Investment opportunities in the current market cycle

At this stage in the market cycle there are several influencing factors and resulting opportunities for investors.

Phillipa Healy: Hi, I'm Phillipa Healy. And today I'm joined by Michael Lukin, Managing Partner at Roc Partners. Mike, you spend much of your time meeting with investors. What are some of the key questions you're hearing from investors at the moment? And how does that connect to the current market environment and really where Roc are seeing opportunities?

Michael Lukin: It's a really interesting time in in markets. I think what we've seen is this migration from fear of missing out to patience and looking at investment opportunities with a future horizon. We're really in an inflection point as a result. I think there's a couple of key factors people are keeping an eye out for. I think inflation and interest rates are probably the two key ones and what that does to the economic environment. We're looking at investment opportunities and thinking about what does this business look like or what does this industry look like when the market or the GDP growth slows down. Is it resilient? So things like healthcare, things like consumer staples, things like basic, business opportunities that regardless of the economic cycle people are going to have to consume. So we're looking at those type of opportunities with that kind of lens and being just a little bit patient.

I think we're in a really interesting valuation time in the markets where sellers are really looking in the rear vision mirror and saying my business was worth ‘X’ in December of 2021, and now I'm being told it's worth 20% less and so somewhere in between when buyers and sellers meet in the middle or somewhere around the middle, we should start to see deal flow continue to increase again. But we're really in this quiet phase where buyers are looking forward, sellers are looking in revision mirror and we're in a little bit of no man's land at the moment.

Where does that create opportunities? I think things like private credit
are going to be big winners. Private credit in the Australian context is all floating rate. Higher interest rates means higher yield to investors in private credit. I think in terms of the investment opportunities looking for businesses with the ability to push prices through to the end customers. So good margins, good pricing power. We are cautious on inflation, we are cautious on wage inflation in particular and what does that mean for businesses. And if you've got no ability to pass through those higher costs that means lower returns in terms of earnings for
that business and we're really quite cautious on that just where we
are in the cycle today.

But I think we are in a better buying environment. I think the stock market IPOs for example, will be a lot more difficult over the next 12 months. And so as an alternative to listing a business, private equity should be able to create some deal flow. That should generate really good returns over the next couple years.

Phillipa Healy: So important, to be mindful of those market cycles and the nature of that and really that longer term nature of investment thinking.

Michael Lukin: Yeah. Absolutely. I think we're going into a buying phase. I think one of the key things we're thinking about in our funds business for example is if we do see a further correction in markets, we want to have commitments with managers because they're the people who are going to be able to execute on deals. And what's really interesting in the funds business is that the best times to be investing, despite everyone knowing that I want to invest the bottom of the cycle, everyone tends to pull their head back. And so you find it really difficult to raise money at the bottom of the investment cycle. So I really our mindset and our
framework across our entire business predominantly in the funds business, however, is on having commitments available for people who can execute if there's a downturn and so we think 2022 later 2022, all of 2023 should be some really good buying opportunities coming to market and we want private equity firms in our own firm to be able to execute on those opportunities.

Phillipa Healy: It's really insightful. Thank you Mike

Michael Lukin: Pleasure.

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