What sort of mugs would lend $1.8 billion to a wannabe pub baron like Jon Adgemis who filed for bankruptcy last year with barely $100 in his back pocket?
The answer is closer to home than you think.
Our biggest super funds, and private investors, have loaded up Australia’s booming private credit sector with $200 billion to lend to clients that are too risky for our big banks. Someone like Adgemis would look enticing when you can charge credit card-level interest rates.
It was these enthusiastic private credit players that provided Adgemis’ corporate entity, Public Hospitality Group, with loans to acquire pubs in Sydney and Melbourne long after other private lenders had fled what was clearly a dumpster fire in the making.
Adgemis’ plan to spruce up the unloved pubs he purchased into something resembling a Merivale outlet ended in disaster, and an offer to creditors to repay a fraction of what he owed to escape bankruptcy went nowhere.
“I take responsibility for the position that has been reached,” Adgemis said when he declared bankruptcy. “I am deeply disappointed that my broader vision for the group did not come to fruition, and that, despite sustained efforts, I was unable to deliver a better outcome for creditors.”
The sale of four assets this week for $130 million, including the South Bondi Hotel, will not do much for creditors who will lose a fortune and become a footnote in the largest private bankruptcy in Australia since the legendary Alan Bond went bust.
It is not the only cautionary tale for private credit players on our shores.
The collapse of South Australia’s Whyalla Steel last February – with its former owner, steel tycoon Sanjeev Gupta teetering on the financial abyss – is another example of private lenders facing big losses after backing the wrong horse.
The only comfort is that these lenders are almost entirely offshore, although Australia does deserve an ignominious mention for the involvement of Queensland financier Lex Greensill.
His failed business, the controversial Greensill Capital, had provided funding to Gupta’s various businesses which have not recovered from Greensill’s collapse.
Gupta defended his record at Whyalla after the South Australian government called in receivers last February: “We have our critics in Whyalla, but we have invested around $1.5 billion since we owned the business, and the steelworks remains a net beneficiary of the group.”
Back to Adgemis. He started out as a partner at consulting group KPMG – wooing rich-lister clients like Kathmandu founder Jan Cameron and billionaire Bruce Gordon, and helping them weave their way through multimillion-dollar corporate deals.
Buying and redeveloping pubs proved to be a much different skill-set for Adgemis who was raised in Sydney’s eastern suburbs and attended James Packer’s old school, Cranbrook.
He rubbed shoulders with rich-listers, but building a pub empire using cheap post-pandemic debt was his big plan to join them.
Not many of these friends remain. Both Gordon and Cameron acrimoniously ended any personal and business relationship with Adgemis years ago. In Gordon’s case it involved a legal dispute over a loan to Adgemis.
Anyone looking at Adgemis himself, and his opulent lifestyle, would not have been aware of any problems. He was still driving around in luxury cars and fighting off bankruptcy this time last year from a $60,000-a-month Bondi apartment owned by billionaire Will Vicars.
The collapse of Public Hospitality Group into administration last September was soon followed by warnings from the Australian Securities and Investments Commission (ASIC) of opaque fee structures in the private credit sector, poorly managed conflicts of interest, and unclear communication to investors about the risks they were taking.
There’s no suggestion of any wrongdoing by Adgemis.
But ASIC chairman Joe Longo has the difficult task of warning of further regulation if the sector doesn’t improve its governance, while also encouraging the much-needed funding it brings to the market.
“They are literally the lifeblood that lets businesses grow and employ people. And to that end, we want to ensure that we’re making active choices about how these markets develop, so we get the markets we want,” he said at the time.
The good news is that your super fund would not have lost money from the Adgemis collapse, which was largely funded by specialist private lenders and wealthy investors.
But big super funds like Australian Super have flocked to invest in other forms private lending. It helped to fill the void left by our banks which have been forced to forgo riskier lending since the financial crisis.
The high returns look enticing until you run into someone like Adgemis and learn the hard way that bank deposits offer a lower yield because your money is safe. If the bank makes a bad loan, it loses money.
If the private credit lender you have invested in makes a bad loan, you lose your money.
Which brings us to the old cockroach theory popularised by JPMorgan Chase chief executive Jamie Dimon.
He used it as a warning after US financial markets were rattled last year by the collapse of private credit-backed businesses which served to shine a light on some inexplicably lax lending practices.
As Dimon pointed out, these bad lending practices and collapses are usually a signal that more of these “cockroaches” are lurking. It is a sobering thought for the $US2 trillion private debt market in the US.
“We’ve had a benign credit environment for so long, I think you may see credit in other places deteriorate more than other people think when in fact it’s a downturn,” he said.
Much the same can be said for Australia’s market estimated to be worth $200 billion by ASIC.
And despite assurances from our major super funds that they understand the risks of private credit, the only question when the next collapse inevitably happens, is whether your super is among the gullible lenders.
