What's up, party people? My name is Sunny Ray. This is the Sunny Ray Show. We're back at it again. A full day of interviews. My first guest for the day is Russell Bozac of War- ders Sullen. We're going to He's going to explore how faster, more accessible credit can help rebuild productive capacity, enabling small businesses, local operators, and industrial entrepreneurs invest, grow, and create real economic momentum. So, with that said, Russell, I'm pleased to welcome you today. How are you doing?
Well, Sunny, thank you, and thanks for having me as well. I appreciate it.
The velocity of finance. I guess Let Let's dive right deep into it. What are you building? What is War- ders Sullen? like, what's your kind of unique, you know, world view? And yeah, what's the problem you guys are trying to solve?
Certainly. So, within South Africa, there's a huge focus at a macro level for reindustrialization, as they call it, which is, you know, basically trying to make use make best use of the natural resources that we've been endowed with. And what we do is we help these smaller contractors in the supply chains of these larger projects to get them capex, to get them capitalized, whether it is working capital or asset finance, etc. And in that way, we are doing our bit. We're playing our bit as well. And we sit here in Johannesburg, which is not very not far from the financial services hub and not too far from all of the mines, etc. as well. So, ideally positioned, I think.
Awesome. So, you guys So, you spent 25 years inside Morgan Stanley, Barclays, and Old Mutual. I guess like what did you see from the inside that made you eventually want to build build outside of it?
Look, I think that's a very good question. And you don't really realize it when you're in it, but you know, I've been working for bulge bracket, as they call it, investment banks for most of my working life. And you know, what I saw is that there's a great institutional advantage to be had, you know, around deal screening, etc. But yeah, especially because you can rely on the execution capability of a large team. And if it is a retail or B2C offering, then you've got these companies' distribution to be able to get your products and get your facilities out there. but as a consequence as well, what it means, what we saw from the inside, is that they say no to a lot of deals. And it's not just one or two people that have to look at deals. Deal qualification is done by a committee and usually a series of committees as well. And so, we thought, well, if we could do it on the outside, maybe we could be a little bit more nimble, a little bit more quick, get the money out to these guys, let them get on to the projects as quick as possible. So, that is that was the idea, certainly.
Love that. And then, I guess which deal early in your career taught you the most about how capital reaches businesses that need it?
Yeah, again, there were so many deals at the beginning that we looked at, but one of the earlier ones that sort of stood by me that to your question, I think, is, you know, we had a management consulting client that has retained us purely for, in this instance, for strategic advisory as well. So, you guide, but you don't solution. And so that your solutions are sort of unbiased and you're a pure strategy shop rather than a tied advisor, I think is the best way to put it. But they then flipped the script on us as they say and they said, "Look, we want to get away from the this revenue, you know, this model, this revenue model of billable hours only. Find us a subsidiary that we can also earn through it and make it a platform as well. So can you find the platform, but can you find the money for us as well?" So we said, "Well, okay." We went into our network, we found a an ultra high net worth via Incentum. The guy was quite clear, he said, "No startups and the SaaS platform must be part of a business that's already running and you know, it must already be washing its own face as they say. And we don't need a moat, it must have five-year contracts and reliable cash flows and we don't need a moonshot exit either, otherwise it'll take your focus off integration within the business." And so, you know, what do you do? We said, "Yes, sir." So we kissed a few frogs and then we found a FinTech platform in Dunedin, New Zealand in the South Island and then we approached and worked with the transaction advisor in Sydney. And so lots of 3:00 a.m. calls, etc., but we piqued their interest. The CEO flew out to South Africa and then workshops, finance, legal, dinner, dancing, settled on a final figure of 19 million kiwi, which is about a million US and that was it, you know, utterly network-driven, purely network-driven. So that's our first deal.
So cool. So when did you realize the contractors doing the work couldn't get the money to the work?
Again, someone in our network who works for a large OEM or original equipment manufacturer, they supply the machinery. Someone came to us and said, "You know what? We're not A lot of people come to us with contracts, but we they don't come to us with finance and they've got solid contracts and they want to get to work and the existing banking relationships are not really giving them the space that they need to be able to really maneuver. Can you assist? And so we started looking at well, why are the banks saying no? What else can we do? And are there investors or capital partners on our side that would have the appetite for that elevated level of risk because the margins were elevated as well. And so that really like everything else, it started as an idea rather than a party at a dinner party. And then we sort of said, okay, well, let's see. That's where it started.
So just like that. you know, policy says tier one contractors must share work down to tier two. Like where does that break once the work lands, Russell?
That is a very good point. So first of all, it's an excellent policy to not to compel the larger contractors, engineering contractors, civil works contractors with large multi-year contracts with the state to have them share out the economic opportunity with the up-and-coming contractors. So in principle, it's an excellent idea. where it normally breaks down is if the contract if the larger contractor, the primary sub-contractor primary contractors we call it, if they haven't worked with these subsidiaries before, then at an executive level it breaks down and at an operational level on site it also breaks down as well. So where they've had dealings with one another in the past and they've co-delivered, that sort of works as well. But the subby must have finance. The subby can't come open-handed and say, "Well, I need to participate, but I don't have mobilization finance to buy my own kit, etc. Can you help?" So that was the angle, I think, of attack for us as a small-time financier.
Got it. And you know, banks decline these contractors for reasons you know, they can defend. But I guess like what are they I mean like what are they reading right and what are they reading wrong?
So, banks are well within their rights to decline. In fact, what we found specifically is that banks only a approve 7 to 8% of all the applications that come to them. So, that's a lot of applications that they say no to. because banks have got debt covenants that they need to protect. And also banks are used to earning interests interest payments month on month. And that pretty much is how our bank works. Whereas a subcontractor, it's milestone-based payment. So, you get paid now, you do some work, 3 4 months later you get paid again. So, there's no real smoothing in the cash flow. which makes banks a little bit scared. But the other thing that we had found was that a lot of financiers sitting in banks are pure financiers. So, they're not operators. So, they don't have that domain expertise. We had found and I speak anecdotally and I speak broadly, please. but we have found that they don't if they don't have a pair of coveralls, as I always say. If you don't have a pair of coveralls in your even if you only have suits hanging in your wardrobe and have leisurewear when you go to the gym, then you don't really you're not out there, you know, doing it. So, sometimes you've got to Wall Street your way through, but sometimes you've got to section into your way through that. That's the game.
Got it.
Yeah.
I like that. Okay. And what's the most expensive thing you got wrong about African infrastructure risk? And what changed after it?
It's again, a very good question. You know, we don't just price the interest rate for a lease. You've got to price your risk, I think as well. And if you just sit in the office in an air-conditioned place and you sit behind Excel and then you use models that you were taught at business school, there is a lot that you're leaving out on the field. You know, you really need to go out and and see what else are you missing when it comes to pricing risk. Simple example, right? So, we know that the price of fuel fluctuates and we know that the price of fuel is a banding through which it fluctuates and you can sort of use that from an actuarial point of view to price in fuel price fluctuation. However, what you might not know is that if the people have got old equipment old earth-moving equipment that are not as productive as well or if the driver just qualified recently and he's got a heavy foot and he burns too much diesel. Simple things like that. It does add up and it creates a coefficient of drag on the yield of the contract. So, you know, how would I know that if I come from business school? But again, if you're on site, you get to see so many things and all of that comes back and it goes into your model which then improves over time. And you've got to find that balance between pricing for risk and then also getting to a point where you can say, "Okay, fine. The deal is not too expensive for the contractor to take up." So, every deal is different in that way, I must say.
Got it. Can you walk me through the fund you're building? Like who writes the check? Who receives it? And like I guess what secures it?
Sure, certainly. So, a lot of our deals many of our deals start off where we just intermediate. In other words, someone comes and they say, "I want to do buy the deal." And then we will intermediate. So, it'll be a standard transaction advisory type of opportunity, but then we seed the deal to someone else. Whereas, what we're doing building our own sort of micro fund as we call it micro private credit fund for infrastructure, you come in as an LP into our fund. The fund disperses the fund will then collect. And then there'll be a distribution at the end of the fund sort of thing. So, that is where we are gathering our LPs to or our would-be LPs to as well so that we will then be the lender of record or the fund will be rather than the individuals. And then we like the ultra high net worth and some of our bigger clients even have expressed interest in coming into the fund on a more permanent basis as well. So, it's that's where we are.
Got it. Cool. So, I guess how have the investors circling this fund found you so far? And like what have you got behind and finding the next ones?
So, look at as I said, it's fairly small. We only started about 3 years ago. Last year and then last year we raised about a million and a half US to apply directly to the this niche this funding niche that we have. And then everyone sits back and they see collections, right? It's all about non-performing loans. They really want to see, you know, are you are the collections behaving as they are behaving? And if they are, they'll give you another little bit and a little bit more and that's how you build credibility, I suppose. And it also slowly to us begins to prove the business model as well. So, we sort of taking it in 1 and 1/2 million US tranches. and then slowly as the appetite and the confidence of our capital partners improves, so too will the they make more money available. But our book is significant. We've got about, I don't know, 10 million currently US in our deal book that is waiting for capital finance. And these are qualified opportunities on multi-year contracts, decent contract margins, etc. So, the game is well and truly on our side to make it happen for these guys.
I guess sit down with a family office or development finance institution and one I guess question comes up every time, right? Like which one is that?
You in terms of preference development finance institution. So look a DFI has got deep pockets and they have a political imperative or civic imperative to be able to kick start the economy, keep it going, be more inclusive from an economic participation perspective and look after our state's public assets and infrastructure assets. So they've got a macro responsibility to be able to do that and they do fund those very large projects and they are capital partners that tackle those things. We are in support as I said of the subcontractors in the supply chains thereof and so we can't necessarily go to a DFI and say, you know, write me a check. You know, the smallest check they would be prepared to write is 50 million, 60 million US. And we simply not at that level yet. But the ultra high net worth is interesting story. They are coming back now from the sugar rush of SAS platforms and so on and they said, you know what? I'm fully allocated in my family office from SAS platforms and we're all set back and we're waiting for the big IPO and the big unicorn etc. But in the meantime we've got some dry powder and we like to get some we like to deploy and get our money back. Do you have something? And I said, well look this is not a structured note that I'm offering you. There is a little bit of risk and you sometimes have to wait for your money etc. But ultimately this is the this is our level of credibility. These are the deals that we've done so far. What do you think? They just said, okay fine. I can do you for one and a half million US and then that gives them an almost or quasi fixed income type of product and they know they understand especially within the essay they understand that mining is a huge part of our GDP. Infrastructure works there's a massive backlog of infrastructure works. Compliance there's a huge drive by the government to get many engineers more included in the delivery of these multi-year projects. So, they understand those macro factors. So, we don't have to sell too hard the macro view of it. They just need an operator that is skilled enough to be able to make sure that what you say is what you can deliver. That's how we're doing it. One dealer at a time, one satisfied customer at a time with a hope that they'll come back with a moment.
And what does a yes from you feel like for a contractor who's heard no his whole life?
It's an interesting thing. I must admit. The And I'll give you an example. When we did our first earth-moving equipment facility, so you see it's not standard M&A deals. When we did our first We put down our first excavator on a site. It was for a contractor who won an opportunity with the local council to do flood mitigation. So, there's a big river about 40-50 miles from where I live. And the it used to overflow whenever the big rains come it used to overflow its banks and into the offices and into the subways and parking lots and playground areas, public spaces, etc. And this contractor came to us. He was turned down by his bank. We gave him the finance, put a put our first excavator down. Drove out there in the next day to see it working. And there it was in the distance operating. And doing good work. And I must tell you for me that was It was almost surreal because I had been office-bound for 30 years, so to speak. And all on a flight to some part unknown. I've never been with coveralls out there. Actually, you can see what you are doing. It's a physical thing. That's when we realized, "No, This is exactly what we want to be doing." So, that's what we like about the about what we do.
So, you've swapped you know, Wall Street suits for coveralls, I guess. What's the muddiest site visit that you know changed a deal?
It's crazy, you know, the people that I know that have only ever seen me in a suit. They've never seen me in gardening clothes or coveralls or anything like that, you know. So, and to be honest, neither have I. But, I like it. I feel that I'm part of the rebuilding of my country's economy in my own small way. And the why that's important, and I think it's the same for a lot of late career individuals, as they say. You've amassed all of this expertise and and a network of contacts, as well. I mean, you can go sit on your farm in the southern with the Cape in the Winelands, if you wish. You know, we've got our own little Napa Valley here out in Cape. You can go and sit there, if you wish. But, ultimately, if you've got so much to give back, we need people that are willing to do so. And we found a bit of a niche, I think. So, we'll continue doing it.
I love it. Where Russell, where do people learn more about you? Where do they learn more about the fund? And then, I guess there's one I was going to ask you maybe 90 days from now, like what has to change for you to call this, you know, a good quarter?
Yeah, look, if I can do another 3 million US in terms of cap raising between now and the end of the year, that sets us up well for going into the suburbs. They're going to come to us in February looking for work, right? It's very seasonal, so they go away off middle of December, they close over Christmas, middle of January, they all come back. And then, the work starts again. So, if I could So, that internally is the target that we have as well. So, that is pretty much what we are driving what we're driving for between now and the end of the year.
I love it, Russell. Tell me where do people learn more about the fund and then you as well you're on LinkedIn.
Certainly I'm on LinkedIn you can have a look at my background as well you can go to watersallen.com you can see who's in the team and we've acquired a chairman about a year and a half ago he's also a Swiss national as well so you can have a look at that and get in touch and say hey what are you doing you know what are the interest rates how can I get access or just tell me more about what it is that you're doing you know so that's what we are doing.
Great okay I'm going to bring this one to an end we got a bunch of people listening live I mean this early in the morning I'm surprised so thank you all for tuning in really appreciate it and Russell I hang out for one minute I'm going to bring this stream to an end until next time everyone cheers.
