Episode Transcript
[00:00:00] Speaker A: This is your host, the Finance Ghost, in conversation with Andrew Brooking and Brian Marshall.
[00:00:04] Speaker B: We became very focused around the sectors that were going to be important to driving the growth in Africa. Commercial real estate is obviously also pretty important for the content business gets conducted out of factories, offices. Real estate is fundamental to any economy. And then the part that was missing was exactly what Java is exceptionally strong at, which is the advisory bits and specifically the work around capital markets. So it became kind of a natural partnership for us to form together with the reach, the brand, the balance sheet and the capabilities, especially around the financing and structuring side.
[00:00:40] Speaker C: The returns of real estate over the long term are steady and predictable. Capital markets are volatile. Not just recovery, but thriving. Seems to us to be here or just about here over the next several years. So it's a great time to be positioned to kind of make hay while the sun shines. And
[00:01:00] Speaker A: this podcast is brought to you by Standard bank and Java Capital. Welcome to this episode of the Ghost Stories podcast. I must say, the corporate finance industry is close to my heart because that's where I did my army years, for want of a better description. In fact, I was in the space during the height of property capital raising in South Africa and I was on the other side watching Java Capital make a lot of money. Andrew, advising on a truly extraordinary deal value every year. And of course, I'm speaking to Andrew Brooking here, who's been doing this for a long time as the founding director of Java Capital.
And the same is true for Brian Marshall, who also joins us today. He's the head of investment banking at Standard Bank CIB. His career with the group, assuming you're LinkedIn, is accurate, Brian goes back more than 20 years with a particular focus on debt and leveraged finance. So very interesting. We've got the full capital stack here. And today these two highly experienced gentlemen have joined me to talk about some exciting recent news that is Standard bank and Java Capital partnering to build an integrated real estate advisory and co investment platform.
Nice. Congratulations. Thank you for doing this with me, Andrew. Brian. So looking forward to learning all about this from you.
[00:02:07] Speaker C: Thanks, Kirst.
[00:02:08] Speaker B: Thanks. Nice to be here.
[00:02:10] Speaker A: So I think let's start with understanding just the structure and the timing of the transaction, and then we'll dig into what this means in terms of the sectors you're focused on, where you're going to play on the stack, some of the trends we're looking at. My understanding is that Standard bank and Java have entered into a partnership. It's this advisory and co investment platform that I mentioned.
In other words, the brands remain distinct in their advisory offerings. It's not technically a merger. Would that be the correct understanding? Perhaps you can just explain for the audience what you're actually putting in place here.
[00:02:41] Speaker C: Spot on Ghost. It's a joint venture arrangement via a joint venture company that is co owned by Java Capital and Standard bank and that entity is both parties exclusive vehicle for addressing the sector.
Where the sector is real estate, real assets encompassing infrastructure and then the scope of what's within that venture would be advisory ma, ECM and capital solutions of a sort that might encompass some equity, might encompass an underwrite or a bridge, something that advances a client's interest in the context of those advisory services or alternatively a co investment piece that is particularly attractive for the joint venture partners.
[00:03:29] Speaker A: So just to be clear here, this is exclusivity around real estate. So if someone wants a real estate piece of advice from Standard Bank Java collectively it's going to go through this thing.
[00:03:39] Speaker C: Correct?
[00:03:40] Speaker A: That makes sense. I think an important point to maybe raise here. As I understand it, you are not directly competing with your clients here. You're not trying to go and bid alongside them for assets or sell assets or anything like that. This is still very much an advisory and capital solutions type offering as opposed to maybe falling over your clients. Right.
[00:04:00] Speaker C: I think it's important to emphasize that our clients have capital intensive businesses that they manage day to day in an optimum way.
This joint venture company doesn't have the capacity to manage real estate or infrastructure on a day to day basis. It's not looking to get into a competitive capital intensive space. But there are lots of circumstances where a capital component to an overall solution enhances the outcome for the client and in itself represents an attractive piece of business. So it's co investing in, if you like, an advisory adjacent capacity.
[00:04:38] Speaker A: And Brian, maybe from your side just to bring you in here, I mean this is pretty interesting, right? This is a banking advisory business partnering with a non banking advisory business ultimately. And I mean these have typically been competitors historically. Now you're kind of bringing it all together from a Standard bank perspective. Why do you feel like that makes sense and, and why Java?
[00:04:57] Speaker B: Well, why Java is probably the easy part perhaps. Let me start with what we've been doing at Sanibank and why we find ourselves in this JB arrangement with Andrew and the Java team. For the last 16 years we've been very focused on building our business around the African continent. It's in our purpose statement in which we say Africa is the only Driver growth. And in putting that together, in addition to the obvious footprint that we have across the continent, we became very focused around the sectors that were going to be important to driving the growth in Africa.
So for the last decade and a half, we've been arranging our business on a very much a sectoral basis. And we obviously started with the big ones. We're really going to drive the biggest difference. And as we stand here today, those are some of our biggest businesses. So, for example, we have a flagship energy and infrastructure business that spans across the continent that is responsible for arranging huge amounts of capital for projects, for SOEs, for governments and so forth. And in sectorizing our business, we brought in bankers that were sector experts that could really engage with clients at a sector level. And then behind that we lined up our products. So, you know, the things you would find in an investment bank, advisory, structuring, financing and so forth, all along those specific sectors. So in a way, a lot of our business then became advisory led in nature. Now commercial real estate is obviously also pretty important sector for the content business. Gets conducted out of factories, offices, real estate. It's fundamental to any economy. And historically we've been very much a lending and a financing business and we've got quite a strong business around that. But we hadn't really put our back into bringing about this fully integrated offering to the market. So we have built our own sector business. And Andrew Robinson, who is a career banker and has also worked in the industry specializing in real estate, joined us last year as the sector lead for real estate. And then the part that was missing was exactly what Java is exceptionally strong at, which is the advisory bits and specifically the work around capital markets. And I'm sure we'll go into the history of Andrew's business, but they've been the driving force around that segment of investment banking in the real estate sector. So it became kind of a natural partnership for us to form because together with the reach, the brand, the balance sheet and the capabilities, especially around the financing and structuring side, it made a lot of sense for us to get into this partnership with Andrew and the Java team.
[00:07:28] Speaker A: Well, one thing I've learned today is it's definitely advantageous to be named Andrew if you have serious ambitions in the property sector. So that's at least one thing we can certainly bank on a more serious note. Andrew, over to you. From a timing perspective, I mean, you've now. I mean, you've been doing this for a really long time. I wasn't kidding when I said when I was in corporate finance advisory more than 10 years ago. Everyone knew who you were, everyone knew who Java was. You've been at this for a while and you've done this now. So is that specifically because of the way that Standard bank has looked to maybe reorganize their offering this client sector focus? And Brian, I totally understand what you're saying because when I read the Standard Bank Capital markets Day presentations that came through very strongly. So that all makes sense. I'd encourage your listener to go check those out if you want to understand more. But Andrew, from a timing perspective, now you've decided to do this. What led to that?
[00:08:13] Speaker C: A couple of things guys. Firstly, we think conditions are close to being really conducive for outperformance in real estate and real asset related space. Obviously one never knows for sure when inflation is going to spike, when it'll come down, quite where interest rates will go. But overall operating performances are good after several tough years. The listed real estate sectors performed well for a couple of years. It's in good shape, capital is available.
So not just recovery but thriving. Seems to us to be here or just about here over the next several years. So it's a great time to be positioned to kind of make hay while the sun shines. So that would be a part of it. It's a good time. As opposed to going into a down part of the cycle. We're coming into what we think will be an up part of the cycle. And secondly, yes, I think Standard Bank's been receptive to this kind of strategic relationship. Whereas perhaps in years gone by it may not have been, but both sides are receptive.
It's essentially a relationship where the whole is much better than the sum of the parts. And that's how we think about it and we hope to be positioned for really good times as conditions settle.
[00:09:30] Speaker A: Yeah, look, I'm that guy who rents my house and invests in REITs. So I'm hoping you're right. I'd like that to happen. My portfolio would benefit for sure. So let's maybe move on then to talk about the sector focus because the one thing that we have certainly learned today is that this is an exclusive thing around property, at least for now. You know, who knows where this develops over time. But there's also infrastructure, there's that kind of stuff that then comes through into this. That sector focus that came through in Standard Bank's capital markets day creates a lot of really interesting opportunities here. Plus there's big distribution obviously into Africa as well that Standard bank brings as the continent champion, let's be honest, I'm keen to understand more about that and just how you see the two businesses actually practically working together and addressing these opportunities around things like infrastructure, for example, property and maybe opportunities on the rest of the continent.
[00:10:20] Speaker B: So the way we approach our business with our clients, with understanding how best to pitch up and provide solutions, is that we kind of go in and especially when it comes to infrastructure, it's about understanding the complete ecosystem. So we've done a lot of work. Renewables is a very obvious example, but that's gone way beyond just the power sector and it's gone into infrastructure, specifically on the continent where the biggest opportunity for business now lies. And when I'm talking infrastructure, I'm talking rails, ports, land borders and that type of infrastructure.
Now that infrastructure enables a lot of other things to happen around that. You know, it could be the mining sector that's able to transport minerals out through a port. So what we look to do is we really go and understand those entire ecosystems and then we go and from a sector point of view, go and understand what are the fundamentals, what is it that's going to inform how clients need to think about things. And many times we offer insights which they themselves don't even have access to. And in so doing, we understand the risk, we're able to structure for it, we're able to advise around it, and then importantly, because of the credibility and the strength of our brand, there's a lot of trust that comes behind that. So we're then able to go and place that. Because at the end of the day, if we're doing our jobs properly, the capital that we use is not there to necessarily build up massive positions in loan, stock or in equity, whatever it is, even though we do have a massive balance sheet. And with investment banking we've got nearly 600 billion of assets. It's the multiply effect around that capital that's important. I'll give a very simple example. We recently, in this year, we arranged for an SOE on the continent, cumulatively across three transactions, $4.5 billion, that's dollars, not rands of financing capacity for very specific things that they needed to do and our capital facilitated that. And the strength in the standard bank platform is really through our ability to place and risk, transform that capital into places where there are mandates to hold that capital. And that's something we do together with our global market and we're able to really find the correct holders of that type of risk. And I've used those Examples because I think they become relevant for what we can achieve in the real estate space. The other part, which is also very relevant for this conversation is public markets have shrunk. Although we are active in the market at the Moment with several IPOs, Private Capital has become a lot more important. And being able to follow that whole ecosystem, we found that ability to put our own capital into equity alongside sponsors changes the conversation, changes our own understanding and our own risk. And in there also lies a whole capability to go and place equity risk with investors that are looking for that type of exposure. It could be all the way from institutions through to founding offices. So we're not looking to compete, we're definitely not looking to sit on boards or influence things. It really is to back the right jockeys. There's a very good example of that, which is the Optasia listing which we brought to market last year. The Fintech that had its beginnings in Nigeria. Now that's a very good example of where we used our capital at various iterations through that process in bringing that business ultimately into the public markets. When we talk about co investment, specifically in real estate and especially, you know, Andrew was just outlining some of the opportunities that are coming along, that's exactly where we're looking to co invest when we talk about equity.
[00:13:36] Speaker A: Thanks, Brian. Yeah, Standard bank definitely a distribution powerhouse across the continent. And your access to deals is obviously amazing, Andrew. Maybe because my background sits in that more independent advisory level where we didn't actually have balance sheets to tap into in house or with partners necessarily. You were kind of spreading it out and then bringing in different investors. The Java proposition has always had that more independent flavor. Your clients, specifically in property, will now essentially fall into this joint venture. And you've talked about how you don't want to compete with clients, et cetera, et cetera. How do you practically manage that with your clients in terms of. I suppose it is a conflict of interest. Right. You've got Standard bank there who are able to bring capital in. Is that always the best capital deal? That's something you'll have to manage each time. Is it still independent advice? I think it's important that maybe we just address that because I'm guessing those are some of the questions that your long standing clients might have had, right?
[00:14:27] Speaker C: Yeah. Ghost, these are real issues. So from your corporate finance background, what you'll be well aware of is that complexity, even conflict of interest, it's omnipresent in financial services where you're addressing something from a kind of 360 degree perspective, we have made it our business to find ways to match capital to real estate. So what do we look for? We're interested in the space where capital gets matched to very tangible assets, if not property, maybe infrastructure, et cetera, where those assets produce very reliable, if not contractual, cash flows. It's capital intensive, it's sometimes time sensitive, it's dependent on access to funding across the capital stack, but particularly the equity piece.
And we've been very active in public markets. Public markets have funded real estate effectively over the 30 years that Java capital has been added. But a point that is increasingly coming to the fore is that capital is not only via public markets. And often you need to bridge, you need to incubate, you need to partner with players in the public space so that they can land a deal where for example, market conditions may not allow them to come to the window for the equity that they need to close the deal and the time available to close it.
So we've come through some tough down patches in listed markets. In the real estate space there's still been great business to be done, equity's been scarce, the business hasn't been done. We also have a conversation with clients where independence is important and we're not going to change that. We will continue to be an independently operating team giving objective advice with sectoral expertise and to some extent being very deeply familiar with our clients affairs. If not feeling like we're embedded with our clients, we're just able to bring another component to the solution now because like anybody in corporate finance, we run at many things and a relatively small proportion of them come off. And we're well aware how capital solutions in the mix of this independent strategic and financial advice, capital in the mix can up your probabilities of execution. We can help our clients execute. And we also see an evolving world where how you match capital to capital intensive hard assets is changing. And there are examples of lens of public market capital and private or institutional capital that are starting to develop and cause the listed sector to have different offerings.
So it's early days there, but we think that there's potential in that.
[00:17:11] Speaker B: Just to add to what Andrew described, you know, there's certainly conflicts of interest, something that's, as he says, omnipresent in our industry. We're very alive to that.
So you know, in other sectors where we have captive in house advisory capabilities, these are things that we grapple with every day. And it's a careful balance to ensure that we do deliver that absolute best result for a client and making sure we keep Those conflicts alive and we're very clear and upfront about those. But we're having an integrated approach and a capability to arrange capital, especially in an M and A environment where often speed and certainty of execution is what makes a difference to a client getting their deal done. There's a lot of value in being able to arrange that capital and structure, understand the risk and underwrite it in a very short space of time.
[00:17:56] Speaker A: Yeah, thank you both for addressing that because I think it is a very important one. Andrew, I quite enjoyed the reference running at many things. You're giving me some PTSD there from my days in corporate finance where a deal was your life for six to nine months and then suddenly it would just fall over on a dime and you had to learn to deal with that stuff, which wasn't so fun. It's not easy. So I can imagine it makes a lot of sense to now bring the deal team, the advisory piece and the capital stack a bit closer. And Brian, you talked there to speed of execution and that makes sense. And people, if they haven't worked in corporate deals, they don't always appreciate how time sensitive these things can be, how that one credit committee can make all the difference, how actually understanding the clients and having the relationship and knowing the asset can be a completely different starting point to where it's a relative unknown and everyone needs to get their head around the deal from day one. So it is a very interesting thing that you've put together here, Brian, maybe just to. Because I think I understand from Andrew's perspective how Java is thinking about this. And maybe just to clarify, from a standard bank perspective, on the capital stack, there's debt, which I think has been your bread and butter historically. There's the world of mezzanine finance, which has always tickled my brain and I think it's just a really interesting space. And then of course there's pure equity, which is, I suppose, traditionally where the banks have struggled to necessarily get involved. So maybe you can just confirm for us beyond any doubt, exactly where on the capital stack do you see standard bank being able to play here and the difference that will make then in this partnership.
[00:19:17] Speaker B: So about four years ago, we put together a business called Structured Capital and we combined our leverage finance, our principal finance. So that's all mezzanine that you just described, capabilities together with an equity mandate. And that was very specifically to get closer to the whole private capital markets and what we do, as I said previously, we don't run a traditional private equity business. That's completely anemic for bank capital, bank balance sheets. I know some of our competitors run very successful businesses in that regard, but that's not something that we focused on at all. Our private capital business is there to advance some of our client strategies and to put capital into situations and equity into very specific situations where we're able to increase that certainty, bring the brand to a situation and so doing provide confidence for others to come and invest alongside us. So that's really what we're looking to do. And we have built up balance sheets over the last three, four years. We have also in that expanded into the real estate sector, back into development finance and development equity. But that's different to, you know, what we're talking about here for the real estate sector. And this is looking at shelter level type transactions.
So you know, we have got a couple of billion already built up in other sectors that we've worked together with sponsors and with family offices and other sources of private capital. And that specifically, as Andrew outlined, with some opportunities that we think will come along and type of transactions that would require capital solutions means we could be putting in equity and a co investment basis into some of the transactions.
[00:20:49] Speaker A: And then Andrew, maybe last question for you and Brian may want to add to it, but I suspect that this will be particularly relevant to you. Having been in the equity game for so long and having seen listed property counters raising finance in the space of a morning, they could raise a billion rand at a premium to book. Once upon a time, that world has largely disappeared. Now, I mean Most of the REITs are trading at a discount to navigate and they get criticized when they raise. And so the market expects them to recycle capital and use that to grow. But of course, you know, by its very nature recycling capital makes it hard to grow and REITs are stuck paying out almost all their profits as a dividend. So it makes it really hard. If it's difficult for them to actually access listed equity capital, then growth becomes that much trickier. To what extent do you think the private markets will help you address this for your clients? Because I'm sure that's one of the biggest conversations you're having all the time with these clients is how do we get access to capital to grow? And how do you think that what you and Brian and the broader teams are doing here might actually help address that need?
[00:21:49] Speaker C: Yeah, Ghost, I think that capital via public markets is not always available and property companies have been through some really lean times. If I think back to 2020, probably the five years from 2019 were lean times. Very little equity available via public markets.
A lot of the REITs were looking for co investors directly into their assets where they thought they could access capital more cost effectively.
There were some attempts by the larger institutional asset managers to get pension fund mandates to deploy capital in that manner, but not that much of that business was done.
So we're still in a space where if you're a listed player, you will largely be looking for public market capital when conditions are conducive for it. On the other hand, if you want to achieve growth in the listed space, you need to develop incubate, have high growth experiments that are not too much of a risk in terms of the settled income expectations of your investor constituency, but which allow for growth in the dividends over years to come.
Because maintaining growth, when your real estate investment thesis is an income thesis, your first job is to ensure that your income distribution is stable and your second job is to be able to grow that income. And the variables you have to play with there, if you're just dealing with a settled portfolio, make the growth quite challenging. And so incubation using private capital to generate income or capital that you haven't raised or funded yourself, these are all really interesting possibilities for public market participants to tap into growth.
And I think there's a longer conversation about the SAA real estate market and how it matches capital to real estate. The returns off real estate over the long term are steady and predictable. Capital markets are volatile. So if you look at it over 25 years, you might start and end in roughly the same place. But if your ownership is via a listed instrument, it could be quite a roller coaster as the volatility of the price of that instrument goes up and down, sometimes very dramatically, whereas the value of real estate and the income that it generates is much steadier. And I think that's an opportunity for capital outside of listed markets to provide solutions where volatile markets are not providing the solution for a period of a cycle.
[00:24:28] Speaker A: And I'll always happily welcome you back for that longer conversation about how these REITs grow, because it would be very interesting. Brian, maybe any closing thoughts from you in terms of the message you just want to leave with your existing and prospective clients here.
[00:24:39] Speaker B: You know, this is a very important partnership for us. But why I'm quite confident this is going to work well, besides, for all the logical reasons we've just outlined, because we, during our period of courtship we've we spent a lot of time with the Java team and you know, I can say there's a good cultural fit between the two teams and we were very confident that this is going to work well and there's some really good things already starting to build up in our pipeline and some really good conversations. So watch the space.
[00:25:04] Speaker A: Andrew Brian, thank you so much for your time today. Good luck, Andrew. Personally, I hope that your predictions are right around the real estate sector. As I said, I am invested in REITs. It's a decent percentage of my portfolio. And Brian, I'm watching that Standard bank sector led story with a lot of interest obviously beyond just property. So good luck to both of you. Thank you for your time today and we look forward to seeing how this all develops. Thank
[00:25:25] Speaker C: you. Thank you guys.
[00:25:27] Speaker A: The information and opinions provided in this podcast are for general information purposes only and does not constitute financial, investment, legal, tax or other advice.
Viewers and listeners must obtain independent professional advice before making financial decisions. The Standard Bank Group and its employees, agents and representatives accept accept no liability for any loss, damage or claim arising from the use or reliance on information and opinions presented in this podcast. And the same goes for Java Capital and yours truly, the Finance Ghost.
