June 6, 2024

FEATURED IN THE AUSTRALIAN FINANCIAL REVIEW: How King and Redlich’s parallel paths sparked Regal’s big buy


By Anthony Macdonald

Australian hedge fund top dog Phil King first met Melbourne’s Adrian Redlich nearly 20 years ago.

The pair had been on a similar journey; they cut their teeth as buy-side analysts in Australia (King worked at Macquarie, Redlich at Merrill Lynch), only to go offshore and put those skills to the test in the cut-throat world of long/short investing and hedge funds.

When they met, King was paired with his brother Andrew and recently up and running with Regal Funds. King had returned home from London, where he worked on relative value and special situations at hedge fund De Putron Fund Management, to set up his own shop. He started small – investing his, his brother’s and their mum’s money – and had a small network of other backers.

Redlich had just started Merricks Capital. It was 2007, he was fresh out of Chicago with Citadel Group, one of the most powerful hedge funds in the world, and running a handful of strategies at his new shop, including in King’s home patch, long/short equities. The strategies all targeted the hard asset sectors – mining, agriculture and property, where there was certainty over actual assets. Redlich was in Melbourne and backed by the wealthy Liberman family.

King went harder and harder at long/short equities. It worked. He’s now the most powerful hedge fund manager in the country, thanks in a big way to his first fund, Regal Atlantic Absolute Return Fund, which he still runs and has returned 23.1 per cent a year, after fees, since March 2004. A $100,000 investment at the start would be worth nearly $6.5 million today.

Redlich, the lesser known of the two in Australian capital markets, quickly refined his strategy and went the other way. He saw that banks were tightening their belts and spotted an opportunity writing $50 million to $100 million loans to property groups, miners, large-scale farmers and infrastructure owners.

“We moved all our capital to private credit,” he says. “It looked like the best risk-adjusted opportunity.”

It worked. Redlich’s Merricks Capital, still backed by the Libermans, now has $2.9 billion in funds under management. His biggest fund, Merricks Capital Partners Fund, has returned 10.1 per cent a year since inception in January 2017, well above its 6 per cent to 8 per cent target, with 44 staff across offices in Melbourne and Sydney.

While both King and Redlich have been successful, each had what the other wanted.

King sees the huge opportunity in private credit and selling private credit funds to his now much larger client base – private credit is red-hot. For a money manager, that means money to be made investing in and managing those assets; Redlich’s Merricks Capital, for example, reported $35.9 million EBITDA last year.

Redlich sees the infrastructure that King has set up around Regal Funds, which is now much bigger than that one long/short Atlantic fund. Regal is owned by Regal Partners, is listed on the ASX, has a serious CEO (Brendan O’Connor) and management team, and $12.2 billion in funds under management across Australian and global equities, agriculture, resources and credit.

Redlich says he was attracting offers from large private equity firms, keen to use his firm as a beachhead into Australian private credit. He saw the benefit of being part of a larger group (some of the banks it invests alongside want bigger and more robust partners, he says) and liked the idea of having someone else to run the expanding business so he could focus on investing. He is Merricks Capital’s executive chairman and chief investment officer.

Teaming up

But Redlich says he didn’t want to cut and run – he wanted to be heavily involved in investing and relevant as a business owner. He hired advisers to help him consider options.

So, the pair who met nearly 20 years ago is coming together as part of a deal signed over the weekend.

King’s Regal is paying $235 million for Merricks Capital, which Redlich owns alongside his staff and the Libermans. The purchase is funded mostly in Regal shares and will see the Merricks Capital crew emerge with nearly 20 per cent of the listed Regal Partners. (The Kings will own about 30 per cent of the listed Regal Partners post-transaction.)

Redlich will be Regal’s CIO, income strategies, and have oversight of Merricks Capital and Regal’s reasonably new credit team and royalties investors.

It is a big moment for both of them; it is one of Regal’s biggest bets since the Kings opened its doors 20 years ago (it celebrated that birthday with a party last month), and solidifies Redlich’s 17 years building Merricks Capital.

“We like it because we are very, very bullish on private credit,” King told Chanticleer on Monday.

“The thing about private credit is it is important to have scale. By combining our businesses, we get more critical mass, will see more opportunities to invest.”

Redlich said: “I worked with a couple of the smartest hedge funds in the world in the 2000s, and I think the people involved in Regal remind me of those smarts.”

Will it work? Bedding down people-based acquisitions can be tricky, especially in funds management – just ask Perpetual.

The fact the two principals have known each other for nearly two decades should help, but just as important is their alignment as significant co-investors in Regal Partners.

They also have clearly defined roles. King says he is happy to have someone who has built a highly valuable private credit investor alongside him as a Regal chief investment officer, just as he was happy to welcome PM Capital’s Paul Moore to oversee Regal’s global equities strategies.

Ultimately, if it is going to work, both men need it to be reflected in Regal Partners’ share price. That is what matters for Regal shareholders, including themselves.

Regal shares were trading at $3.20 on Monday morning, up 18 per cent in the past year, or 15-times forecast earnings per share, according to S&P Global Markets Research data. It’s better than things were last October, when the stock was below $2, but nowhere near the heights that Regal CEO O’Connor and his board want to hit.

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