Honest Money
Honest Money
Wholesale vs. Retail: Navigating Car Pricing Like a Pro
In today's episode, Warren Ingram and Colin Morgan, Co-founder at getWorth, discuss the financial implications of buying cars, focusing on the benefits of purchasing used cars over new ones. They explore the concept of car depreciation, the ideal age for buying a vehicle, and the importance of understanding the wholesale and retail pricing dynamics in the car market.
Takeaways
- Cars are a passion for many, but financial sense is crucial.
- Used cars generally offer better value than new cars.
- Depreciation is steepest in the first year of ownership.
- The ideal time to buy a car is between five to ten years old.
- Mileage is often more important than age when buying a used car.
- Buying at wholesale and selling at retail is the goal for car buyers.
- Keep a car until it becomes unreliable or too costly to maintain.
- Understanding the car market can lead to better purchasing decisions.
- Emotional decisions can lead to poor financial outcomes in car buying.
- Choosing the right time to buy or sell a car can save money.
Get more insight on how Prescient Investment Management can help you here.
Property expert Damian Collins explores strategies for building your property portfolio.
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The Honest Money podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.
Speaker 2:Welcome to Honest Money. We've got a very nice conversation today with Conway Williams, who's head of credit at Prescient Investment Management, and we're talking about private debt and maybe the other side of that coin, private equity, and it's an interesting area of the investment world because it's not something that gets a lot of attention Like when we talk about the stock market or the oil share index going up or down or the bond market going up or down. It's part of that world in terms of how people can make money and generate growth for themselves and certainly how companies can access money. But it gets only really attention especially, I guess, in the global media when they talk about big private equity funds that will go and launch lots of money into something like SpaceX and all the kind of big private businesses out there. But we actually have our own private equity and private debt market in South Africa and it's not tiny. It's just something that we don't really talk about.
Speaker 3:Conway, yeah, that's very true. Good Hi Gordon. Thanks for having me again this morning.
Speaker 2:So, maybe let's just start with what is private equity.
Speaker 3:So I think let's go into complete layman's terms, right? Private equity is the buying of a business that's not listed on the JSC. So imagine you and a group of your friends. You come up with an investment opportunity whether it's a restaurant, whether it's a bakery this bakery might have been going through some problems and you club together some sort of cash and you buy the business. You then don't only provide them with capital, you also provide them with expertise, maybe your networks. You tell your friends and your family to start coming to the actual restaurant. You expand the menu Again. So over years, you then start building the business from a sort of a rudimentary business to a larger scaled business, and then you ultimately sell it. That is exactly what private equity is, and again, you're just trying to, from an active perspective, invest money and improve the business so that you can make a return within a predefined or predetermined period, and then just switching it back to.
Speaker 3:What we do mostly at Prescient in our alternative funds is the private debt side of things. So exactly the same as private equity, but instead of looking at the blue sky returns. So, for example, you're going to buy it at 10 today and you're going to sell it at 50 in five years. We provide lending opportunities. We'll say, okay, here's 10,000 Rand at an interest rate of X, you'll have to pay us back in three, five, seven years and we earn the coupon. We don't have that upside potential, but what we do have is the ability to dictate terms. Reporting requirements actually sit on the board as observer status again similar to private equity but we have a contractual maturity of three, five, seven years and we also rank ahead. If it is, for example, the restaurant fails, we will get our money back, we will sell the equipment and only the residual will go to the private equity or the equity holders. So that's just the simple layman's difference between private equity and private debt and also the explanation of the two.
Speaker 2:So what you sacrifice when you're an investor in private debt is you sacrifice that ability to earn the 10 times your money return on the one side, but on the other side, if things go wrong, then you are going to be at the front of the queue when the business then either gets sold to someone else or the assets get sold because it gets liquidated, and then you'll be right at the front of the queue to get your money back.
Speaker 3:Yes. So the key difference, in my view, or in terms of how we look at the investment, is from a credit perspective or a lending perspective. You want to preserve capital, whereas on the private equity side you want to grow capital. So it's a very different risk profile that you are taking, but both of them have valid positions in a portfolio. But you have to understand that one is a lower risk type investment whereas the other one is a bit more of a higher risk investment. That's the private equity side, because you get that enhanced return potential. Okay.
Speaker 2:And I think maybe the other thing just there is the jargon for it is liquidity, so it's the ability to jump in and jump out of the investment. I know private equity, very specifically, is very notoriously illiquid. You know, if you buy, if you put money into a private equity fund, they tell you that they're going to keep it for the next five or sometimes seven years and if you're very lucky, things go well, they sell the companies that they own and they give you your money back plus some growth. But if you need money after two years because your world has fallen apart, that might be very tricky. How does it work with the private debt, conway?
Speaker 3:So I think the starting point is that both generally have a medium to long-term time horizon, whether it's private equity or private debt. Right, you know that these are highly structured opportunities. They can't readily be sold on the market like you could buy listed debt or listed equities. So you know that there is a bit of a liquidity consideration when you're buying it. But with that liquidity consideration comes the potential for higher returns or enhanced returns. So I think you're trading off returns volatility with the fact that you actually don't have a completely liquid instrument. I think that's completely correct With liquidity, when we talk about how we actually manage drawdowns or how we manage redemption from clients, we build diversified portfolios.
Speaker 3:But also that diversified portfolios goes hand in hand with how we actually consider maturity management, because remember I told you that in private debt you actually have a hard maturity in three, five, seven years. Private equity doesn't necessarily have that hard maturity. You actually have to find a buyer for your stake and I think that's very, very important. So if we've got 20 instruments in our portfolio, we know what our weighted average life of our portfolio is. We know we're going to have quarterly, monthly, six-monthly or annual coupons. We also know when that maturity is going to be. We have natural liquidity that is actually built into the fund, so it is a tad better from a liquidity perspective, but we're never, ever going to sell that.
Speaker 3:It's a complete liquid instrument that can be liquidated at the drop of a hat. These take time for you to actually do a due diligence on, to execute on and then also monitor, and you make your money over a period of time. This isn't a bank account. You're just going to put your cash in and then pull it out. It has you have to match the asset and the liability, so your client's needs with the needs of the fund and actually make sure that the client understands what they're investing in so that they can maximize the benefits of these type of funds.
Speaker 2:Okay. So just one quick explainer. Coupon will be the interest that I'm going to earn on my money when I put it in, and you're saying that when you look at that you could be earning your interest or your coupon payment. It could be monthly, quarterly, six-monthly or once a year. Most likely it won't be monthly, okay.
Speaker 3:No, it's generally quarterly, so these are generally floating right instruments. So imagine we do a 50 million deal to a textile company for five years. Every quarter you're going to get your X percent coupon and at the end of the period you're your quarterly or your investment and then your greed terms. Whereas on a private equity type business you're either going to get your dividend, which is annually if the business is doing well, or you're going to get your massive up to get the end when you sell it.
Speaker 2:So I think there's just that different maturity profile. So as a private investor, I'm going to shop around and I'm going to see that I want some of my money invested in local and global stock markets and local and global government bond markets and corporate bond markets. But then I'm going to have this element where I'm looking for a bit of a higher return on my capital and I'm not worrying about trying to get capital growth. I just want the highest rate of interest I can get and you know, I mean this is a podcast that's going to live forever. So maybe just for example, like, if I can get 8%, you know, on locking my money away in a two-year fixed deposit, what are the kinds of rates that investors would get on private debt not private equity above something like a fixed deposit?
Speaker 3:It's actually a tough question because it all depends on the mandate.
Speaker 3:So a lot of private debt funds are normal capitalist in nature.
Speaker 3:But then in the South African context we actually have a big developmental impact when it comes to this private debt or alternative space, and I think you have to tie in the developmental impact, the job creation and the likes with earning commercial returns. So for me to say that you're going to earn 25% is just wrong. You're going to earn what you're investing in. So, for example, if you want to invest in an initiative that's actually going to have job creation, you have to understand that there is going to be a pricing requirement to reduce it, to induce that sort of developmental impact. From our specific perspective, our renewable energy fund does CPI plus five and a half, our Infrastructure Debt Fund does Jai Bar plus three and our High Yield Credit Fund does Steffi plus three. So if you want it in lay terms, you're probably earning anywhere between three and six percent above what you could earn on call rates, which again talks to the fact that you're taking enhanced risk, you're reducing liquidity, but you're actually getting paid for it.
Speaker 2:So that's the I mean if we just talk about CPI plus five and a half as an example. So that's inflation plus five and a half and over a decade or so you know, very typical balanced fund which has a very high allocation to local and global stock markets would aim to give you that kind of a return. So it's interesting that the returns can be quite high. I mean, we're going to get to diversification now because we've got to be careful that we don't convince everyone to go and put all of their money into that basket. But just for context. I mean, inflation plus five and a half is a very good return if you get it. You're obviously not.
Speaker 2:This is not entirely risk-free, so we've got to be very careful here and don't create the impression that this is zero risk investment. But it is lower risk than buying the share of a private business. So inflation plus five and a half is a very good rate. So you are well compensated for taking the risk number one. But number two, giving up the access to your money that liquidity question for a period of time, whether it's three, five or seven years. Because when you started I was thinking oh no, no, this sounds like a charity Conway, but it's not. You're going to make money. I mean, people are going to be well compensated and have a positive impact.
Speaker 3:Yeah. So there's a couple of points right. The first one is yes, you're tying your money up for a period of time. Not all funds have these tie-up requirements. Certain, of our funds you can actually get access to your cash sooner than the five or seven years, but, importantly, we're not suggesting that you put all of your cash into this sort of type of investment.
Speaker 3:A well-diversified portfolio should have listed bonds, listed equity, government bonds. It should have an allocation to alternatives, whether it is private debt and private equity, and if you have an allocation, you actually can generate your own sort of liquidity so that you don't have to pull cash from the more liquid funds and give up the long-term returns. In that instance and that is when people ask us should we check all of our cash? And we say be careful we understand that again, there are needs that we have as the investor to deploy capital and to meet commitments that you have on the investor and investor company side, but then also to meet your redemption. So you're completely right in that regard.
Speaker 3:The second point is that these are investments. These aren't risk-free government bonds. So there are, while there is upside in terms of positive revaluation, there is always risk that there could be a credit event and again, if you understand what a credit event can do to a portfolio, you'll understand why you need to invest with a manager that knows how to restructure. But it also puts diversity at the heart of their underlying investment view. So if you have a diversified portfolio and your manager also diversifies, then you actually a credit event will not eat all of your returns, and that is what we also embed in our process.
Speaker 2:I can give you a simple example of how we do it.
Speaker 2:Sorry, conway, I just think that's a powerful point here, as we are. You know, when we're talking about investing, it's just making sure that you've got as many eggs in as many baskets as possible, and then just understanding that point you've made is really powerful. This is investing by definition. There is always the potential to lose money or lose time. You know, sometimes you need to let an investment ride for a period of time for it to dip down, recover and then pay you for the risk that you've taken. So I think it's a. I mean, it's a key point in this is, you know, whenever we're trying to do better than inflation with our money, it must be clear that we're taking risk, and I think that you know the only investments that are guaranteed to beat inflation in an absolutely straight line are Ponzi schemes.
Speaker 2:I think is kind of my personal view. So you have to know this is going to go. I mean, it could go up in a straight line for a period of time and it could be really good returns for you and that's great. But equally you could have a I mean it's a nice term. Conway says a credit event. That means something went horribly wrong with the company, but it doesn't mean that everything got lost. It could just mean that it takes time for the business to get sold or the assets to get sold, and then you get your money back, and I think that that's the key here is it's about that trade-off between time and return.
Speaker 3:Yes, yes, and I think there have been many credit events in the South African market over the last while, ranging from African Bank all the way in 2012, 2014, to Sasol to Tongat. So you have to know that there is a risk that you could lose money in a fund, and it's to make sure that you have a manager that has experience in restructuring but also, as I've mentioned, hasn't put all of your eggs in one basket. Diversity is key. We do calcs on our side, for example, to see that if our expected return on our portfolio is X and we actually write off a specific asset which isn't always the case even in the sign-up example, there was a recovery, but we say you write off all of that asset, what would it do to the return of the fund and how long will it take for us to actually get back to the return that we had been sort of targeting?
Speaker 3:And in that instance, we have diversity rules. No single asset in, for example, in our high yield credit fund, can be more than 4% of the fund. So if you're just assuming you've allocated 5% of your 100 grand or your savings to actual alternatives and then the manager, such as ourselves, actually has a 4% limit, it's actually only 20 bps, a tiny amount of your fund that can be written off if there's one credit event. So that is. Diversification is of utmost importance for us and it's one of our driving pillars in terms of how we actually invest.
Speaker 2:And I mean I think that's the key. I think we're burning through time and I need to answer my core question here, which is number one. I mean I think you alluded to it is when we're looking at private debt. It does find a whole lot of interesting things as well. It's not just the kind of old school, old world industrial kind of businesses. I mean, it sounds to me like you can also access the things that are making South Africa and our world better. You can access renewable energy projects and you know those to me feel you know, kind of like. I mean, it's an economic and a social good for the country, for the world, and a way to make money. So I just wondered you know things like when we're driving on the roads and we see a tall concession? Is that private debt as well?
Speaker 3:So that is better described as a PPP or public-private partnership or a concession, but ultimately it is an alternative vehicle that's not listed, so it would be considered private and in that instance you would have private equity investors putting in equity capital, you would have private debt investors providing the loan capital, and that ecosystem would allow that concession or PPP to actually flourish. But if you just want to ask what sort of investments you can access through private debt, it is everything and anything from clean energy to transportation, to very, very topical water infrastructure, which is probably our next energy crisis. We need water infrastructure to be sorted. It is digital infrastructure, which is the way of the future, which is storage, which is cloud services. It is even SMME funding, which we do quite a bit of, because we believe that we have a specific skill set when it comes to assessing SMME and lending businesses, and then also the traditional PPPs, so, for example, project finance initiatives. So we've done across our first fund, we've got 31 investments, we've deployed in excess of 5 billion into the renewable energy space across all of the rounds, and it's actually very interesting in terms of the impact that those make, not only from reliable and an energy sufficiency perspective, but also job creation from actual local procurement and the likes. It's a massive developmental impact and what we've been able to prove in the decade that this fund has been around is that you can actually earn those commercial returns while achieving developmental sort of initiatives and narratives. It is a developmental type fund and again we're achieving that with the returns. In our broader infrastructure fund. We've got a lot of SMME digital infrastructure initiatives which allows people in the rurals to actually be able to access the internet or access water or actually have better roads. So again, we're earning the returns that we want to, but it actually has a multiplier effect. Our IELTS fund does the exact same.
Speaker 3:So again, anything and everything that's out there it's generally the assets that the banks won't necessarily fund because it's not big enough. So we will do a deal for 10, 20, 50, 100 million for a bank. That's not necessarily going to meet all of the returns. It could be. But again, we would then take those type of initiatives. We would have observer status, we'd provide our expertise and our capital.
Speaker 3:Those businesses would then grow and then they would move on to the larger scale banking system, which then can provide a 500 over a billion transaction. So it's a very nice way for us to sort of kickstart the economy at the bottom, where people don't really want to take that risk, and then also earn the returns. And then, I suppose, incubate businesses and make sure that these businesses flourish Because, again, smaller businesses one of the biggest, I suppose, headaches that they do have is that they don't have all of the systems in place to get the capital that they need. And so we institutionalize those businesses, we bring in better boards and we bring in networks and we sort of play middleman in that regard, not only provide capital and we've got some very decent success stories where our small amounts of capital have made significant amounts of difference for that business and then also in the life of the man on the street.
Speaker 2:So, conway, just in general, if someone's listening and they decide that this is an aspect of their portfolio that they would like to make sure that they're getting an allocation to, what are the kinds of ways that people access these instruments?
Speaker 3:So our two funds that we do run, these are business trusts. These aren't generally accessible to the man on the street, but what we do recommend, if you do like this type of portfolio, is to invest in sort of, for example, our flagship fund, which is the present income provider fund, which is just on 40 billion right now. It's the largest income fund in the country and that has a 5% allocation to clean energy, 5% allocation to infrastructure and also a 5% allocation to high-yield credit. And through that mechanism you not only get that 555, which are target exposures, not actual exposures you also get the ability to access government bonds and various other sort of instruments, but you'd have an allocation to it. These are on various platforms and the fund has been running for decades and again, the performance of the fund and the risk management of the fund does allow it. The other way is to invest in our present income plus fund and that also has allocation to unlisted. It is a BN90, cisco fund, Reg 28 fund. So you get all of the protection and you get that access to 10% of unlisted assets as well. So, again, our multi-asset fund, our balance fund, also does the exact same.
Speaker 3:Allocation to alternatives again gives you that smooth lack of volatility profile. Yes, you have that liquidity, no mark to market, question marks over it. But it is a broad-based fund which allocates broadly, so there are many ways to do it. The alternative is, if you are high net with individual, you can come to us directly and you can invest. But again, those that's a little bit of a different way of doing it if you think of it. But again, our Income Plus Fund, you could actually do an allocation monthly. That's a SIS platform type fund.
Speaker 2:If I'm looking at a fund fact sheet and I want to see those, what are the kind of categories? What would they call that on the fund fact sheet to see those percentages?
Speaker 3:There are various. It's not a standardized methodology but for example, on ours we would show unlisted amounts are 10% because we cap by regulation in income plus and you can also see that on the various other funds Platform funds don't really show unlisted versus listed, but we do do it on ours.
Speaker 2:Conway Williams, head of Credit President, investment Management. That was very interesting for me. I think it's a great way for us to kind of allocate money to investments that are good for us as investors but also good for our country, and ultimately we get a win-win, which for me, is the best way to be an investor and appreciate your time and thanks so much for joining us. Thank you very much, warren.
Speaker 3:And have a great day.
Speaker 1:The Honest Money Podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.