Special Episode | Inside the World of Alternative Assets with Navigator's Stephen Darke

Alternative assets are going mainstream — but are investors ready?

In this special episode of Stocks Neat, Steve Johnson is joined by Stephen Darke, CEO of Navigator Global Investments, to unpack the ever-expanding world of alternative assets: from hedge funds and seeding strategies to manager selection and structural risks.

With decades of experience allocating capital globally, Stephen shares what it takes to identify a repeatable edge, when to walk away, and why institutional lessons are now flowing into wealth channels.

“You can't just get excess returns across all cycles without giving something up, and what are you giving up… Liquidity.”

If you’ve ever wondered how alternatives can complement a core portfolio, or why liquidity isn’t always your friend, this episode delivers plenty of food for thought.

Transcript

[00:00:03] ANNOUNCER: Just a quick reminder, this podcast may contain general advice, but it doesn't take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDFs, assess whether that information is appropriate for you, and consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance. 

[INTERVIEW] 

[0:00:40] SJ: Hello, and welcome to Stocks Neat, Episode 36. I'm Steve Johnson, Chief Investment Officer at Forager Funds. Today, we'll be doing something different to what we've been doing for the past for years. Long-term listeners will know that we had cut the podcast back here to once a quarter with the Forager team. I'm going to try and introduce a second podcast in between the Forager ones, where we try and help you a little bit more with the broader portfolio rather than the stock-specific stuff that we tend to stick to at Forager. 

I'm going to try and bring in some guests that are going to help you make good, wider portfolio decisions. Let us know what you think of today's episode and the concept in general. And don't forget to like our podcast on whatever platform you are listening on. It helps us get value out of all this effort that we're putting in. 

I'm joined today by Stephen Darke, who is the CEO. Are you CEO and managing director? What's the title? 

[0:01:34] SD: CEO. Don't know how to manage things right there. 

[0:01:35] SJ: CEO of Navigator Global Investments, NGI on the ASX. 800 and something million Australian dollar market cap after a bit of a share price pop yesterday, which we'll come to. We'll kick things off, maybe with a bit of background. And if you hear some familiarity through today's podcast, there's a good reason for that. We've been friends for a very long time, Stephen. And maybe you can just tell us where we first crossed paths and how that came about. 

[0:02:01] SD: Yeah, sure. And thanks, Steve, to you and Forage for having me. I don't remember the exact year, but I mean, I started Macquarie in 1999 after a couple of years as a lawyer before I realized that was not the future for a young Stephen Darke. I started in '99. When did you start? Was it 2002 or something? 

[0:02:16] SJ: Valentine's Day 2000. 

[0:02:18] SD: Wow. Okay. 

[0:02:20] SJ: And a girl, let's call her a girlfriend at the time, but she sent a bunch of flowers to Macquarie on my first day at work as a grad, which went down really well. 

[0:02:28] SD: Okay. Well, no girl has done that to me. I started Macquarie a year before you, and we obviously worked together in London on a lot of interesting sort of aviation-based structured deals. But now I was at Macquarie for 23 years. And look back then, there were about 200 people in the investment banking group when you and I were both there. And Nicholas was running it, and it was a great time. It was those sort of entrepreneurial days where small teams of people were sent to seek out really interesting opportunities in the investment landscape. Pretty fortunate for both of us to have had that. And I met you there and we've been friends ever since. 

It's interesting to see we both have focused our later careers in asset management in quite different ways, but I enjoyed the time. And obviously, going to London and then came back and then got sent to New York. And how that happened was at 2005, the senior management of Macquarie Asset Management were like, "Well, we're leaders in infrastructure, but what else could we be doing in alternative asset management?" And really back then, private credit, private equity were in its early stages at least in Australia but not in America. 

[0:03:28] SJ: I just want to jump back on. A lot of people listening have either owned Macquarie at some point in time or owned – when I'd left there and then went to Intelligent Investor, it was a company we had a lot of respect for, it's amazing how many people we catch up with today they've gone on and done either within Macquarie or elsewhere amazing things with their careers. And that culture, you're going to talk about some stuff that is completely, completely different to what we were doing in London. 

[0:03:52] SD: Yeah. 

[0:03:53] SJ: In fact, a lot of that stuff that we were doing in London almost doesn't exist anymore. It's been shut down probably for good reason, regulatory-wise and things. But so many people just, "Well, we're going to do something different." And that was the Macquarie culture at the time was far less you've got this technical expertise and we're going to exploit it. And far more smart person solve things from first principles. And I really thank my experience there for everything I've been able to do in my career just in terms of an attitude of we all came from really different backgrounds. There was very little hang up about what school you went to or where you were from. And that confidence around I can actually do it I think came from that culture a lot. And you've seen a lot of people – it wasn't something we talked about, it wasn't something that was written on the wall, but you have seen a lot of people come out of that place and do amazing things just because of that training ground. 

[0:04:38] SD: Yeah, I think that's spot on, Steve. I remember when I sat down the first day, I mean, I actually didn't know what I was going to do. I sat down, I think opposite from me was Ben Brazil, and next to me was a bunch of people who were really the leaders of Macquarie 10 years later, and we would just suddenly put on the diligence of buying BT. That was the first deal. And you started looking at buying this asset. And then you get told to go to London to really focus on, in our case, Japanese operating leasing of aircraft. I think that they were after people. 

And it's a real credit to the management back then to not so much look at the academic track record just, but actually whether someone has the ability to work in a team and then transfer their skills globally. And so I think that's also why it's one of the rare financial services businesses to be successful globally, because they take that talent, diversified talent, and then they were able to sort of move it geographically to where the opportunities were. 

And so in 2005, where the perceived opportunity was, let's find a way to start getting into the alternative asset management industry. But we soon worked out that trying to do that remotely from Australia was not the answer. And also, we worked out that you had to do it with some form of joint venture or partnership with someone who had really been focused on alternative asset management for a long period of time. That's what we ended up doing. We ended up investing over 100 million US into a joint venture in New York, and then that's when they turned around and said, "Well, Steve, I know you got two small kids, but you got to go over and make sure we don't lose the money." And in the GFC, it was pretty close to having done that. It was a brutal time, which we can come to. 

In 2006, moved the young family over to New York to start learning about hedge funds and private credit and private equity way before those terms at least domestically in Australia were cool. And really enjoyed my time over there. And I do view it probably as the more interesting area of my 23 years at Macquarie because I was sort of supporting entrepreneurs. We were giving money to start-up asset managers only in alternatives. 

[0:06:33] SJ: Can we maybe just stop there for a second? A lot of listeners might not even know what the term "alternatives". And it's a pretty broad church as well. When you're talking about alternative assets way back in 2006, what did that mean back then? What does it mean now in terms of what you're actually investing in? 

[0:06:50] SD: I think the definition hasn't changed, but what's characterised or included has definitely picked up more asset classes. But in essence, it's those investments that are not traditional equities, fixed income, and cash. And it's investments that are designed, if they are managed properly by the right people, to generate risk-adjusted returns which are attractive but also uncorrelated to those more traditional returns. 

Recently, when you've seen the equity market have a very volatile time and have a big drawdown, and it does happen obviously quite constantly, you would like to see a portfolio of alternatives not behave like that. And in fact, produce returns that are different from that, so that If you have a portion of your portfolio in alternatives, then, indeed, the entire portfolio is much more resilient in times of volatility and stress. It may mean that you make less money in a very high-returning equity market. But overall, the risk-adjusted return in your portfolio is far more consistent. 

[0:07:50] SJ: Okay. When we talk alternatives, we're basically just saying anything that's not listed equities, bonds, cash, which has been the predominant make-up of most people's portfolios for a long time. There's a whole heap of other stuff that goes into that, but it's anything that's not that effectively. And one of the key things that people are trying to achieve by investing there is less volatility of returns. Or maybe even better, less correlated returns that you get the returns at times when some other classes are not doing well. 

[0:08:18] SD: That's right. And we can come to a little bit about what's happened in 2025 and how some Navigator strategies have actually performed. But I would say that the sort of things that the part of the asset management industry that alties includes are hedge funds, private credit, which you certainly have read about a lot in the AFR, but it's a loose term that's used that probably shouldn't be viewed so loosely. Private equity, infrastructure, where obviously Macquarie has been a pioneer, but there's many more players now. Some portions of real estate and commodities. 

Now, more recently, though, and I'm not an expert in this, it's picked up asset classes like crypto. That is viewed as an alternatives. Navigator doesn't have an edge in investing in crypto. So we wouldn't look at that. But more broadly across alts, we have all of the asset classes I just mentioned, except for infrastructure. It is challenging to find an infrastructure manager within our investment size. We can get to Navigator's model shortly. 

[0:09:07] SJ: Got it. Back to Macquarie. They've made an investment in a bunch of managers that are running funds that invest in this type of stuff. And you've gone over there to look after those investors. 

[0:09:16] SD: There was actually a check. Investors gave us a couple of hundred, Macquarie gave us a hundred. And we went over there and we were looking to seed or incubate startup managers that wanted to establish an alternative strategy. Most of them came out of prop trading businesses, maybe at Goldman's or Morgan Stanley. They had a particular edge. They're very successful individuals. Usually, there was more than one, a team of them. But what they didn't have, even they had their own capital, they didn't have the distribution. They didn't have the knowledge on how to construct a new product. 

And so we interviewed probably 700 managers in their presentations over the course of five years and ended up investing in 11 firms. But we were the ones that diligence, identified, structured the investment. And we would take a share with the equity in each of those 11. 

[0:10:02] SJ: In the actual manager. 

[0:10:03] SD: In the manager. 

[0:10:04] SJ: Rather than the underlying fund. Sometimes both to try and help them get it up. Or it's mostly just the manager? 

[0:10:09] SD: In the case of seeding, which is a bit of what Pinnacle does here in Australia right now, which Navigator does not do, but I was doing that back at Macquarie. What they're really after is two things. They want the initial capital alongside there so they can begin to trade their respective securities. And they also want the distribution and fundraising. And so it's those sort of things that we actually brought, as well as investors got a lot of comfort from having an institutional investor who was there from day one that understood seeding. And so that's what we did. 

And out of those 11 firms, only four were successful. It's extremely tricky when you're starting up a new firm. And the GFC really made it very hard for some of those firms to raise money. And also, some of their investment strategies just broke. It just didn't work. I mean, the GFC was the biggest asset test towards whether a strategy truly can survive stress. And the four that did went on to be great businesses and have been monetised or sold and were very successful results. That was pleasing to see. 

But it's that sort of experience of identifying the managers, diligencing them. Having some of them fail and knowing why that is. And also, and as you know very well, Steve, the challenges in building a people-based asset management business. What can go wrong? What can go right? If you get it right, what a fantastic high-margin business it can be, and very scalable and capital-light. But wow, the things that can go wrong need to be mitigated and understood very well. 

[0:11:31] SJ: People talk about rock star economics. You look at the entertainment industry, and there's people making squillions of dollars. And then there's 99.9% of the people that are trying to make a living out of it, not making anything, right? 

[0:11:42] SD: That's right. 

[0:11:43] SJ: It's not quite as extreme as that. But I think a lot of people on the outside see the survivors and the successes in funds management and go, "Look how wonderful that business is." 

[0:11:52] SD: Yeah. 

[0:11:52] SJ: I would argue that the average economics are probably pretty difficult and getting more difficult in our little space anyway, because the regulatory environment is getting so much heavier. Distribution's actually getting harder because of some very sensible rules and regulations about how you sell your product. But anyway, I think it's true in our world. It's true in that world as well. But the successes can pay for many, many, many failures. To your point about when they work, they can work spectacularly well. 

[0:12:17] SD: That's right. And the dynamic you just set out. I tell you when it concerns me, it concerns me when you see people say, "Wow, look at those economics. I could do that." They put up their flag, they set up their own business. And investors are attracted to the business and maybe don't do their diligence, don't look under the hood. And then you have a lot of investors that are potentially investing with a manager who actually isn't in a position where they could underwrite private credit or don't have the pedigree or track record to do a particular strategy. That's when it concerns me. Because if that can go wrong, and then potentially the whole industry is then tainted with mistakes made by someone who probably shouldn't have been running the money and that strategy. 

The diligence required is very, very important to understand what a manager is. I call it its edge. If a manager doesn't have an edge or a competitive advantage in the business that I'm in, and it's not perceived in the first couple of meetings, it really isn't something that would probably be very attractive. 

[0:13:13] SJ: You came back to Australia. And maybe we can cut it all short. But you've landed in a seat of what's a, I think, very unique ASX-listed company, maybe even globally. There's not a lot of these types of businesses that are listed on the stock exchange. But that experience that you just talked about at Macquarie I would say almost leaves you uniquely placed to run a business like this. And maybe we can come to exactly what Navigator is, how you landed in the seat first, that you had some involvement with some of the managers that this business is now investing. Maybe let's just talk about what Navigator is first and then we'll come back to your involvement in it. 

[0:13:49] SD: Yeah. No, no, absolutely. Navigator, as you say, it's listed on the ASX at around 900 market cap. 

[0:13:57] SJ: He's rounding up. He's rounding up. 

[0:13:58] SD: Rounding up, rounding up. Haven't checked today. Try not to check daily. What are you getting by effectively buying Navigator? You are getting an ownership interest in 12 firms. And those firms are – even though they're not necessarily – when you look at the website, we I can talk about some of them, necessarily brand name firms in the AFR. They don't want that. Actually, you don't want that as investor. You want your firms to be generating the best returns. They don't need to be in the press all the time. 

These 12 firms are global. They're all alternatives. Navigator is a pure-play alternatives manager, where you're owning, as you said earlier, not a fund. You don't have interest in underlying funds when you're paying fees. Actually, your owning management companies alongside the founders where they're receiving the fees. Those equity stakes that we hold in those 12 managers give us the cash flow coming from base fee revenue and performance fee revenue that are generated by some of the best managers in the world. And it's a very diversified portfolio. That's what you're getting across that portfolio just to give you an idea of the scale. We call them partner firms, and we can talk about how Navigator helps them. But those partner firms manage just over 80, 81 billion US dollars. And even if we take our ownership stakes on a lot of them. 

[0:15:10] SJ: You need to say billion. 

[0:15:11] SD: Billion. Yeah, that's right. Probably over-emphasise my Gold Coast accent. But the Navigator itself, when you take up our ownership stakes, is more like $27 billion that really generates revenues at our level. But the underlying firms, I mean, the largest one is almost 20 billion US dollars. And the founders are just some of the world's leaders in investment strategy. That's what you're effectively getting as Navigator. 

[0:15:34] SJ: There's one exception to this in Lighthouse. But can we talk about these, what you mostly own? 11 of the 12 firms. You actually own minority stakes. And can you maybe just touch on this concept of staking? I see it a lot internationally. I don't think it's something people are very familiar with here, but just how that actually works and why someone that owns one of these funds management firms would want to have a navigator as a minority shareholder in it. 

[0:15:58] SD: That's a great point. You're right. This is a fairly nascent asset class that actually really came out of the GFC and was really started by my largest shareholder, Blue Owl. Back then, they were actually Neuburger Berman – 

[0:16:11] SJ: This is Navigator's largest shareholder. 

[0:16:12] SD: Navigator's largest shareholder, about half of our stock. They are called Blue Owl. They're listed themselves in the US. They were the ones that really started the idea of owning a minority stake in an alternatives firm. And this was back at their time at Lehman's, where the senior guy actually, I think, took a stake in D.E Shaw all those years ago. And since then, they've done 60 transactions, including more recently, a very high-profile Australian, Stonepeak. The minority ownership in Stonepeak is held by Blue Owl. 

And let me tell you why it helps both parties. In the case of the actual underlying firm, typically in Navigator's situation, they may have been 10 years into their own firm. They have been working hard. They've invested in their own firm. Maybe they've raised three or four funds on the private market side, and they see an opportunity to raise another fund in an adjacent strategy or a new strategy. But they've invested all their capital in the actual business. It's a profitable business operating at high margins. They see an opportunity, but they can't necessarily fund it. And so we actually help provide strategic capital to them or growth capital. 

And so providing, for example, $30, $40 million a capital into the business, that allows them to raise maybe a billion-dollar fund because investors do call for skin in the game by the actual manager. And we would take maybe a 20% ownership interest. But we preserve their entrepreneurial and creative culture that they have established. We don't try and control the firm or take over the firm. Because in that situation, they don't want that. What they want is a partner that can provide them strategic advice around things like succession planning, new product development, how to allocate performance fees, how to think about joint ventures. And that they want the capital in order to grow the business. 

In other words, we can help them grow from one to five billion to five billion, six billion, 10 billion by providing capital in a structure that allows them still to carry on their firm where they are truly the managers of their own firm. We don't think it's smart to get involved in the day-to-day decision making of managers that have done very well for 10 years. We think there's risk in that. What you wanna do is to align their interests, move their compensation to the bottom line with you so that they only get paid when you get paid. And make sure these founders use your capital in a way that's going to grow their firm. And then we end up with 20% of their entire firm as it grows. 

[BREAK] 

[0:18:35] ANNOUNCER: Stay tuned. We'll be back in just a sec. Are you a long-term investor with a passion for unloved bargains? So are we. Forager Funds is a contemporary value fund manager with a proven track record for finding opportunities in unlikely places. Through our Australian and international shares funds, investors have access to small and mid-sized investments not accessible to many fund managers, in businesses that many investors likely haven't heard of. We have serious skin in the game, too. Meaning we invest right alongside our investors. For more information about our investments, visit foragerfunds.com. And if you like what you're hearing and what we're drinking, please like, subscribe, and pass it on. Thanks for tuning in. Now, back to the chat. 

[INTERVIEW CONTINUED] 

[0:19:19] SJ: And that percentage, I think, is really interesting and important in that business. We know they are people businesses. And I think there is a line there where, if you own too much of it, the incentive is too strong for those people just to leave the business and go and start something new where they have 100% of the economic ownership. How do you think about what the right ownership level is for Navigator? 

[0:19:39] SD: Yeah. Well, this podcast is not about Pinnacle, but in McCann and Pinnacle also. Really, if you think about it from an Australian climate, we're the first ones to really scale this concept of minority ownership. We're not the first. But in alternatives, the experience is pretty well unmatched by Blue Owl. And obviously, Navigator is on the smaller side. The way I would think about it – and remember, with my seeding experience, we were taking up to 50% of the equity. And typically, when you start the beginning of an asset manager, you take more of the ownership. And then as they get larger, you end up deluding yourselves to give equity to the secondary team. 

We found, at that level of ownership, as the firms got larger, there'd be stress and tension between owners of the equity, the financial sponsors, me and the asset managers who believe they're the ones generating. Why are they only getting half of the upside? In my view, it should be nowhere near 50%. 

And in fact, really, 20% to 25 % is what we target. Because at that point, the founders and the management team. Because, typically, we're the only owners of these businesses alongside the management team. Sometimes there might be a family office or maybe another firm that's like us. But typically, you don't want too many chefs in the kitchen. You really want just the management of founders to own, say, 75%. 

At that level of equity, they feel as if they have and they do three quarters of the upside and we have provided capital for a relatively smallish stake. The reality is 20% of an incredibly successful, large, growing asset manager is worth a lot of money, and it's a very attractive investment. And so if you look on the other side of the coin, remember when we said, why would parties do that? Why would Navigator do it? Or why would people buy Navigator stock? You end up owning just say 20% of a portfolio of diversified asset managers that are throwing off cash for management fees where we're not seeing fee compression. We can get to that. But in the alternatives world, if you truly can generate returns across market cycles, we're not seeing compression on fees. 

By owning these firms, you're getting the fee revenue without compression on your revenues. And if you can construct a portfolio that's diversified, then actually these cash flows grow and grow and grow. And we really just leave them alone as long as we manage them, we understand their P&L, we have guardrails, and we help them where we can. I can talk a little bit about how we've helped Longreach, which is our affiliate here in Australia and how they're helping other managers. But typically, it's an extremely attractive return profile 

And what I mean is you could have cash yields in the mid to high teens off these sorts of investments. And if one sells, really, some of them are trading at 20 to 30 times earnings. I mean, recently, BlackRock bought GIP for 30 times EBITDA. And they also bought HPS, the leading private credit firm. By the way, Blue Ale had a stake in HPS before it was sold. Why did they do that? Because BlackRock, Larry Fink, probably realized that he was behind in private markets. He could wait 10 years to grow it organically, or he could buy these firms. You can buy them, but it's very, very expensive. 

We're creating a portfolio of managers that ultimately have that valuation on an exit if they're ever exited. In the meantime, you get a really strong cash flow stream. And yesterday's upgrade of earnings by 17% to 22% for Navigator this financial year shows that those cash flows are resilient in these sorts of climates. That's why the investors like us do it. And it's also why the managers feel like they want a sort of strategic partner, but they don't want to seed control. They want to grow this business into a much bigger business, and we want them aligned to do that. 

[0:23:01] SJ: One of the reasons I wanted to get you on the podcast today, I think we're going to see a lot more of these alternate asset classes be put in front of the average self-managed super fund or mom-and-dad investor here in Australia, a lot of whom are our clients. And it's a bit of a catch-all category as we've already talked about. And I think some of the product that ultimately is going to get put in front of retail here in Australia, people need to understand it if they're going to even consider it. Can we maybe just walk through some of the key categories across this Navigator portfolio? You've got a bunch of quite different alternate asset managers. And I thought maybe we could just touch on some of those key different asset classes and maybe what people should be thinking about if they are having product in that space put in front of them. 

[0:23:47] SD: Yeah. Absolutely happy to do that. Let me comment on the Australian landscape at the moment. Yes, you are seeing – and actually, our Longreach businesses is benefiting from this. You are seeing an increasing appetite predominantly from the wealth platforms, as well as from family offices, and high net worth individuals, and investors like, I'd say, all of your listeners will see opportunities to invest in everything from real estate funds to likely infrastructure feeder funds through to what's called secondary funds. And a lot of those will be offered into the Australian Wealth Management Channel. 

Now, typically, Australian pension funds can't buy them because of a rule that means that they're more limited on the fees that they can charge. They call it a democratisation of alts in terms of the individual investors having more access to it. I think you're going to see that expand and accelerate. And I think you're seeing that in the US as well, and you're going to see it here. As long as the managers are excellent managers and the products are structured appropriately for liquidity. Because you can't just get excess returns across all cycles without giving something up. And what are you giving up as an investor in these funds? You're paying a bit more fees, but you're happy to do that if the returns are there, but you're giving up a bit of liquidity. 

Another characteristic of alternatives is they're a little more illiquid than the more traditional cash stocks and bonds. I mean, you can trade and sell a stock in a day. But in the case of alternatives, you need to understand that you may be invested for a period of time without being able to get your capital back. But are you happy with that if they're generating the return. 

What concerns me is that some investors might not understand that liquidity risk in their products. I would encourage all of your listeners, when you're looking at particular alternatives to truly understand how you can get out of that product, because we saw situations, especially in the GFC, where everybody ran for the fences at the same time. You need to be in products that are structured appropriately to protect investors' capital. And we look to do the diligence around that. I could turn to Navigator in a second, but I mean, is that something worth spending more time on? Because I think it's a very important point as alternatives hit the shores of Australia. 

[0:25:47] SJ: Yeah, I think even within that whole category, when I see the word hedge fund. I think in Australia here, people are probably more familiar with John Hempton's Bronte Capital, Phil King's hedge funds that he's running, where returns have actually been quite volatile. And particularly, I think with the Regal products, they're called hedge funds, and there is leverage involved, but they're typically amplified equity products where, in the lingo, they're 300% long net, right? So that they're using leverage to bet on a whole heap of stocks going up and then a small amount going down. But the returns can be really volatile. 

A lot of this stuff that you're invested in is completely the opposite to that. My colleague, Harvey Migotti, who's portfolio manager in our international fund, he came from Balyasny and he was working on a long/short fund over there and he was not allowed to be net long anything. If he wanted to buy Airbus, he had to sell Boeing in exactly the same amount. And if he lost money on any one day, he was in trouble and about to get fired. It's a completely different world, even within the category of hedge funds, there are so many different types of products out there. And I think that's important for people to understand. You're going to see, I think even within private debt and private equity, no different to equity funds. There are as many different types of funds even under the bonnet of each category. And I think it's important that word hedge conjures up a bunch of, I think, concepts of people that can be quite dangerous in some products that are not actually that hedged. 

[0:27:18] SD: Yeah. Well, I think this is a very important topic, Steve. When I came back to Australia in 2018, I said to Macquarie, "What are the best hedge funds in Australia?" And I looked at a few of them, it was more for personal investment. And to be honest, I personally could not get comfortable with any of them. Because when you look through it, actually, as you say, without getting into jargon, their net returns were not low. Well, they call it extension strategy or 130/30. We're actually geared on the long side, and you have a little bit of ability to short. But it really isn't hedging out the market risks. 

What you're talking about, and I haven't met your colleague. Actually, I would love to do that. But if he came from Balyasny, just for the listeners, that's Dmitry Balyasny, who's one of the best investors in the world. Balyasny, and Ken Griffin at Citadel, and Izzy Englander at Millennium, they have built multi-strategy funds with all these types of people. And each of these portfolio managers cannot step outside their risk box. And the minute they step outside that risk box or they don't generate returns, they will not be allocated capital by these gentlemen. And they run trillions of dollars on a leverage basis across those three firms. And by the way, Lighthouse is viewed as one of the top six multi-strats in the world. It's on the smaller side. The ones we're mentioning are quite large. 

[0:28:32] SJ: Lighthouse is fully owned by Navigator. 

[0:28:35] SD: Fully owned by Navigator. Navigator has a multi-strategy, a multi-manager firm, 100% owned. Run by Sean McGould, who used to have my role. But indeed, he dropped down because running $16 billion multi-strategy hedge fund is a full-time job. And he's doing a great job, and he has done since he founded the firm in the late 90s. 

But these sorts of firms, when you're working for Dmitry, or for Ken, or for all the people underneath it, you are learning everything about risk management. And a true hedge fund should be hedged against market risks. We have an equity multi-manager firm called Northrock that sits within Lighthouse. Runs about five billion right now. And it, for the first quarter, had a challenging quarter, and it was down just over 1%. Now that is a quarter that we weren't overly happy with. But if you went through the first quarter of this year and you're down 1%, that's a protection of capital. 

Now, interestingly, Northrock's positive again. It's doing exactly what it would do on the teen. But going through that volatility, how many casualties did we see in February in Australia from funds that were either perceived to be short or indeed were just leveraged? They are firms that I personally would not look at within the Navigator portfolio. And we don't hold any long-only or any sort of large leveraged high-concentration bets. That is not a hedge fund. 

[0:29:48] SJ: Yeah. It's completely fine in terms of what it is, right? As long as you understand. it. But I think for the Navigator story, it's really important. And I think it's something that has struggled to be understood and communicated is that the nature of the firms that this company owned are typically lower than equity market long-term returns, but with very, very, very low volatility and typically no low drawdowns in bad market periods. 

[0:30:11] SD: That's right. And in every earnings report, the last one being on the 19th of February this year, we include slides on the performance. And if you go back on an aggregate basis, the performance of the portfolio is nine-ish percent net of fees across all of Navigator's portfolio. That basically means, after Navigator and its managers do take the fees, which go to our shareholders ultimately, obviously, the investors in the funds managed by our partner firms are getting 9%. Now, some might say, "Oh, wow. 9%, that doesn't seem that high." But 9% – 

[0:30:40] SJ: Get more than that with Forager. 

[0:30:42] SD: Okay. Yeah. Well, yes. Congratulations, by the way, on a very strong year, Steve. I want you to do it again. 

[0:30:46] SJ: Past performance is no guarantee of future performance. Read the PDFs. 

[0:30:49] SD: You might be able to do it again. But no, no. Look, 9% on very little risk, that's the thing. You can see the nine and say, "Oh, that looks a bit muted." But 9% on average every year without risk is something that you take every year of your life. And so you are right. Let me cut to the chase on it. Our hedge funds are absolute return, which means in any market climate, and we do the diligence on this, multiple decades, they have to be able, these managers, that's why they're the pedigree managers in the world, generate returns across all market cycles. 

And sometimes, of course, it dips below, but it should never move beyond trying to do what it says on the tenant. It shouldn't have huge moves. Otherwise, that volatility is actually not technically a hedge fund. We've got within our portfolio Europe's best quantitative hedge fund. It's called CFM. Incredible business, 18 and a half billion. The largest fund within that complex, just won a European Hedge fund award for best performance, it's closed. Why is it closed? Well, you can't just get returns year on year out on an unlimited amount of capital for some strategies. 

And so it's called when your capacity constraints. They are closed. They will reopen that fund when they believe they can generate the alpha on a larger pool of capital. But very disciplined managers won't try and raise money for the sake of it. And you and I have spoken about this in relation to your business. You actually want to focus on return generation for your clients, not amassing AUM. 

And sometimes institutional asset managers that are not run by principals are effectively incentivised to increase the AUM that they're managing. What you really want as an investor as a principal is to maximise the performance you're generating for your clients. And so CFM is an example of one of our 12 firms. And what an incredible firm. And out of 23 years that CFM's been going, I had a look recently, they made positive returns in 21 of them. That's across GFC, obviously this year, and also 2020 and 2016 where there was some bouts of stress. What an incredible performance. And we are looking for firms that can grow into being as successful as CFM. 

[0:32:48] SJ: I think it's a really important piece for people looking at the Navigator business to understand because that return stability, I guess, also feeds into the performance fee component of Navigator's revenue. And we're all used to looking at the Pinnacles of the world. Pinnacle's got Hyperion as a big investment. Some years the performance fees are through the roof. If I was valuing Forager, the performance fee valuation component of our business would be very, very low. We got paid performance fees in 2021. Haven't been paid one since. That is a typical long-only equity structure and it's what we're a bit more accustomed to, I guess, here in Australia. Navigator is a bit of a different beast like that. The performance fee component of it seems to be more stable. 

[0:33:30] SD: It is. And I think I've got to take this on the chin as being, I think, a failing of mine in the last – I've been in the seat 18 months and I've got to know the portfolio in a lot more detail now. But I think there is a lot more work that can be done because the market at the moment in my view views those performance fees as if they were long-only over a benchmark. Just for the listeners, if you're able to do it, and not many managers can, but if you do have a long-track record of generating absolute returns, the performance fee hurdle is zero. And for some of your listeners, you won't quite believe it. But if my managers get over zero percent – 

[0:34:02] SJ: You're in the wrong business. 

[0:34:03] SD: Well, yeah. But it's hard to get into this. But you need to be basically year on year out generating returns with very little risk, otherwise investors won't allow you to have that fee structure. But all of our hedge fund managers are over zero, which means if they get 10%, then they pick up 2% of that as a performance fee. But if they were to get consistently not absolute returns, then people would redeem from their portfolio. I mean, you can't have it both ways. 

And so we have absolute return managers or what's called benchmark-unaware performance fees. And so to your point, and it's something I'll work on for full year results in August, is we need to communicate why benchmark unaware performance fees are so much more attractive as a sustainable cash flow. In the presentation in February, we've got average performance fees in the last three years of 94 million US dollars. And when you look at the volatility between the performance fees we received, they really stay within quite a consistent ban. And the reason they do that is because they're paid on absolute return and my managers generate absolute return. 

And I think there's more work to do to communicate that message by Navigator and myself to the Australian market because those cash flows should not be viewed on a one-time or zero multiple. They should be viewed on a much higher multiple as being consistent. But look, I think it's in the early stages, and we'll do much more work around the communication of that. 

[0:35:24] SJ: And what's the plan here? What would you like this business, Navigator, to become over the next five years? What's going to happen with all of these profits and cash flow that you're generating? 

[0:35:33] SD: Yeah. Well, look, we've got 12 firms right now, and it's such a great portfolio. Hedge funds are performing well in this climate, as you've seen from the last AUM update. But there are real geographies that we are not exposed to from a strategy perspective. For example, we have one manager based in Asia and we have one manager based in Australia. We have one manager based in Europe. Although, a lot of them have offices in Europe. There is an opportunity to add, I think, geographic exposure, especially in Australia. And there's a couple of managers that really have the pedigree where if they ultimately wanted to take a strategic partner as a minority capital, Navigator would be interested in looking at that partnership. But they're very tricky. It's like getting married. You don't take someone into your capital structure without dating for a long period of time and making sure they're going to provide the strategic help, they're going to provide the capital, and they'll let you grow your business. Managers are rightly, or they should be, extremely cautious about taking in a partner like a Navigator or about the six or seven peers that we have globally. 

But I'll give you another example. We don't have a distressed credit manager in Europe. I personally think, and this is part of our role, in the next five or 10 years, where do we think money's going to flow? Where do we think the opportunities are to invest? And to have a distressed credit manager in Europe would be, I think, very interesting. There's no infrastructure manager, like I said earlier. 

And we've guided the market towards one to two deals a year. We recently closed on a 23% acquisition of a US global healthcare manager, a great business run out of Philadelphia, and they're about to raise their fourth fund at $750 million. It should be a great financial addition to their firm and, therefore, to us. I'd like to see another transaction by the end of the year, but only if actually our diligence plays out. If we can't find one that truly adds to our portfolio and is not in the long-term interests of our shareholders, then we won't do a deal. 

[0:37:23] SJ: As a general principle, people should be expecting you to invest most of the profits here and trying to grow this company over time. 

[0:37:28] SD: That is correct. That is correct. I mean, the deals we're looking at have IRRs in the 20s. They are exceptionally great transactions the way we structure them with consistent cash flow. We think it's in the interest of shareholders to continue to invest that capital in that way. 

Now, if we were to have surplus capital, for example, if someone came along, again, BlackRock, and bought some of our larger managers for a large amount of money, that's different. If we then looked at our pipeline and said, "Well, we don't have a pipeline of excellent deals that actually will absorb that capital," then we'll give that back. That's the right capital allocation. But right now, with our pipeline of what we've got, we're in investment growth mode. 

[0:38:05] SJ: Got it. Well, thanks for giving us that tour of what's very impenetrable, I think, to some people all over the world. But I think people are going to see more and more of this. It's been very, very interesting. One thing I remember from our time in London, we'd be working late in the office and then you'd go home and play computer games until three o'clock in the morning. Are you're still playing computer games these days? 

[0:38:22] SD: No. I wish. I don't know if I shared this with you, but – 

[0:38:24] SJ: You have a professional profile online of your winnings over time? 

[0:38:28] SD: No. No. 

[0:38:29] SJ: Harvey, who I was talking about earlier, you can actually Google his gaming profile. He's got prize money. Maybe we can – instead of these boring finance podcasts, we'll start a Twitch account and get you two playing each other online. 

[0:38:40] SD: I don't know how old Harvey is. But I will tell you, the professional gamers in the world are largely from Asia. It's part of their cultural pastime, but also their ability to do keystrokes per minute is incredible. And as you get older, and I'm saying 27 and older, you lose that what's called twitch speed. Without digressing too much. At 51 here, Steve, I'm very bad. 

[0:39:02] SJ: Very good. 

[0:39:03] SD: Thanks for having me. 

[0:39:04] SJ: It's been awesome having you on. Please, please, please. Again, we're trying something a bit different here with the podcast. We'd love to hear your feedback. Maybe any other guests that you'd like to hear from that would be good people for me to have on the podcast. Again, I want it to be less about Forager and more about the wider investing universe. Keep that in mind. But let us know what you think. And once again, don't forget to like us on the platform. It really helps spread the word. Thanks for tuning in. 

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