ROADNIGHT MUSING – JUNE 2024
UNEARTHING GREAT INVESTMENTS
Investing is not just about coming up with an idea. The reality is investment managers are evaluated on whether an investment makes money or not and is 100% measurable. There is nowhere to hide for ongoing underperformance.
Roadnight believes that to produce superior returns across the investment cycle, requires:
Having a robust investment philosophy
Actively applying that philosophy across the business, not just in the investment process
Adjusting your processes to the economic and investment environment as they evolve
To do this, at a minimum, you need to constantly work on improving our knowledge base and the firm’s investment processes to ensure you are making the right calls. If you aren't passionate about investing and generating strong risk adjusted returns, you'll quickly realize this is not the career for you!
The never-ending quest to unearth great investment opportunities goes hand in hand with:
thirst for knowledge / seeking to understand how things work
knowing where to look
A THIRST FOR KNOWLEDGE
As Benjamin Franklin once said - “Investment in knowledge pays the best interest”. Our summer reading pack is probably one example of our innate interest in knowledge building across a very broad and unrelated set of topics.
At first glance there does not appear to be much in common between elite professional sports people and investors, but there is. For an elite sports person being born with a physical talent is a minimum prerequisite, but you still need to have incredible dedication and work ethic to produce superior results. It is the same for elite investors. Given this, it is no surprise that all our junior analysts are studying post graduate degrees. In addition, much of our days are spent reading about companies and industries and talking with industry experts and digging into understanding the details behind a company’s business model so we can understand the risks and how an investment should be structured to mitigate or minimise these risks.
KNOWING WHERE TO LOOK
Private debt by its nature is hard to source and access. You simply can’t roll up to a stock exchange (or a restaurant) and order a stock (or a cheeseburger). The direct nature of private debt (as opposed to syndicated bank loans), means we have a bi-lateral relationship with the borrower, and customise terms to fit the situation. While this is granular and time-consuming work, particularly for smaller loans, it creates high barriers to entry and in our view, superior risk adjusted returns.
Our loan sizes typically range from $2-to-$30mil. Given their size, these companies are generally advised by their trusted accountant, broker, or lawyer, as opposed to investment bank or larger institutional processes where you are competing with more funders. Relationships and network building are key to origination. The fragmented nature of the market means an advisor needs to know that:
commercial banks are not the logical funder; and
Roadnight Capital is able to provide funding and brings a level of experience and sophistication that is not otherwise available
To achieve this, Roadnight has focused on building deep relationships with a handful of high-quality trusted advisers who share details on their clients' capital needs and desired outcomes with us. This means that we are often seeing opportunities before others in the market and can work together to structure a solution that works for Roadnight’s investors and the Borrower. In essence, we are bringing back old-school relationship banking without all the regulatory and operational issues that commercial banks face.