In this episode of the [i3] podcast, “Conversations with Institutional Investors”, we speak with Mary Manning, Chief Investment Officer of the National Reconstruction Fund Corporation, a recently established $15 billion fund that has been set up to promote the manufacturing industry in Australia. We speak with Mary about the investment objectives and how to balance investing in innovative new technologies, such as the fund’s investment in quantum diamonds, that is industrial diamonds, not the fancy ones, with the risk profile of the fund, Mary reveals that they have over 900 applications for funding and are now looking for the best opportunities to invest, but also how to balance the strategic asset allocation and avoid being exposed to too much equity holdings. We also discuss what sets the NRFC apart from other government funding and investment vehicles such as the Clean Energy Financing Corporation and the Future Fund.
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Overview of the interview with Mary Manning:
02:00 What is the National Reconstruction Fund Corporation?
08:00 Focusing on the seven sectors of priority: red tram
13:00 One of the risk of having a broad mandate is that you are trying to do everything all at once and not achieve much at all
15:00 We need to be a self-sustaining organisation, so we need to have some sort of dividend income stream
17:30 We have made 10 investments to date; the largest is a $200 million investment commitment in Arafura Rare Earths Limited to help finance the Nolans Project in the Northern Territory
19:30 Investing in quantum diamonds
21:30 The point of the NRF is to manufacture things
23:30 We get a lot of dual-use technologies that overlap between defence and enabling technologies
26:00 We do have certain funding targets for the seven sectors, but you might also notice that they don’t add up to $15 billion
28:30 We do have some restrictions, but they are not necessarily old economy. We have a focus on manufacturing and some of that includes old economy type businesses
34:30 A great problem to have is that we’ve had over 900 proposals (for funding)
36:30 The Act does not allow us to have control positions
40:00 There is some confusion about what the NRF does and what the Clean Energy Finance Corporation does.
44:00 When I started it was a bit like drinking out of a fire hose for quite some time.
Full Transcript of Episode 118:
Wouter Klijn 00:00
In this episode of the [i3] podcast, “Conversations with Institutional Investors”, we speak with Mary Manning, Chief Investment Officer of the National Reconstruction Fund Corporation, a recently established $15 billion fund that has been set up to promote the manufacturing industry in Australia. We speak with Mary about the investment objectives and how to balance investing in innovative new technologies, such as the fund’s investment in quantum diamonds, that is industrial diamonds, not the fancy ones, with the risk profile of the fund, Mary reveals that they have over 900 applications for funding and are now looking for the best opportunities to invest, but also how to balance the strategic asset allocation and avoid being exposed to too much equity holdings. We also discuss what sets the NRFC apart from other government funding and investment vehicles such as the Clean Energy Financing Corporation and the Future Fund. Let’s get started. Mary, welcome to the show.
Mary Manning 02:18
Thank you so much for having me. It’s a pleasure to be here,
Wouter Klijn 02:21
No problem. So can you tell us about what actually the National Reconstruction Fund Corporation is? Because I understand it’s created to help diversify and transform Australia’s industry and economy, but it also has a return objective. You’ve been asked to take a commercial mindset to the organisation. Is it as a sovereign wealth fund, a government corporation, a subsidisation vehicle? What is it?
Mary Manning 02:47
Great, great place to start. So the National Reconstruction Fund, or the NRF, as we call it, is a sovereign fund. It was set up by the government about 18 months to two years ago, and the purpose is to device diversify and transform the Australian economy. But maybe we can dig a little into what, what that means and and why the NRF was was set up. So the impetus for the National Reconstruction Fund and similar funds around the world, there are a number, that have have been established, was perhaps in the wake of some geopolitical events, and then certainly in the wake of COVID that governments realise that countries need to have some sovereign capabilities. So globalisation meant that, you know, there was a lot of changes in the world, but it also meant that a lot of countries lost sovereign capabilities in in certain areas. And one area where Australia’s sovereign capability had been on the decline for some time was manufacturing. And so the Australian economy as as you’re well aware, and your listeners will be well aware, you know, lots of very impressive sectors in terms of mining and commodities and digging stuff up, and, you know, putting it on on ships and sending it elsewhere, but not a lot of processing or value add or the manufacturing of those types of minerals, and similarly, a very vibrant services economy, But manufacturing in terms of actually making things in Australia had been on the decline, and, you know, an economy that’s structured this way carries certain risks. So covid is probably the best example in terms of, if there’s a shock to the global economy and supply chains get disrupted, it’s a very uncomfortable and vulnerable place for a country to be to not be able to make certain things. So I guess medical sciences is a great example. During the pandemic, Australia could manufacture hand sanitizers or certain vaccines or, you know, let alone semiconductors and aspects like this. So part of the reason the NRF was was set up, was to make sure that we have these sovereign capabilities. And those are some of the companies that that we’re investing in. The next part that I’ll add is those are some of the push factors about why the NRF was set up. But in terms of pull factors, as you may know, Australia has amazing research and innovation inside our our universities and world class startups and scale ups, but a lot of these, I. Sort of companies or ideas that are in universities are not making the jump to commercialization, and then a lot of startups and scale ups are actually going offshore because they can’t find the financing in Australia. And so another aspect of the NRF is to make sure that these domestic companies or Australian born companies or Australian born ideas stay in Australia and benefit Australia and Australians going forward. So that’s a brief intro to the NRF, and I’m sure we’ll get into some more of the specific factors in the rest of the podcast.
Wouter Klijn 05:31
Now it’s interesting that you mentioned that, that it sort of came out, that COVID realisation, that a lot of manufacturing had disappeared overseas, and we’ve seen a lot of discussions around reshoring, friend-shoring, but it seems to be more about supporting industry from the ground up.
Mary Manning 05:49
Yes, that’s exactly true, supporting industry from the ground up and also helping to create new industries. So you know, one of the areas which is a focus for the National reconstruction fund is quantum and you may be aware, but Australia is a global leader in quantum computing and in the supply chain that goes around quantum computing, it’s a Centre for Excellence in terms of people who work in the quantum industry. And so this is not sort of a industry that used to be great and then got offshore. This is an emerging industry which is really exciting for Australia, and so that’s part of our job also, is to make sure that those new industries emerge and become as important and as powerful as they can be.
Wouter Klijn 06:30
Yeah, so we delve straight into some of the thematics in your portfolio there, quantum computing. How did you identify that? Is that something that the team came up with as a thematic or is that part of sort of a policy push into this sector? How does the opportunity get identified?
Mary Manning 06:50
Maybe I will take a step back and just outline, sort of the the investable universe of the national reconstruction fund, and then I can go on to where quantum fits inside that. So the NRF has seven priority sectors across the economy in which we can invest. And seven is a lot. So we made up an acronym to to remember the the seven, and it spells red tram. So if you can’t remember what the remember red tram. So the R, the first R is renewables and low emissions technologies. The E is enabling. Capabilities. So this is kind of a broad brush term for a lot of aspects of technology. It’s AI, machine learning, robotics, space, biotechnology, etc. The D is defence, the T is transport, the second R is resources. The a is agriculture, fisheries and forest trees, and the M is medical science. So if you add up all those seven red tram sectors, it is a huge part of the economy. And one of the things that I did when I started was back to your very first question about sort of sovereign capability and why the NRF was was set up. If you look at those red tram sectors, some of them are sectors or industries where Australia already has a very strong competitive advantage globally. So resources, AG, renewables would would definitely be in that category. And the idea is just to value add more, improve those industries and integrate them more into a manufacturing supply chain. The other ones, defence is probably the best example, and medical science is also. These are our areas where you have to have sovereign capability, regardless of whether you have a competitive advantage or not, because it’s it’s a vulnerability and a sovereign capability aspect. And then, you know, transport is probably somewhere in between. So those are seven priority sectors. It’s very broad, and it covers the whole scope of of the sovereign capabilities that Australia has and also needs. And then one of the things that I wanted to do when I first started was identify different sub sectors within those red tram because, you know, they’re they’re very broad. So what are the sub sectors which within each of those so we actually identified over 50, which means that investable universe is enormous and within enabling capabilities, which is the tech part quantum, was specifically listed in our act, the act that set up the NRF and called out of an area of focus. So of course, we looked at it. That’s what we’re mandated to do. But certainly, once the investment team started digging into the opportunities in quantum it became obvious that this is a really exciting time for Australia, and it’s an ability to, like, build an ecosystem around an emerging technology in an area where Australia is already considered a global leader. So putting those kind of two things together, it’s an area where we spent a lot of time analysing and looking for good investments.
Wouter Klijn 09:42
Yeah, yeah. So it’s a broad uniform you also have a very sort of broad mandate, in the sense that you need to improve the Australian economy. No pressure there. So how do you narrow that down to investment opportunities? And maybe you can put it a little in the context of you have a very clear investment objective, you have a target, what does that mean for sort of the risk profile that you target in the fund and the type of companies you can invest in?
Mary Manning 10:13
Yes, we do have a commercial return. You mentioned this at the beginning, and it’s really important to go back and highlight this. We have a benchmark. It’s the Aussie government five year plus two to 3% and you know, the investments that we make need to generate a commercial return. There’s another very important part of our our target return, and the benchmark, which is that we must target this benchmark over the medium to long term. And one of the areas that we’re finding already where the NRF can play a very important role, is that a lot of the private funds, and you know, certainly the Superfund industry, they by definition, may be required to have shorter timeframes. So if you’re a private fund, and you’ve raised the fund, and you need to deploy it by x date, you need to have generated returns by x data, you’re not going to be able to raise fund two and that, that, you know makes sense, and certainly with your future, your super you know, the super funds have have, like performance hurdles, which are, are quite regular. And that is, is, you know, it can influence the way that you invest. And as you may know from my previous role, I spent a lot of my career doing equity investment, and your time horizon is super short. You have to give your investors like a monthly report, and you have annual performance, and you have your Bloomberg. And you know, you wake up in the middle of the night and check your your alpha every day. And so one of the great things about the NRS mandate is we can take a longer term view. And you know, that really opens up the universe in terms of of some of the the companies and the industries in which we can invest, because it’s not a daily or a monthly or even a yearly target that we’re aiming to. It’s more that medium to long term. So in terms of identifying different opportunities, there’s a couple of ways to look at it. I should mention that we can invest across debt and equity. So this is a really important aspect of of what the NRF can do. Similar to my comment before, in terms of, there’s the seven priority sectors, and there’s, you know, around 50 sub sectors. Underneath that, within debt and equity, there’s 15 different sub asset classes that we can invest in. So on the debt side, that goes for everything from senior secured to mezzanine to to venture debt. And then on the equity side, everything from listed equities to private equity to Series A, B, and then there’s, you know, if you add all of those up, it’s about 15 different sub sectors. So the combination of of the sub sectors and the sub asset classes means that we have an absolutely huge mandate. So one of the first things I do you know, you you know that that show on Netflix, everything everywhere all at once. One of the risks of of having a very broad mandate is that you try to do everything everywhere all at once, and you end up doing nothing particularly well. So I wanted to make sure that, you know, we use this very broad mandate, but also we’re focused on the right things, so that we can actually get some things done, certainly in the early years of the NRF. So we do have a strategic asset allocation that allocates between debt equity, and we can also do partnerships. So this is investing via managed funds, which in turn invest on our behalf, and then there are also certain allocations in terms of the different priority sectors. And within that, those 50 sub sectors, we’ve identified two or three within the red tram of where we want to focus and where we’re seeing the most opportunities. So that’s what we’re focused on right now, and anticipate that over time, those things may change, but it’s important to have a map about where you’re going and start in that direction, and then if you you need to, you know, alter course as you go then, then you know that. That’s certainly understandable, but I felt very strongly when I started at the NF about a year ago that we needed a map, and then we’re following that map now.
Wouter Klijn 13:58
Yeah, absolutely. So can you tell us a little bit about what that SAA look like? Is it more akin to, say, a Balanced Fund, of a super fund, and I also believe that there is a capital commitment of about $15 billion for the fund. Does that sort of influence as well the way you look at the investments you make?
Mary Manning 14:18
So it’s kind of a triangulation. I’m not going to give you the exact numbers in the in the SAA. That’s That’s confidential, but there are a few aspects of the NRF mandate that were taken into account when this was developed. The first is that we need to have a diversified portfolio and invest across debt and equity, invest across those seven priority sectors, and then also invest across Australia. So we can’t just put everything in New South Wales, or, you know, everything in like Perth based companies. So those three aspects of diversification were taken into account in terms of what the allocations are. Secondly, we do have a medium to long term time horizon, which I mentioned before, and so that. Means, particularly in more of the early-stage equity, you have the luxury of being able to invest in, say, Series A, B or C, D, where you might not get that return for a few years. The other aspect of the NRF is that we do need to be a self-sustaining organisation. So there needs to be some sort of interest income or dividend income or coupons from certain investments, so that we are a self-sustaining organisation. It’s not like a private fund, which, you know, I was more familiar with before, where you have a management fee, and then you have a performance fee, and your management fee is what’s paying your working capital in the immediate term. Then ref obviously doesn’t have a management fee, so we need to have some of those returns from from the dead investments early on, so that that’s sort of how I circled it. And then we, I mean, the other thing is, $15 billion is a lot of money, and I take that very, very seriously as a responsibility. And from a stewardship perspective, it is, it is taxpayer money. And so sort of allocating out to the the different sub asset classes and then checking to make sure what that meant in terms of, like our market share, and whether that was reasonable in the context of the Australian economy. So I guess an extreme example would be if the SAA said, let’s put $14 billion in series AB, that would be like a multiple of the current market share. So obviously that’s not going to work. So when I’m saying like triangulating, these were all the factors that went in and then coming out with a with an allocation that made sense across all those different characteristics.
Wouter Klijn 16:29
If I look at the mandate, where the fund is at a high level, intended to stimulate local manufacturing and support the economy, there seems to be a little bit of a bend towards potentially more startup companies, smaller companies, but I think you can invest across the entire spectrum of startups to more mature businesses. How do you see that interaction between sort of those high-level objectives and managing the risk profile of the fund. Does that limit the amount of like startups you can invest in?
Mary Manning 17:04
This is a good question. So maybe I can just give you some flavour of what our, our current portfolio looks like, and then certainly what our what our pipeline looks like. So in our current portfolio, we’ve made 10 investments to date, and I’m really proud of these investments. I’ve been at the NRF for about a year, and our first investment was November. So in less than a year, we have deployed almost 600 million of capital across 10 investments. So I’m pleased with that momentum, but within that 10 the smallest is a $13 million early-stage investment in a in a quantum company, and the largest is a $200 million convertible note in era fewer rare earths, which is a listed rare earths company. So even in those like a small portfolio of 10 investments, you see a really big range in terms of the size and the maturity of the company in which we can, we can invest. So for right now, you know there, there’s certain investment deployment targets, which, which we are aiming for. And it’s important to have a diversified This is a very, very simplistic point, but it’s worth making. The best way to have a diversified portfolio is to have diversified pipeline. I spend a lot of time looking at the pipeline and working with the team to make sure that we have that diversified pipeline, and then, if we can execute those deals, end up with a with a diversified portfolio. So in terms of your specific question about allocation to early stage, there’s a couple of things that go into it. I guess. One would certainly be the risk metric. The second would be what I mentioned before, in terms of the NRF being a self sustaining organisation. And then the third would be just the capacity to deploy the 15 billion. So those are some of the factors that go into our investment decisions.
Wouter Klijn 18:49
That quantum company that you mentioned was that Quantum Brilliance?
Mary Manning 18:53
Yes, we made two quantum investments. Quantum Brilliance is the $13 million. And then we also made an investment in into QuintessenceLabs, or we call it Q Labs, which is another quantum business based in Canberra.
Wouter Klijn 19:03
So that first one, I think they make. It’s a foundry for quantum diamonds. And we’re not talking jewellery here. We’re talking about industrial applications. But what makes that an attractive investment?
Mary Manning 19:16
Yes, you’re right. This is not like Tiffany, the Tiffany of quantum, that’s important to highlight. So part of it is within the quantum industry. There are companies and startups that are developing quantum computers, and then there are companies that are in the quantum supply chain. And as you may be aware, within the like quantum computing, there are number of different modalities, and it is unclear right now which modality is going to be the winner. There is some suggestion, and it’s kind of a working thesis around the world, that it’s, it’s a winner takes all, or certainly a winner takes, takes most in in the early stages of those, those quantum modalities. You know, there’s a few examples there. But when we look at individual quantum investments, and certainly quantum is a portfolio, you need to have some balance in there. Just saying, I think that this quantum modality is going to be the winner, and we’re putting all of our quantum investment in that, that that is a very, very risky strategy. So quite early on, we actually developed some thinking around a portfolio approach to quantum and which modalities plural do we think could be potential winners? And let’s try to have exposure to multiple modalities, and then let’s have exposure within the quantum supply chain, and some of those picks and shovels companies which they can be successful regardless of of what the outcome is in terms of the modality. So quantum billions, which is, as you say, sort of the hardware around the foundries and the diamond technology, and then, you know, Q Labs and other companies that have to do with cyber security or the or the software. Those are companies which are or, you know, quantum sensing is another example. Those are also companies which we are very interested to invest in. So that’s a top down approach to quantum brilliance. Bottom up, we really liked the company’s products and the fact that it is a foundry, so it’s manufacturing something. Perhaps one of the areas that I have not focused on enough is that the point of the NRS to manufacture things. So we like that, that aspect of QB really like the founders and the team and, yeah, they were fundraising, and it was a really good match with NRF and our mandate.
Wouter Klijn 21:28
The other quantum company, Q Labs, or QuintessenceLabs. It uses quantum communications. What is that? And why is that attractive in terms of the cybersecurity that they focus on?
Mary Manning 21:41
Yeah. So Q Labs is a very interesting company, and again, really like, like the founder, and certainly the products that they have and some of the customers that they have, because one of the to use some familiar phraseology, like the known unknowns about quantum is that as we start using quantum computing more in society, there’s a cybersecurity risk, which is, is enormous, and it’s kind of like a few steps away from where we are now, like people are just focused on what quantum computing can do, and then what that means for some of the, you know, the activities that that go on in the economy. And then the third step is, okay, well, what does that mean for cybersecurity? And Q Labs is, is really a pioneer in terms of of identifying some of those cyber security risks and then coming up with with solutions. They have some very impressive companies around the world. And this is a Australian born and Australian based company that’s in Canberra. So again, really good fit with with the NRF mandate.
Wouter Klijn 22:37
Are there any sort of national securities aspects that you have to consider when you’re looking at things like cyber security and, you know, cutting edge technology as quantum computing.
Mary Manning 22:48
It’s a very interesting question, and one that I was probably not prepared for. So do you like, not the question I wasn’t prepared for, but, but the the linkages I was unprepared for, in terms of, if you remember, in red tram, the D is defence, and the overlap between the tech part of the pipeline and the proposals that we get in the defence part is very, very strong. So we get a lot of dual use technologies that overlap between defence and enabling capabilities. And it’s an opportunity for the NRF, because certainly having a sovereign investment investor, where you have some of these thematics that are important to the government, and they have something to do with defence, it’s quite helpful to have a sovereign investor on your cap table for a number of reasons. So that’s an area where we are seeing quite decent deal flow.
Wouter Klijn 23:39
So as a sort of a government vehicle, do you get to see insights in certain deals that maybe a commercial organisation doesn’t?
Mary Manning 23:47
No, I don’t think so. There’s no like, there’s no sort of inside track. I think one, one of the pieces, the feedback that we’ve heard a lot from from companies, is that people are very patriotic, and they want some of these founders. They want to stay in Australia. They want their kids to grow up here. They they want the weather, and they want to go to the beach on the weekend. I’m sorry, being facetious, but like, people really want, like, are very patriotic founders. However, sometimes the business opportunities are are offshore and the funding is offshore. And so we do get a number of people who come to us who say we would love for a sovereign investor to be on the cap table, because it means we can stay here, and it means that, you know, as this company grows up, and if we need to list somewhere, at least, there’ll be some voice on the table that’s saying list on the ASX, not, you know, do a a flip up to us, top CO and then list on on ad stack, and Australia is losing a lot of really good companies, primarily to the US, but but other jurisdictions as well for those reasons. And so having a sovereign investor which is aligned with their interests and has a medium to long term outlook, like the NRF can be helpful in keeping some of those companies on shore.
Wouter Klijn 24:58
Yeah, so we’ve discussed the seven priority areas, the red tram, so to speak, and each of those areas have their own financing target associated with it as well. And had a look at some of them, and it’s I think one of them is renewables and low emission technologies, which has a target of up to $3 billion which is the largest of the seven categories. And at the same time, I also saw that there are certain restrictions about investing into coal mining, into forestry assets, sort of the old economy, type of assets. Is there a certain sustainability bent to to the fund.
Mary Manning 25:42
Yes, maybe I’ll take the there’s a few questions in there. So yes, we do have targets that were in the act, in the priority sector declaration for the different red trams. But you also may have noticed that they don’t add up to 15 billion. So there was kind of like some high-level thinking about these are levels of allocation, but they don’t add up to 15. So the ultimate number is is not going to be exactly aligned to those. And the other comment I’ll make in that context is that it is surprising how much these these sectors overlap with each other. So renewables and low emissions technologies overlap very, very closely with transport, because a lot of the deals that we get have to do with electrification or EVs or electrification fleets, etcetera. And has, has there’s a transport angle to it. There’s a whole other area of renewables and low emissions technologies which overlap with agriculture. This was another similar to my comment about defence and enabling capabilities that I was a bit surprised about. But if you look at like sustainable aviation fuel, for example, one of the reasons Australia could have a competitive advantage in that going forward is because the available of feed stock, whether it’s sugar cane or other agricultural products. So there’s a really strong link between those two. So to be totally frank with you, it gets a bit complicated in terms of allocating individual deals in the red tram buckets, because some of them are in like two or even three, that, I think, is actually evidence that the NRS mandate is really important, because all of these, these same issues that the Australian economy is dealing With, and the areas where we have where we focus, they’re all interconnected. And so if you can help solve problems in in one area there, there’s second and third order effects that that will help elsewhere in the economy. So to your second question, which was about the sustainability bent and sort of the old economy versus new economy. Yes, we do have exclusions. There’s not very many. So as you would well be aware, in some private sector, sustainable funds or ESG funds, there’s, like, a list of exclusions that are, as as long as there are, we basically have three or four. And it’s not an old economy or new economy dichotomy, because there’s a lot of part of of manufacturing, which, which could be considered, you know, old economy, and then there’s, there’s parts of, you know, like AI or quantum, which are very strongly new, new economy. But one of the things that that we found is that it’s not really an old, new, new dichotomy. It’s just like, What are these companies doing, and are they, are they forward facing? So it’s my understanding that those exclusions are more so that it wasn’t contradicting the investments we’d be making in renewables and low emissions technologies. So to be investing in in renewables and then be also financing a coal fired power plant, or you’re working, you’re working against each each other in the in the portfolio. So that’s one of the reasons why there’s exclusions. The other aspect to mention, from a sustainability perspective, but also in terms of some of the rationale for setting up the NRF and what we are mandated to do. So we have all the sort of financial metrics what we have to do. And then there’s a section in the act called Section 17, which talks about other factors that we have to have regards to in our investment approach. And so very creatively. We call them the section 17 factors, or that have regards to factors. And these are things like emissions reduction, circular economy, job creation, national security, crowding and private finance, regional development. They are more like non financial aspects that we look at in our investment process. And two of those, the emissions reduction and circular economy principles are related to sustainability. So there is that sort of connection between what we’re doing and and sustainable investing.
Wouter Klijn 29:30
Yeah, because I know that in your background, you worked as an equity investor at Alphinity, and I think Alphinity definitely had a bit of a sustainable angle to its approach to equity investing. So was that sort of part of an overlap with the fund, and was that part of the reason why you joined it?
Mary Manning 29:51
Well, yes, we can. We can talk about the personal reasons why, why I joined the NRF. I think the first thing is, it is a very, very exciting mandate. I. Spent most of my career in investing in equities, and we’re all very aware of the concentration in listed equity markets anywhere in the world, whether it’s the mag seven in the US or whether it’s the Australian banks in Australia. And as a listed equity portfolio manager, like what you’re doing on a day to day basis is kind of boiling down to a handful of stocks, which you may have been looking at for years and years. So from my own intellectual and sort of professional development, I wanted to do something that was much broader. And the NRF certainly, certainly fits, fits that, that characterization. So the ability to be a chief investment officer that was, was very appealing to me from a professional perspective, and then the ability to invest across debt and equity. And I’ll, I will take this opportunity to say I have an absolutely amazing team, because debt is not my background, and even, you know, very early stage VC investment is also not my background. And so I’m really pleased with the team that’s in place, because we work very, very closely as a team to make sure that everybody brings their area of expertise to the table, and everybody also has a broad view in terms of of sectors that we can invest in. So and then also, you know, the NRF, it’s not just that we have a benchmark and we have to beat the hurdle rate, and then that box is kicked, and we move on to the next thing. There are these more important factors about diversifying and transforming the Australian economy and creating jobs and Regional Development, national security, the ability to play a role in that, even a small role, is really, really appealing to me in terms of the attractiveness of the NRF, and certainly my role there.
Wouter Klijn 31:36
So the team that you lead, are they all pure investment background, or are there also backgrounds that are more related to sort of the bigger macro picture, sector expertise? What is sort of the background of your team?
Mary Manning 31:52
When I started, there was very few people on the team. This is an important point to highlight, is that another reason why I wanted to join the NRF is that it was kind of like a startup, but it already had $15 billion which is very rare, right? Usually, I’ve started a fund in my in my career, it was a fund within Ellison capital. But, you know, you start with like, $100 million or less than that, in some cases, and you’re building the team, and you’re building the investment process and the strategy while you have very little bit of money, and then the idea is, once all those things are running, you go out and use it to raise more money. And the NRF was, was not that we had already been mandated $15 billion and then you’re kind of building it from there. So when I started, there was these really important building blocks that needed to be be put in place. And one was the team. So the way it’s structured is, is not unlike an investment bank. We have a head of debt, who’s Simon Beisel, and then we have a head of equity investments, who’s guy raper, and then we had have a head of priority sectors, who is Andrew Macphillamy, me. And then underneath the debt and equity, there’s, there’s sort of the asset class specialists who have extensive backgrounds in investing in those asset classes. And then under Andrew’s priority sector investments team, there’s the sector experts, and then we have a pool of associate directors and senior associates who can work across all deals. And so the idea is that when an investment proposal comes in, or when we’re looking at an opportunity, you have a deal team that has asset class. So if it’s a debt deal, you have an asset a debt person, you have the person from that has the priority area, industry knowledge. And then you have people from the pool who are working on the modelling and the writing the paper. And then we also have sort of specialist expertise in terms of technical analysis, ESG, etc, and that’s how the deal teams are put together. And that’s, you know, how we’ve made 10 investments in a very small period of time. But it’s working really well, because you get a good cross pollination of of ideas. And, you know, hopefully come out with with really good investment ideas that have had a, you know, full 360 look at the opportunity.
Wouter Klijn 34:01
Are you still building out that investment team, or is it now well in place?
Mary Manning 34:07
We are still building out. So a great problem to have is that we have had over 900 proposals so that the NRF, yeah, I know. And hats off to to another colleague of mine, Frank Tonkin, who it’s his job to to handle a lot of the inquiries as they come in. We do have a web form, so we get a lot of proposals that come in that way. And then certainly, the investment team has an origination strategy, like, it’s not just the deals that come to us, it’s what kind of deals do we want to do? And let’s go out and and talk to our, you know, the broader community and our networks and and bring in the kind of deals that we want to do so a combination of the inbound and outbound is over 900 proposals, so you need a big team to be able to to filter through those, and then to be able to execute on a timely basis the investments that we want to do. And that’s one of my commitments to the private sector. One aspect of the NRF, which we haven’t discussed, is that we are mandated to “crowd in” private sector capital. So what that means is that, say there’s $100 million debt deal, and one of the big four banks is going to do it, we can’t just swoop in and say, No, come with us instead of the NRF will do it, instead of one of the banks, if there’s private sector capital that is going to do that deal, then they should do it, but say there is a deal where they’re kind of struggling to get it off the ground, and if the NRF commits like a cornerstone, then everybody else will come in, or you know that you’re the first investor in a Series A, and if the NRF is there, then then other people will commit to the Series A, that that’s the the crowding in aspect of it. And so one of my commitments is that if we are going to be crowding in private capital, you know, from from the market, we need to be working on a time frame which is in line with with private capital deals. We can’t be taking twice or three times longer to get deals done. Otherwise it’s going to be difficult to partner with them. So the team is still growing, because we have a lot of deals in the pipeline, and we have a lot of deals that need to be executed by the end of this financial year.
Wouter Klijn 36:02
So how close do you get to the companies that you invest in, in terms of, you know, do you go all the way to a private equity model where you take board positions that you, you know, get really hands on with the management? Or do you keep at arm’s length?
Mary Manning 36:17
So as for the act, we are not allowed to have control positions. So yeah, we can’t have more than 51% or there can’t be aspects of our ownership or investment that that would indicate control. That said, as part of our due diligence, we have a very detailed investment process that was other than the team that was the second major block that I needed to put in place is like, what is like, what is the investment process here? We can’t just, I said about everything everywhere, all at once before. The other image that we use a lot on the team is throwing spaghetti on the wall and seeing what sticks. That is not our investment process. We have a very, very detailed investment process that goes through the initial screening and then phase one, phase two, phase three, due diligence. And so in order to process things, you know, quickly, we get to know the companies very well through phase one, phase two, phase three, and then if and when we invest, we have other called amps asset management plans, which is our intention of how we’re going to manage that asset once it’s in the portfolio. And we work with companies to make sure that those amps are in place. But yeah, it’s not control positions, and then we have seats in the board and are dictating to the companies which way they go.
Wouter Klijn 37:32
Fair enough. And do you use external managers, or can you also take direct stakes into your investments?
Mary Manning 37:38
Both, is the short answer. So so far, of the investments that we’ve done, most of them have been direct, and that was certainly the majority of our intention for the investments. But in that strategic asset allocation we we discussed earlier, there is an allocation to to partnerships, and we’ve done two so far. The most recent is, is Brandon capital, we already made $150 million allocation into their BB6 fund. And Brandon, as many of your listeners would know, is a global leader in medical science and venture capital investing, and we’re really thrilled to have them as a partner A because it helps us address a part of the market which is very specialised, like it’s not a coincidence that Brandon is one of our first partnerships investment, because to really understand some of those early stage medical science deals, you need a lot of sector specific knowledge. And well, we do have some of that in house. It’s really helpful to have a partner. And then there’s other aspects of the partnership which are, which are helpful, in terms of their network, their, you know, their research, their own sort of research capabilities, and so that’s something that we’re looking for in partnerships. We’ve also made an investment in RCF Resource Capital Funds. So that’s those are two examples. But certainly, as as other opportunities become available with respect to like funding funds, that’s something that we can look at.
Wouter Klijn 39:01
So it’s a bit of a combination, sort of like the Future Fund that, until recently, wasn’t allowed to invest with external managers. I think if we look at the objective of the fund, one of the things that struck me is there’s some areas of overlap with the Clean Energy Finance Corporation. How do you sort of split out what is your area and what is their priority?
Mary Manning 39:24
Thank you for asking, because there is some confusion about what the NRF does and what CEFC does. The first point to make is that there are a number of SIVs, that’s what we’re called specialist investment vehicles that are set up by the government. So CEFC is, is one, but NAIF and Export Finance Australia, Net Zero Economy Agency, Arena, these are other ones. And then you have a Future Fund, which is, is not a SIV, but obviously has, has similar characteristics. And we are mandated to cooperate with these, these entities. And it is fantastic. I come from a background where it’s, it’s more about competition than collaboration. And so I just like to call out that the CEFC has been very helpful to the NRF. They’ve been around for many years and have learned a lot of important lessons, and they they have been very helpful as the NRF gets set up, and certainly sharing those those lessons with us. So it’s a very collaborative environment. And certainly because renewables and low emissions technologies are one of our priority sectors. There’s a lot of areas for overlap there, but the main difference is that the CEFC, or one of the main differences, can invest in generation, and that renewables, low emissions technologies, for the NRF, is not about generation, it’s about the manufacturing that has to do with the renewables supply chain, so they’re related, but you know, we are not. A good example would be, if someone’s building a wind farm, we’re not financing the wind farm. But if there’s a company that wants to make a part that goes on to one of the wind turbines, and they’re manufacturing that in Australia, then that’s certainly something that the NRF would look to do.
Wouter Klijn 40:59
So that’s clearly a distinction there. So if you look forward, what are sort of your priorities for the next 18 to 24 months? I mean, you’ve got 900 proposals to look at. I’m sure that keeps you busy, but it’s sort of a strategic level. What are you focused on?
Mary Manning 41:17
It’s a great question. So because we’re just into a new financial year, I have done an outlook for certainly the next 12 months, and then there’s a medium-term outlook as well. So the first thing is that we need to continue to deploy capital at scale. And with speed, $15 billion is a lot of money to deploy between now and FY 30. And so there’s certain milestones that we need to meet within there. And I’m really pleased at the outcome from the last financial year, because we kind of went from a standing start. We had no investments at all, and not really a team and not really a process to So to go from there to exceeding our target, which was $550 million of investment, I’m pleased about that. We need to really continue that momentum going into FY26 so that’s the first thing. The second thing is to do some more debt deals. So we have done 10 investments, but really, like, two of them are our partnerships, and eight of them are or, you know, seven or eight, depending on how you count, our equity investments. So we need to diversify that portfolio into to make sure that it’s across all of the aspects of the asset classes, and then also diversify across the seven priority sectors. Of the 900 proposals that we’ve received, some of them are clumped a little bit in the priority sectors. But I’m very set on having a diversified portfolio, so making sure that that that’s diversified. And then I think the other thing is, and why, I just like to say thank you for having me on this this podcast, is to make sure that people in the market know who the NRF is, and they know who I am and who the team is, and that we really, you know, develop these partnerships, whether it’s a we sometimes call them like capital P partnerships, those are the funds in which we invest. But there’s also small p partnerships, which are just people that we work with in the market to discuss deal flow and to discuss what’s happening in the Australian economy and investment opportunities. So really, just to get the NRF name out there and to work with people in the financial ecosystem to make some great investments.
Wouter Klijn 43:15
Yeah, do you work with some of the super funds as well? There’s obviously a lot of expertise in that sector here in Australia. Do you sort of catch up for peer conversations there?
Mary Manning 43:28
Yes, it’s an area where I would like to do a lot more collaboration. So to be honest, when I started, it was like drinking out of a fire hose, and not just for a short period of time, like months and months of drinking out of the fire hose. So you know, now that we have that momentum and we’re moving forward, I would love to engage more with, with super funds, certainly, where there’s areas of overlap between the debt and equity parts. And then I know there are, there are certain like, whether it’s renewables or different parts of super funds, where they’re they’re focusing on, on those asset classes. And then I guess the other thing is just to listen to what the super funds are saying in terms of areas where they’re seeing opportunity, or areas where where they’re not seeing opportunity, and why that is. That could be really helpful feedback for the NRF and how we look at investments.
Wouter Klijn 44:14
Yeah, and if we do a little bit of crystal ball gazing, we fast forward 10 years, you’ve deployed the money, it’s working. What is sort of the measure of success that you’re looking for, in terms of the the objective to stimulate the economy and stimulate manufacturing in Australia? What does that look like?
Mary Manning 44:34
So looking forward 10 years, that that would count in the medium to long term, you know, time frame that I talked about before. So I guess the first thing is, we would’ve had to have had to deploy the 15 billion, and ideally that we would see returns from that, and that’s being recycled back into investment. Secondly, if you look at the CEFC, which you brought before, certainly they started and they were successful in their investment. So they got more money allocated to be able to fulfil there. Mandate, and that is also an important goal for the NRF, is to do such a good job that, you know, we continue there. And then, I guess the third thing would be some of those, you know, section 17, or have regard to factors that we discussed, whether we can see evidence that that our investments, you know, have led to job creation, have led to commercialization of Australian research that they’ve led to improvements in national security. They’ve there. You know, there’s some good projects we can point to with respect to regional development. These are some of the things. They don’t happen overnight. So it’s not like you make the investment announcement and you can measure it the next day, but certainly on that medium to long term time frame, those are our areas that that we’re focused on.
Wouter Klijn 45:40
Now, I think it’s it’s very interesting. You get involved in a lot of exciting sectors and see a lot of new technologies, but there’s also a big responsibility on your shoulders of transforming an entire economy. So Mary, thank you very much for your time. You sound plenty busy, so it was great having you on the podcast.
Mary Manning 45:59
Thank you so much for having me. I look forward to staying in touch.
Wouter Klijn
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