exactly. That's a really important point. We haven't -- it's not as if there's a bunch of people who took the lion's share of the consideration that has been paid and therefore, is going to take a different view on the outlook of this operating business going forward. It's very much that the payment went to the original capital provider of the business and the staff are very incentivized to make this a huge success together with Qualitas going forward. So that's very much the case. And maybe to that, Oli, I'd just also add that it is our intention to send 2 very senior staff, Qualitas members across to the U.K. And one of the people involved has literally worked together with Mark and I for over 23 years, was one of the very original staff members. I literally think staff member #2 of Qualitas back in 2008 and just knows us, the business, our investors exceptionally well. And the second staff member actually has been based in the U.K. for 2 or 3 years, is currently resident in Australia, but had spent the last 2 or 3 years over in the U.K. identified this opportunity amongst a number of other platforms that we took a very serious look at, really understood the market, did the market scoping study for us looking at the small loan market, the mid-tier market, the large-check-size market, really strongly built the network also contributed significantly to the building of our European investor base. And so it's important for investors to understand that we're really putting across deep experience of our existing business into the U.K. and someone that has already been resident there for the last -- at least the last couple of years, who really helped in identifying and understanding this market opportunity for us.