Roadmap for Private Credit from Australia – Frank Danieli of MA Financial Group

**Frank Danieli** (0:00)
What you don't want is the moral hazard, which you're seeing in some parts of the global private credit market at the moment, especially with the exposure to sponsor backed direct lending for software companies, where people are saying, well, hang on a minute, I lend in this particular area, that's my job. So I'm going to find ways to rationalize that the next leverage loan of this type is good. How do I do that? First, I'll start giving up on price. I can shave some pricing away. Once it gets to a point where there's not a lot of alpha left, you can't keep giving up price. You have to look for something else to give. That's when you give up terms, and that's how you end up with 85% covenant lending in some of these markets. Once you've given up all your covenants, then what do you do if there's still competition and you can't do anything else? You can either call up to your clients and say, take the money back, which usually money managers aren't in the business of, or you keep doing that activity. Then you give up sacred rights of lending, your documents become Swiss cheese. You have to still find ways to rationalize it. They then say, well, hang on a minute, I've got Swiss cheese, I'm not getting paid that well. I better only lend to quality companies. That's how you've ended up with concentration to a whole bunch of software companies because they actually did sound like really high quality companies.

**Ted Seides** (1:15)
I'm Ted Seides, and this is Capital Allocators.
My guest on today's show is Frank Danieli, Head of Global Credit Solutions at MA Financial Group, an ASX-listed alternative asset manager that oversees 15 billion Aussie dollars across a broad range of private credit and lending strategies and 179 billion Aussie dollars in the lending ecosystem platform. Frank began his career in restructurings, the self-described dark side of credit, and has used the lessons from special situations and distressed loans to build a performing credit platform across asset-backed finance, direct asset lending, and corporate private credit. Our conversation discusses what global investors can learn from the model of private credit in Australia. We explore the evolution of private credit in Australia and why it developed differently from the sponsor-backed lending market in the US, the regulatory shift that pushed lending off-bank balance sheets, the role of Australia's pension system, and MA Financial's strategy for building proprietary origination across the lending ecosystem. We then turn to MA Financial's investment process, including the separation of investment selection from portfolio management, red teams, war games, and rigorous stress testing. Along the way, Frank shares why sourcing, not fundraising, will define long-term winners, why private credit requires diversified balance sheets, and why portfolio management and risk management are the largest sources of alpha in the asset class.
Before we get going, long-time listeners might remember my discussion of the lived experience of Joseph Campbell's Heroes Journey, created by Michael Mervosh and described in Episode 402, two years ago. Well, after an eight-year sabbatical, I'll soon return to the mountains of West Virginia for my next journey. I'll take leave of my familiar surroundings and electronic devices to go on a week-long adventure, meeting allies, facing ordeals, and encountering the so-called belly of the beast. After which, I'll return transformed by the experience. Like my past journeys, I have no idea what I'll find or learn once I arrive, and that is the essence and beauty of the experience. If you also feel the call to adventure, there's still time to engage and sign up. Hop on heroesjourneyfoundation.org to learn more about the upcoming journey. Hope to see you on the mountain. Thanks for spreading the word about the Hero's Journey and Capital Allocators. Please enjoy my conversation with Frank Danieli.
Frank, thanks so much for joining me.

**Frank Danieli** (4:03)
Ted, good to be here.

**Ted Seides** (4:04)
Why don't you take me through your background that led to your path in the seat?

**Frank Danieli** (4:08)
My background was in a combination of funds management and consulting. I come from the dark side of credit. I was a restructuring or workouts banker, advising special situations, hedge funds and companies, banks that had got themselves into a capital structure that needed to be fixed. I met the founders of Mollus Australia. Mollus Australia was a 50-50 joint venture between Mollus and Company, the global firm listed on the New York Stock Exchange and the local Australian staff, which is today MA Financial Group listed on the ASX.
I was doing that and in particular in the post financial crisis era, the platform in Australia had about a 50% market share advising on these situations, the recapitalizations occurring from that post GFC era through to today. I've parlayed that into building a performing credit business where the whole goal is to try to limit the chance that we're going to be in one of those situations. The reason for that structure was that the objective was ultimately to build more than just an advisory business, in particular an asset management platform. About 85% of the business today is in various forms of asset management. I lead the credit platform, where we're investing across a range of different strategies in that market. We also have created this lending ecosystem, which is a large piece of financial infrastructure platform on which there's about 179 billion or 125 billion US dollars of managed loans on platforms.