Income Fund Training with Sequince Capital

Last Updated on Feb 8, 2022 by Jos

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Contents

    Purpose of this training

    Jos Aguiar 0:02
    Hi guys, today we’re here with Sean Garvan, he’s the principal at Sequince Capital.

    Now the purpose of this call is so you can get to know a little bit more about how funds operate, and why you may want to invest in a fund and why you might not want to invest in funds.

    So, on that note, Sean, let’s take it away.

    Sean Garvan 0:23
    Thanks, Jos so thanks for having me.

    Essentially, sequence capital has developed bespoke alternative wholesale funds to provide investors access to investment and commercial opportunities that may not otherwise be available, either through traditional investment advisors or that they can’t get direct access to these commercial opportunities without having a fund type structure overlaid across the top.

    So the example that we’re going to use today is our High Yield Income Fund. It’s a fund designed to throw off a regular and consistent income to investors.

    And with regular distributions, as it also has some capital preservation mechanisms built in.

    The target underlying investments are predominantly UK based.

    So we’ve got quite a bit of information here, I’m only going to sort of touch on some of the key points. There’s a fair bit of information about who we are and how we’ve we’ve come to be.

    Again, we’re globally focused but are Australian based.

    And we target and focus on on putting together opportunities that wouldn’t otherwise be accessible through through traditional means.

    This particular Fund is designed to generate superior absolute returns compared to other listed and unlisted funds, investing in alternative assets.

    We seek to preserve capital by selecting investments where downside risk is insurable, the capitals secured. It’s a wholesale fund, open to sophisticated investors.

    Why can’t investors normally access this type of investment?

    Jos Aguiar 2:21
    Can you please explain this more what you mean, when you say it wouldn’t normally be accessible to investors?

    Sean Garvan 2:29
    Yeah, certainly. Our underlying investments are essentially debt funding into commercial activities, that is not necessarily, a publicly available opportunity to even sophisticated private investors to provide debt or invest directly into those commercial operations.

    We’ll go through some of the details of those underlying investments, but essentially, we’re talking about collateralized financing of litigation funding, and we’re also talking about secured collateralized financing of film production in the UK.

    So just generally, you know, these these types of things are not something you can essentially make direct contact with those types of those types of corporations and offer to provide capital to so we’ve, created an investment structure that provides investors access to those opportunities.

    What kind of funds would investors generally not want to access?

    Jos Aguiar 3:35
    Just in contrast to that what kind of funds would investors generally not want to access? So a lot of times we get people coming to us saying we just don’t want to invest in funds, they don’t have the returns, or we don’t want to invest in things that we can access ourselves anyway.

    Sean Garvan 3:51
    A fund is just a is just a legal structure, and providing custodial authority to an investment manager or trustee to to take take investors funds and have discretion on, how, where and when to invest those funds.

    Now, if you’ve got that structure, and you’ve got all of those resources in place, then there’s fees being charged to perform that function.

    And then there’s the fund itself, the funds objective is to invest into listed equities or listed property trusts or other relatively traditional mainstream assets.

    One would question as to whether there is a need to have a fund structure over the top of investment types where investors can easily access them directly without that additional cost.

    An experienced investor would generally prefer to have an active management role in their investment decisions.

    They’d tend to not want to have a managed fund or an investment manager sitting in between and prefer having direct custodial ownership of the underlying investment assets.

    Jos Aguiar 5:19
    Got it that makes a lot more sense.

    Sean Garvan 5:23
    In this particular situation (our fund) it’s not possible to have a direct involvement with the underlying investments then then the fund does serve a purpose.

    So, this is a very, very high level overview of what this particular fund does,

    Again, superior absolute returns compared to compared to compare their funds, we’re targeting an annual income yield net of fees of 10%.

    The fund aims to preserve and stabilise capital by ensuring that all lending and investment is secured and downside risk is insured.

    And the other objective is to provide a regular predictable predictable income stream to investors.

    Okay, so some of the other ways that it generates its revenue, secured lending to underlying investments at a premium interest rate.

    It targets underlying investments that have a sustainable long term scope for ongoing borrowing so that we can ensure that the fund can have a sustained and predictable lending revenue in the long term.

    How is capital secured / protected?

    And the fund aims to secure and protect its capital by more than one instrument.

    So it uses various strategies, specific and general security agreements such as after the event insurance with reference to the litigation funding, government estate, creative industry tax credits, UK VAT claims, a number of other mechanisms.

    What are the underlying investments?

    In terms of the underlying investments for this particular fund, this is where it will probably become a little bit clearer as to why this opportunity may not otherwise be available direct.

    One of our financing partners is global finance platform, they are a litigation funding company in the United Kingdom.

    So the fund provides a scalable debt-line for use by that company and UK law firms to cash flow, a specific type of small claim case for which millions of individual claimants exist in the UK.

    It’s exactly the same case type. It’s specific and repeatable for achieving a successful outcome.

    It’s related to the overcharging and undisclosed charging of fees or payments of commissions within financial and insurance products in the UK.

    This has the earmarks of some of the things that came out in the Australian banking royal commission a couple of years ago.

    However, it’s a lot more systemic, on a lot larger scales, it’s been going on for a lot longer time in the UK.

    So essentially, there are hundreds of 1000s, millions, in fact, of cases where regular folk have been either overcharged for fees or have been supplying the financial product or insurance product, either without any or partial disclosure.

    As well as a lack of disclosure on sales commission’s being paid on that product.

    So there’s a clear legal precedent set for plaintiffs getting getting a refund or compensation on these these fees for these cases.

    And that would usually result in a refund of any fees, charged commission’s or bank interest are only charged over the life of the product.

    How do you calculate overcharges / miscalculations?

    So our funding partners also have a specific proprietary auditing technology, which allows them to accurately verify an overcharge or miscalculation within a client’s file, and, and that usually results in a win rate on these cases of greater than 95%.

    But in every single case, they fully insure the outcome of the case with after the event insurance. So even in this in the small portion of cases that may not succeed in court, all costs of the case, including our finance capital, and our interest revenue is all insured for that small chance of loss.

    Jos Aguiar 9:50
    That’s insane.

    Sean Garvan 9:52
    Yeah, so this is a really bespoke commercial opportunity that’s been identified.

    There’s some figures that we received from the law firms just before Christmas around the current state of that, if you want to call it a market litigation funding for, for mis-sold financial products is basically turned into an industry in the United Kingdom.

    It’s been, it’s been a thing for nearly eight or nine years.

    Yeah, the current claim, the current claim book for this type of activity is is is around 38 billion pounds.

    The law firms currently have around 28,000 active cases running at the moment, across the UK, there’s between 200,000 and 300,000 cases in total being run every single month, they expect to be able to continue at that volume for seven to eight years.

    So there’s there’s still a long runway of litigation work to doing this space.

    And there’s a high demand for capital to fund these cases.

    Because we’re talking about regular folk, you know, mums and dads that may have had a credit card with a piece of personal insurance attached that they weren’t aware of that want to seek compensation for or they want to refund.

    So they seek to engage the law firm.

    And the law firm needs to be able to offer them “No Win No Fee” service for the case, therefore, the law firm has a high demand for for capital to be able to offer that service.

    And that’s where that’s where the fund comes in.

    How long will the funds litigation funding investment opportunity last?

    Jos Aguiar 11:37
    This sounds like it’s a relatively short term opportunity. So maybe a decade of bandwidth for this fund?

    Sean Garvan 11:48
    The particular focus of the litigation funding right now is for what’s known as PPI which is personal protection insurance, which is one of the largest financial fiascos that occurred in the UK.

    However, there there’s other examples of this type of activity, mis-selling and miscalculation that law firms are currently litigating against.

    One other, which is extremely prolific in the United Kingdom is the miscalculation of interest charges and fees on home loans and mortgages. This has already been verified as it’s rife, and very prolific with throughout the industry.

    And again, the law firm has a has an auditing software technology to to accurately verify cases of overcharge.

    So there’s a broad scope of different litigation cases with large cohorts of clients with similar or identical claims to run.

    So mortgage over charges is one.

    There are also other instances of insurance discrepancies.

    So I guess what we’re getting at is that there’s going to be a continuing demand for this small claim litigation funding long into the future and law firms will be able to pivot, you know, from one type of claim to the other, and still continue to have a demand for that capital.

    How does this compare to other funds?

    Jos Aguiar 13:37
    That’s awesome. So question for you. How does this compare to other funds like say Charles Schwab’s or vtsax fund? From an investor point of view?

    Sean Garvan 13:55
    Yeah, look, the fund is not designed to have an unlimited upside in terms of performance, we’ve very specifically structured the funds so that it can achieve the target income yield to the investor.

    It lends out to its capital at a fixed rate, and it has very clear and stable operating costs, so that it can return a consistent yield to an investor.

    You know, it’s not a fund that’s designed to go out into the market and look for opportunities or to exceed performance benchmarks and from one year to the other, have fluctuations in its performance.

    It’s designed to be consistent. So we’re very clear about that.

    We’re not looking to blow the lights out one year, and then potentially have a below average year the next.

    We’re targeting 10% Net fees every single year.

    And that’s where the value proposition is.

    If you’re seeking for a portion of the portfolio to return a stable and regular income yield, and you’d like that capital to be relatively protected through the through the, you know, the insured debt strategies that we’ve got.

    And you’d also like that capital, and the income performance to be insulated, or non correlated to the rest of your portfolio, if you’ve invested directly into equities or property.

    The activities of this fund are not correlated to volatility in the share market or in the property market.

    In fact, we would expect the demand for this type of capital in a downturn economy to increase,

    Given that if household income and cash flow is being squeezed, and then then a desire to obtain a refund on one of these financial products would increase, therefore, the funds demand for capital will increase.

    Jos Aguiar 16:19
    That’s pretty interesting, those target returns are very similar to what a typical family office will look for in their property portfolios. So interesting from a capital allocation point of view.

    Sean Garvan 16:31
    Yeah, you know property property funds, if we were to talk about property within funds, it’s very, very common, very popular right now, in terms of wholesale funds to go into a property project.

    We see a lot of that, and, you know, I think you can be it can be taken by, taken by the target returns. The target returns that are claimed in some of those property funds, quite attractive on on the surface.

    And, you know, some had some reach those targets, others do not, there’s a fair bit of variance there, we find. And also, you know, liquidity of the fund is another another consideration to make.

    Jos Aguiar 17:24
    That’s generally why they’ll do those investments directly anyway.

    They get exposure to the property markets as a direct investment, rather than through a fund which is what makes this interesting from point of view of having additional ways to allocate capital with the same return.

    Sean Garvan 17:41
    Exactly. It’s not designed to be the core of a portfolio it’s more of a satellite or an alternative strategy that can sit alongside that, you know, the majority of the of the assets that we feel it, it definitely has a place in a diversified portfolio.

    So that’s the that’s the primary underlying investment activity.

    Film Financing

    The other one is through a company called goldfinch media finance, they are the largest independent film financier in the UK.

    They have a project portfolio that is vast. 200 Plus projects! Over half a billion Australian dollars invested into film projects.

    They’ve got a got a 0% default record in the last seven years on lending activity.

    So the fund provides a secure debt-line for that company to assess and conduct a very, very, very robust due diligence process on film projects where essentially they they only fund projects where they are able to 90 to 95% secure and protect the capital.

    They do that in a number of ways.

    We touched on them just briefly before they’ll look for tax credits and rebates typically in the United Kingdom, up to 40% of any film project will get get a tax credit or rebate.

    So, you know, financier is going to be comfortable knowing that at least 40% will be protected by government.

    And then they increase that by looking at pre sale contracts, minimum guarantees and sales agents and a number of other strategies.

    So essentially, that is a way that I guess the fund is supporting the creative industry in a prudent and responsible way.

    It receives a fixed interest rate for that funding.

    But on top of that the fund will also participate in a profit share for projects that go on to to have a higher higher degree of success at the box office and through the streaming revenues and what not.

    So something a little bit abstract, a little bit different, but it’s got very, very strong fundamentals in terms of the way that the, you know, the projects are assessed and approved for funding.

    Jos Aguiar 20:18
    Very cool, different way to access the market, so it can be quite a decent return if the films do well.

    Sean Garvan 20:27
    Exactly, exactly. So that’s where the fund again, protects its its downside, and also gives us a little bit of an open upside. And allows us to operate the fund at a relatively low cost.

    Summarising benefits of Sequince’s Fund

    So just summarising on some of the reasons why someone would want to be engaged with something like this,

    • Looking for high yield, and we want that to be paid regularly.
    • You’re looking to access alternative investments typically only available to institutional investors or private investment officers with the right connections or via direct connections to those businesses.
    • A low correlation a typical asset classes, as we touched on before, there’s been a heavy focus on preserving capital.
    • Working with investment managers and stakeholders that have been in these industries operate in this businesses for many years and that the underlying commercial activities is not new. These are businesses that have been running for many years and we’re simply raising capital to plug into existing machines that are not fledgling industries.

    How much capital is required to be able to invest?

    That’s essentially the overview of the fund.

    Who can invest, this is very much technical information around what denotes a sophisticated wholesale investor, which most most of the audience will be aware of.

    “In terms of investment amounts, the funds takes an initial minimum investment of $100,000 subsequent investments at $50,000 dividend reinvestment is possible and there’s no minimum on that.”

    Target quarterly distributions can be either done via nominated bank account or reinvest purchase of additional units in the fund. Withdrawals are available.

    What is the investment timeframe?

    Investors should be should be prepared to leave capital within the fund for at least two to three years, the fund doesn’t expect to make withdrawal offers prior to three years.

    So yeah, three year investment timeframe is suggested.

    What fees does the fund have?

    A bit of information about about fees.

    So again, the target return net of fees of the fund is 10%,

    Initial contribution fee 2% of application money,

    Ongoing fees, investment manager fee of 1% per annum of the net funds net asset value and .75 for the trustee fee.

    So you’re looking at around 1.75% per annum, which you know, is fairly competitive in the alternative investment management space.

    Who can invest?

    Who would be who would be looking at this type of opportunity.

    Obviously, the fund can accept investment from individual individuals, companies and self managed super funds or private firms, family offices, anyone seeking diversification of existing portfolio into alternative or innovative investment vehicles.

    They might have a particular interest in accessing UK investments and anyone looking to hedge a portfolio of other traditional investment assets.

    So, yeah, just that’s that’s essentially an example of what we would what we would deem to be a worthy or worthwhile application of a fund fund structure.

    For an investor where you can you can justify the use of of a managed fund or a unit trust, managed investment scheme vehicle to access an opportunity that wouldn’t otherwise be available.

    What is the definition of a sophisticated investor?

    Jos Aguiar 24:43
    That’s great.

    So one question that I think that people will be thinking that are listening in on this call that would be eligible to invest in the fund that don’t necessarily think they are. Can you provide a definition of what a sophisticated investor is?

    Sean Garvan 25:02

    I’ll discuss what a sophisticated investor is from the perspective of Australian rules here.(the fund, in fact, can accept foreign investment.)

    Note: If we’ve got investors, that are non Australian tax residence or based elsewhere, we still have the ability to accept investment from them, providing we go through the standard KYC processes.

    Australia classifies as a sophisticated investor if they hold net assets of at least $2.5 million.

    That includes property, equities, superannuation, any financial assets, net of debt, or they’ve had a gross income for the last two financial years of at least $250,000.

    Now, that could be that could be payroll income, or it could be self employed gross revenue.

    Important to note that we’re not looking at net profit for a self employed person or business, if you’ve got a company or you’re a sole trader that turns over 250,000, a year or more, then you may qualify.

    And, and those same rules go for any entity that’s controlled by that person.

    So that also encapsulates self managed super funds as well.

    The other way that you can qualify to invest automatically is if you if you’re investing at least 500,000 into the fund, you’re automatically qualify as sophisticated without having to demonstrate if you meet the assets of the income test.

    Jos Aguiar 26:51
    Interesting, that’s cool. What about outside of Australia?

    Sean Garvan 26:57
    Outside of Australia, there would be there would be a requirement to probably demonstrate the same, the same criteria or invest the 500,000.

    There’s one other way that we can accept the investment, it’s subject to the trustees approval, and that’s what’s known as an experienced investor.

    So essentially, we have an experienced investor assessment form a questionnaire which people can complete, to allow the trustee to understand their level of experience with investing and their level of comfort with risk and get a feel for whether they have sufficient knowledge and experience to assess the merits of the offer the value of the securities, the risks, you know, the adequacy of the information, if that if the responses to that assessment are deemed acceptable, and they may be approved to invest in the fund, even if they don’t meet the assets or income test.

    Conclusion

    Jos Aguiar 28:06
    Interesting. It’s cool. It’s been very, very interesting, I think very helpful for people who’ve been on this call.

    Sean Garvan 28:15
    Well, it’s my pleasure, I appreciate the opportunity to explain I understand that, you know, sometimes the when you when you hear the terminology fund, it can, it can be, I guess, it can be a very broad definition.

    Most of the time that when we hear about funds in the media, it’s relating to some of the more mainstream retail funds or shares base funds and listed property trusts,

    And, you know, again, there’s layers of management and structure in there that attract costs that isn’t necessarily essential if you are an experienced investor or have, you know, a relative desire to to be more active in your portfolio.

    So, you know, we see this being unnecessary structure to provide access to those underlying investments that we talked about earlier.

    Jos Aguiar 29:20

    That’s great. If people are interested in investing in this we’ll put the details for yourself or for us to get in touch with you under this video.

    Sean Garvan 29:31
    Perfect, yeah, we’d be happy to conduct any in one on one calls to go a bit deeper into the underlying investments and how we achieve that capital preservation or any any other aspects of you happy to have a chat directly to anyone that wants to.

    Jos Aguiar 29:46
    Brilliant, thanks again.

    Sean Garvan 29:49
    Thanks Jos

    Contacting Sean

    If you’re interested in discussing this fund with Sean please email [email protected] with the subject line “Sequince Capital” and I’ll be happy to put you in touch with him directly.