The Most Interesting Man in the World? Second Passports, Territorial Tax, Mezzanine Finance + MFO Investing

Mike0:00Welcome to The Business of Family. I'm your host, Mike Boyd. Multigenerational wealth creation involves so much more than capital accumulation. The most successful families cultivate values, stories, knowledge and resources to pass on to the next generation, and they do it very intentionally. On this show I sit down with members of some of the world's most interesting business families to hear how they do it. To see where your own family stands, take the Business Family Diagnostic at businessoffamily.net.

0:45It's my pleasure to welcome back by popular demand, Tiho Brkan. Tiho was one of the early participants on the podcast and to date still has one of the most downloaded episodes we've ever had. Tiho's last episode generated a huge amount of discussion and follow-up questions to both he and I, and we promised that we would do another conversation. Tiho is a multifamily office investor, a global citizen, and some say the most interesting man in the world. We dive into today in deeper detail, mezzanine finance in real estate deals that Tiho invests in and coordinates for his clients. We also unpack citizenship by investment, residency programs, investing cross borders, and a range of other things, including the state of the global markets and how family office

1:39investors are thinking about placing their capital in this crazy world today. I hope you enjoy the second conversation with Tiho Brkan. Tiho, fantastic to have you back. This has been a highly requested follow-up to your first episode. Thanks so much for making the time to do this once again.

Tiho2:02Absolute pleasure, Mike. Thank you for inviting me and great to be here. Looking forward to it.

Mike2:07So last time we got together, we talked about what you're seeing in the world as running a multifamily office, investing your own wealth, your own family's wealth, participating in opportunities around the world. And that was, I think, June last year. So we were about seven or eight months ago. I'm curious what you've seen evolve from your perspective over the last six to eight months. What are families doing with their investments or not doing?

2:36How have you seen the world shift from being in the midst of the pandemic to growing and evolving over the last few months?

Tiho2:44That's a fantastic question, Michael. Actually, a lot has happened in the last eight months. It feels like we've talked just yesterday, but if you actually look at the financial markets, if you look at what's been going on around the world, and I'm talking about both monetary and physical policy, I guess governments together with central banks have gone into overdrive.

3:04So I was reading a KKR report the other day, and they were estimating that around the world, the stimulus that happened from, let's say, March to March has been in excess of $30 trillion. So that's with a T, that's not with a B. And that's enormous. That is basically one and a half sizes of the US economy, the US economic GDP.

3:29And that's just spent in less than 12 months. We've never seen this before. Countries, for example, like Italy, which were in trouble already a decade ago, if you recall, I think people have amnesia today because of the euphoric market. So they don't recall any of the worries we've had 10 years ago. But Spain and Italy and countries such as those, they were in trouble 11, 10, 11 years ago, the way they were spending their deficits.

3:54Well, this year, Italy spent 35% of their GDP in one single year. So what I'm noticing is that there is, you know, the sentiment is very euphoric. When you throw this kind of money into the economy, sentiment of investors, whether they are, let's say, sophisticated investors managing a large amount of money or whether they're retail investors in public, there is basically a euphoria or I would say a mania going out there.

4:22So a lot of the investors that I've been talking about are looking at how to make as much money as possible as quickly as possible. And that's been really the trend that I think will probably last for another X amount of months or X amount of quarters. But usually this is a very, very scary time to be considering long-term investments.

4:43Now, a handful of family offices that I've been talking to are aware of this, especially the ones that I either work with or cooperate with or co-invest with and generally part of investment clubs and so forth. And what they're focusing on, actually, with all of that in mind, is trying to figure out how to protect themselves in case we have a downturn, a major valuation repricing.

5:08And I'm not talking about a downturn in an economic sense, because what we are having here now is a disconnection between, a complete disconnect between the economy and the asset prices. You know, I've studied recessions dating back to the 18th century. And, you know, since 1870s, the United States has recorded data by the Federal Reserve in the cycles of the economy and so forth.

5:31Typically, recessions used to happen every six to seven years. But in recent decades after World War II, in particular, these cycles have been stretched by central banks and they are prolonged. So in essence, you're meant to get a asset repricing. It's normal to see credit markets go under pressure and bankruptcies and default rates increase during recessions. But this time around, we've had one of the worst recessions ever recorded.

5:57I was looking at the Bank of England data, even during the British Empire, and dating back to the 1709. Back then, there was a South Sea bubble and a massive crash in the economy as well. And this recession was the worst for the UK since the 1700s. So it's incredible. But if you look at asset prices, if you look at real estate in places like London or in, you know, some parts of the United States or in Singapore, potentially, or in Australia and so forth, you would think that we're having a huge amount of prosperity and it's all built on very strong fundamentals.

6:35And unfortunately, it isn't. So a lot of the family offices that I talk to who I will consider smart money, who I would consider in some ways always looking to mitigate risk, protect risk, anticipate risk is a big one as well. They're looking for uncorrelated assets and investment opportunities. And they're also focusing on defensive strategies, going as far up in the capital stack as possible. In other words, focusing on seniority and priority in senior debt or mezzanine debt. They're also looking at litigation financing, which is something that I've started to look at in a large way as well. And they're generally looking for opportunities in spaces, even in e-commerce, where, for example, valuations can be quite high, but where risks can be mitigated, where,

7:22for example, majority of your customers are the government and different government institutions. And these institutions or these customers, I should say, they're paying one or two years up front. So you have reoccurring revenue and you are entering these companies at very low valuation. So I've looked at deals like this as well. I think margin of safety is paramount for certain people because they're anticipating a potential downturn if they are smart, because we've seen throughout history how this tends to end.

7:50And I would say this time around, central banks are going to definitely make sure that they can prolong it as much as possible. So I don't know the timing aspect of it. And I also don't know how it will play out. Because as you see, normally, in normal downturns, valuation repricing happens where you hold cash. Cash gives you optionality.

8:10Cash gives you opportunities to be selective and buy the stress from motivated sellers. But in today's world where cash is being printed, M1 and M2 money supply around the world is increasing. Well, not everywhere, but in the United States is a good example. And also in the European Union, it's increasing at a very rapid speed. The question today is cash actually defensive or will it get you into trouble?

8:35Is cash going to be king, which is one famous saying, or is cash going to be trash, which is the other famous saying? So yeah, it's a very difficult environment, Mike, I have to say. And while it's easy to make money today and everything seems to be working, the question for very smart investors, I think, is to anticipate what's around the corner.

Mike8:57It's a great perspective. I guess my follow-up to that is these contrarian investors, family officers that you work with, sitting on their hands at the moment? Or is there also a rush to participate because there is so much money supply, but they're looking for uncorrelated assets during this boom time? I mean, there's mania out there. Are they participating or are they sitting back?

Tiho9:22Well, I definitely think investors are always looking for a home for their cash. There's no doubt about that. I mean, I'm doing that. And, you know, I think I'm a little bit more contrarian than most people. I don't think it's the word contrarian can sometimes be used in a wrong way as well. People assume that if there is a mania going out there and that means you're negative on the stock market and you're going to have to go and short it and you have to buy naked puts on it or you're going to have to structure certain bets like credit default swaps or something fancy like that.

9:53That doesn't have to be so. So in essence, a contrarian investor can be also a value investor or a relative value investor in essence. And what that means is that you ride a certain wave, let's say it's the stock market, until valuations become extreme for you. And you understand that high valuations today entail future disappointing returns. The future expected returns will most likely disappoint investors at this point in time.

10:21And you don't go and bet against the stock market. at these manias and these euphoric bull markets that go parabolic in some essence, they can last for a long time and you can actually lose your money. That's not a very wise way to invest. A better way to invest is to go and look for opportunities elsewhere, sidestepping that and saying, I've rode that bull market as far as I can tolerate the risk. And now I'm going to look for value or relative value elsewhere. In the financial markets, most of the investors always think about stocks, bonds, maybe gold and credit and all these kind of traditional investments like REITs. But for family offices, most of the ones that I have been in contact with and work with,

11:06they don't really have those mandates that they have to stick to just one kind of liquid asset type or public markets and so forth. They have the opportunity to go everywhere and do anything. And that's wonderful. You have what they call basically an open mandate. And you can invest in different regions of the world. You can invest into different capital stacks, whether it's equity or debt. You can look at long duration, in other words, buy and hold for a long time. Or you can look at short duration, in essence, maybe lending.

11:37You could be looking at different currency denomination as well, because there is a potential to invest from one country to another. And not only can you earn a very good yield or a very good capital appreciation, but you can also have a difference in currencies, either push your investment appreciation higher or lower, depending on whether you get that right.

11:58And then there is, in essence, also co-investing, investing with the right people and having the right network of people that can produce the kind of opportunities that you're looking for. And you have the trust in their track record, in their execution and skill set. So when I'm looking around the world right now, I'm basically, together with my clients, we're trying to figure out, instead of the question that everybody, I think, is asking, especially the retail community out there and the public, which tends to enter the market at the end of the move. And they're asking, how much money can I make by next Monday? When I'm sitting around the table with my family and several clients that I manage their wealth, as well as other investors,

12:40whether they're from Malibu, whether they're from London or South Africa and so forth, the question that I'm asking them and the answer that they want to know as well is, how do we only lose 20% and not 50% in the up and coming downturn? I don't hear anybody saying that. I don't hear people questioning that. So that's the contrarian aspect. In other words, we're anticipating or preparing for something and trying to mitigate their risk as much as we can by looking at uncorrelated assets or defensive assets, moving up the priority and seniority in the capital stack and saying to ourselves, well, hopefully we can weather that storm better than others.

Mike13:20Tiho, every time we chat, this is what I enjoy most, your global view, your vast experience across so many different asset classes. It's almost like you've lived multiple lives. And we won't get into that today because our first conversation that we recorded talked about some of your prior experience. But following up on your last point there about the longevity of investments or the duration of which you're looking to invest, has that shifted at all?

13:49When families are looking to invest for the very long term, has any of this frothiness in the markets or the money supply increase in the markets forced families to think about shorter term investments? Or are they going the other way and actually taking a 20 or a 30 year view on some of their investment decisions? Do you have an insight onto that?

Tiho14:10Yeah, I was just talking actually to a family office outside, inside California, actually, and we were talking about this exact topic. And the way that they're executing this, this is a great example, is that they're doing a mixture of both. When it comes to the uncertainty that they're experiencing, that all of us are really experiencing right now, certain part of their portfolio, or let's say one part of their bar, it's like a barbell strategy.

14:37One part of their barbell strategy is towards shorter duration and higher priority or seniority. So they're looking at ground leases. They're looking at senior debt. They're looking at mezzanine debt. They're looking at that defensive nature. And they're looking at durations of 12 to 36 months at most, usually 12 to 24 months. So that's one aspect of it.

14:59The other aspect of it, from what I'm seeing, is that they're attempting to, at least in some countries, you can't do this in all of the countries, but they're attempting to borrow as much capital as possible. In other words, in the form of debt, that they are trying to fix it at the lowest rate possible, and with the longest duration they can, up to 30 years in some cases.

15:23And the strategy here is that you're hoping that eventually, central banks would create so much inflation that they will inflate away. And this is what they're trying to accomplish in the first place. They're going to inflate as much debt as possible. But the ironic thing about that is, even though the central bank is signaling this to investors, it's actually having a very negative outcome, in my opinion. And not a lot of people, if any, are thinking about this or talking about this. The central banks are clearly out there saying, we want to try to inflate the debt because austerity, the faults, bankruptcies, and haircuts will not work and the society will probably be at each other's neck. They can't take it. So we're going to attempt to create or manufacture inflation.

16:04We're going to let inflation run above a certain limit. And investors, ironically, front running the central bank as they always do after they get their signals. And now we're actually taking on as much debt as possible. We already have too much debt, what I'm trying to say. And we have to inflate that debt away to potentially fix the problem. But because there's been a signal from central banks that that's what they're going to do, that's the path they're going to take. Now we're adding so much more to that, if that makes sense, which is going to put the system and I think the overall, the current economic cycle or the real estate cycle and the stock market cycle into a serious level of risk. We've had some issues in 1998 with the

16:49Asian financial crisis, which basically almost triggered a recession in the Western world. There was an Asian financial crisis and Russian default. Alan Greenspan came out and cut interest rates and started adding money on the balance sheet of the Federal Reserve. But that was in a small way back then because interest rates were still very high. Eventually, we've had a tech crash.

17:08And then Alan Greenspan, which was followed by Ben Bernanke, the chairman of the Federal Reserve, he cut the rates all the way down to 1%. And I remember famous investors like Michael Burry and Stanley Druckenmiller, the legends of the hedge fund world, let's say, stating that interest rates were extremely low relative to where they should be from the period of 2001, let's say, when the tech bubble popped all the way to 2004, as they started to slowly edge them back up.

17:38And that created malinvestment, that created excesses, and that eventually led to a subprime and a global credit bubble, which popped. And as a result, we had 2008 and 2009, which was the total meltdown of the banking system. Well, the debt levels were very high back then. But if you think that was high, today is just a completely another level.

18:03And not only that, but we've had now interest rates. In some cases, it's called the ZERP policy, zero interest rate policy, which basically has stood at almost zero. the Central Bank of the United States attempted to get it above two, and then they came back down just recently. So imagine how much mail investment, how much access investment, how much zombie companies are out there right now, and how much capital is sloshing around trying to look for a home way up the risk curve. In other words, you're usually investing at a certain asset that you are comfortable with, and now you're going up the risk curve because you can't get the returns that you're comfortable with normally. There is no more yield in credit. There is no more interest

18:47rates at the bank. So you're forced to speculate. And after 10 years of negative interest rates and zero interest rates, I just wonder what's going to happen. And the debt levels today are extremely high relative to where we were in 2008. So I think every single crisis that we've had, eventually it's triggered by more and more debt. And now central banks are telling us we're going to attempt to inflate this debt away. So people are taking on even more. So to come back to the point, I think family offices are playing this in a barbell strategy way, at least the ones that I'm talking to. And that's the way that we're attempting to play it. On one side, we want to be as safe as

19:26possible, as senior as possible, have everybody else subordinated behind us so that in essence, we can protect capital as much as possible. But in case inflation does happen, we also want to have some long-term duration of investments which will benefit under inflation. And I don't necessarily just mean borrowing a huge amount of money and fixing it at a 30-year, like a long-term 30-year mortgage or something like that. I think long-duration assets also, just as a hint that we can talk about eventually in the future, is you can have investments like agricultural land, farmland, or even what we like is pastoral, austral, and also poultry investments. So New Zealand lamb, Australian beef, and Australian chicken, I think is a great investment because

20:16it has both fundamental as well as inflationary protection. Fundamental signals here, you have three and a half billion people in front of Australian doorstep, basically the whole Asia Pacific attempting to slowly rise from very low levels of purchasing power, power, and living standards. And they want to eat far more protein in their diet relative to what they used to eat 20, 30 years ago. And their incomes are rising so they can support that kind of a diet.

20:47Their living standards are increasing as Asia continues to boom. And Australia is at a perfect place to be supplying that. And on top of that, throughout history, whenever we had high rates of inflation, you didn't really see stocks. Obviously, you didn't see bonds and also real estate do very well. There's a connection that real estate will do really, really well if inflation happens. Well, that's true over the very long term, let's say a decade or so or even longer.

21:15But what happens in the short term if you start in 1960s and 1970s, in particular, 68, 1970, when Nixon took the gold standard off and created the floating mechanism of currencies that we have now. And also 1974 oil embargo and the double dip recession under Paul Volcker in 1979 to 81. That was one of the worst recessions ever. If you look at that period, every time inflation spiked, real estate crashed. The famous crash in New York in 1974 with real estate in New York went down a lot. Same in London and so forth. And also stock markets suffered in 1974 as well and around the late 1970s and 1980s. But what did well was agriculture and precious metals, real assets,

22:02essentially. So I think you have to take both of those into context, Mike.

Mike22:08It's fascinating. I could listen to you talk about this stuff all day long. I love the perspective that you bring and simply how global and diverse it is. I said that before and I'll say it again. Tiho, one of the things I want to get into next is talking about risk and moving up the risk curve. One of the things you were talking about was the capital stack, getting as senior as you possibly can with other subordinated behind you. And this brings us to one of the topics I want to cover today, the capital stack, and specifically conversation around mezzanine debt in real estate projects. You mentioned it in our last recording, and it was one of the biggest,

22:46most talked about pieces on Twitter and other places since. And the thing that I've received the most questions about in terms of let's get a follow up to this. So would you mind indulging us in a bit of a deep dive in terms of what does a real estate mezzanine deal look like? How do you structure it? And how does it make an interesting investment for those that are listening?

Tiho23:09Of course, Mike. Well, it's great to see people interested in that. And I'm going to discuss it the way I have done it before in my personal experience and also what I've seen others do as well, which is also my personal experience. So if we just take a step back and we think about real estate, the way I think about it at least is there's three different real estate strategies.

23:30That's your core real estate, your value-added opportunistic. So for those that don't know, core real estate is very low risk, mainly focused on annual cash returns. A leverage is very low. So the key is keeping the occupancy rate high. And this is kind of your buy and hold long-term investment. If you think about value add, that is your basically a bit of risk, a bit of reward kind of a play.

23:57It's not really focused on cash flow, but some portion of it can be. You're already borrowing money. You have some more leverage than normal, more than 50%. In most cases, occupancy is not really the key here because you're trying to improve an asset. You're trying to add value to it. This is not a long-term buy and hold.

24:13This is kind of improving the asset. And then after that, you can either stabilize it and continue to get higher rents, or you can actually sell it and exit it. And then you have opportunistic real estate. And it's important to understand this. This is where cash flow is non-existent. And it's all about the capital gain, I guess, or the ground-up developments, the major rehabs, repositioning of the buildings, non-performing, and the stress deals, and so forth.

24:38and here it's essentially this is where mezzanine debt is used. So mezzanine debt will rarely be used in core real estate and sometimes or very, very, not very often in value-add projects. You could have some bridging loans. We can discuss that another time. But mezzanine debt, it's a very common strategy and opportunistic real estate deals. So one of the things that I would like to share before I start as well is, look, we are a global investment executor. So, we are always looking at investments all around. So, I'm not talking in particular from one country's perspective, like for example, from the US or from another country. And one caveat to add here as well is that in the US, mezzanine debt isn't as popular as it is, let's say, in the UK

25:25or Australia, which are another two very developed real estate markets, but obviously far smaller than United States. And the reason for that is that the real estate tax code is written in a way that entices investors, basically twist their hand to always look for exposure into equity. And that's connected obviously to 1031 exchange and depreciation and endless deferrals of taxation.

25:51But in other jurisdictions, that's not the case. So measuring that exposure is probably one of the most versatile real estate strategies throughout the whole cycle. If you think about a real estate cycle, you have four stages. You have early stage, you have mid-cycle, you have the late stage, and you have the downturn. And then it repeats again into the early cycle. And mezzanine debt, you can use it even though I would say in the early stages, you want to be in equity as much as possible. Basically, we've just had a downturn. Hopefully, valuations have fallen to the levels where they're very attractive. There's a lot of distress out there. And you want to be buying

26:29real estate in an equity exposure because that gives you a limiter or uncapped upside. But sometimes there'll be a distressed deal and the owner will say, look, well, I want to continue to have ownership, but I need a line of credit or I need a mezzanine debt loan or I need something like that to get me through the distress period. And then you can come there and say, well, this is a distressed or a non-performing opportunity. And with mezzanine debt, you can earn a lot of money even at the early stage of the cycle. In mid-cycle, you probably continue with both strategies, equity and mezzanine debt. And by the late cycle, mid to late cycle, you're starting to

27:06look at protecting your capital as opposed to trying to have a limited upside because you're understanding that it's been five or seven or nine years of a boom and we are getting there now. valuations are starting to look expensive, but there's still some deals out there that are attractive and you are happy to participate in those deals by earning a fixed return as opposed to unlimited upside. In equity, people always say, I always want to be in equity because it has an unlimited upside potential. Well, just one thing I'd like to say is that I've never met anyone who made a limited amount of money. So in theory, that sounds very good, but when the downturn comes,

27:44you actually are the first to lose. You are the first under pressure. You're essentially the buffer or the protection that senior and mezz enjoy. So you're the first in line to take the hit. So choosing the right mezzanine debt opportunity can result in very good outcomes. I'm just going to name some before we actually jump into a specific deal and how we do it.

28:09From the deals that I've participated in, and this is sometimes strange for other investors, especially because interest rates are so low now. But mezzanine debt for us typically achieves at least a 15% return per annum. But we have participated in deals that are over 20%. And now, you know, sometimes American investors would say, and there's a reason why they would say this, because they have agency debt, unlike any other country. And agency debt, for those that don't know, is that government is subsidizing loans. We don't have this in the UK or Australia or many other countries.

28:39And that increases the grooves of the overall debt cycle and the credit cycle. That helps a whole lot. So in other areas, for example, outside of the United States, like UK or Australia, if there is a downturn in the credit cycle and the supply of capital is very difficult to get your hands on, private capital will always demand far more compensation for the risk that they're taking.

29:07So 20% is not an easy deal to find, but I have seen a lot of them actually during 2020, during the COVID meltdown. Moving along, I think with mezzanine debt, returns are far more certain. If you think about it, they are actually contractually fixed, and it's a fixed income. And also enforcement can be triggered on these as well.

29:29So there's a higher likelihood that you'll get paid, and we'll discuss that later. So equity-like returns, right? In other words, you're investing in debt and getting equity-like returns, but at the same time, you're still receiving bond-like downside protection. So that's the great hybrid and versatility of mezzanine debt, especially depending on which deal you choose. So in terms of valuation, mezzanine debt has a break-even outcome, even if the valuation declines by 25% or 30%.

29:58Obviously, this depends on your LTVs and LTCs, and we can discuss that later as well. but it's pretty cool to be making 15% per annum returns. Let's say if you look at the World Stock Market Index, ACWI, that's the All Country World Index, I believe it's averaged over the last 30 years, something like 8%. So in mezzanine debt, you can get almost, in some cases, double that return. In other cases, almost triple that return. And if the valuations were to fall, if you have a crash in real estate of 20% to 30%, like we did during the Great Depression or during the global financial crisis of 2008, you potentially could still break even, which is up for discussion,

30:42obviously. But that's a fantastic starting point. You're getting a hybrid of upside and downside. In a likely event of a default as well, one has to remember that one holds a second lean over a tangible real asset. So that usually tends to result in minimal chance of losing a principal. And that's something that I'm happy to discuss with you and all the things that mezzanine debt has on offer there. Tax advantages as well. Look, in the United States, you have 1031 exchange, but most of the countries around the world don't have that unless you're just buying your primary residence or your house, your flat that you're going to live in.

31:19So for investment purposes, taxes are on real estate seen almost everywhere around the world. But if you're investing in interest, the taxation, the withholding tax on interest is going to be far lower than, let's say, on capital gains or an active income like rental income and so forth. And that goes for almost all the OECD countries. Something to remember.

31:40So, yes, in the United States, equity has tax advantages of 1031 exchange and depreciation. But for the rest of the world, let's say 7.7 billion people, they prefer to get paid in interest, I think, when it comes to taxes over capital gains, because technically the rate should be lower. And that rate tends to be even more reduced if you're doing cross-border investing.

32:02So that's a perfect point to get into. Mezzanine debt is also great for cross-border investing. For example, if you're investing for the first time, debt makes far more sense and it's far more appealing relative to equity due to the security nature of it or the charge aspect of it. I would love to give you a few examples here.

32:22Recently, we had a talk with a Uruguayan family office who manage a lot of money in Chile and Argentina and Uruguay. And they typically invest into Germany and UK, United States, and they don't do it with equity. They do it with debt. Also, Latin American investors, they don't get the benefits of equity, tax advantages of equity like in other countries.

32:45So for them, it's far more important to have a fixed rate of return and to have a charge over assets. Another example is last month, I had a talk with a Bondi family office. I mean, for those that don't know, Mike, you should know this one very well. Bondi is a beautiful beach in the world. It's located in Sydney.

33:03So it's a perfect place to set up your office overlooking Bondi. I think that's fantastic. But so, you know, they land all over the East Coast of Australia into various real estate developments and projects and so forth. And now they're looking to expand in the UK. When I was talking to them last month, they were basically saying, well, if we're going to go to another country and we've done this before, we've played around a little bit with the US and we played a little bit in Asia.

33:29Now we're also looking at the UK. We want to start with debt. We don't want to start with equity. And then, Mike, you should know this one as well. This is a common one in Australia. But Hong Kong and Singapore family offices have been for years and years investing into Australian real estate as lenders, private lenders, either on a senior or mezzanine debt. And this is a massive one. So a huge amount of capital has come in. And look, with Hong Kong, there's no double tax treaty. So that's a bit of an iffy one. But with Singapore, poor, it's fantastic. And that interest withholding tax I've discussed before will be probably halved.

34:04So if you think about Australian withholding taxes, it's 30% on dividends and 10% of interest. That's a great example as well. Moving along as well, a couple of others I think worth mentioning very quickly as well is better alignment of interest for the LPs as a project sponsor is usually subordinated. So you think about your enforcement and protection of principle and interest, that's very good. And finally, I think the fees are very attractive in mezzanine debt as opposed to equity. It isn't very attractive to syndicate mezzanine debt deals, unlike equity deals. So most real estate GPs, especially those who are fee driven, right, they tend to stay away from the space. And that's also in favor of LPs. That's some of the advantages of mezzanine debt.

34:50And I'm happy to do a deep dive into the world of mezzanine debt investing and discuss the due diligence process on a typical deal that we've done just recently, maybe a deal in the UK. So how do I think about a deal when I'm looking to invest? So from the due diligence process, the first thing I have to see, we don't want to invest into anything that's not inverted commas here, shovel ready. Okay, that means it's ready to be financed. And these are technical terms now in real estate. But once you finance the deal, and the raise is finished, You have a mobilization period of three months or so, and then the construction starts.

35:27So it's an automatic thing. There's no waiting around for planning and permission or anything like that. We're not going to be investing into deals that have the potential. Forget that. We're investing in deals that the spade goes into the ground the moment we sign the contract and our capital is performing and working. So due diligence process. I think this is very important.

35:47I've done this a whole lot of times, and this is a very, very interesting part for me. I really enjoy this. So I can break it down into several aspects that I think are important. First of all, I tend to start with the project itself. So what is the theme? What is the purpose of the project? Does it make sense? What is the planning and permission? And is it in place? It hasn't been approved. And what was approved? And what are the council notes or the Barrow notes or the city notes? So moving along, I also want to investigate the location. I'm looking at the project side.

36:20I'm looking at the macro, the micro location. I'm looking at the infrastructure, the transportation. These days after COVID, you're also looking at other things as well. You're looking at whether there are parks around the place or rivers where people can keep their sanity, which is very, very important. Moving along after that, we're looking at the borrower. This is usually your developer, your sponsor, your GP, whatever you want to call them.

36:42The key thing for us is their track record, their reputation. How many years have they been in business? when i say track record as well and we want to be working with people who have been around for more than one cycle in other words they've seen a massive downturn but if we think about it today it's 2021 i ask people well did you develop during 2008 and how did you go you know that's now almost 13 years ago and if they've been around for at least one cycle that means they were in during the boom from 2002, probably to 2007. And the boom now from 2010, 11, or whatever you want where the real estate bottomed until today. So that's a long time developing. And obviously,

37:25the skill set, the team, the talent, it's all going to be there. And then some of my favorite part, if you're a bit nerdy and you like your numbers, as I do, I got a degree in accounting, So I like my numbers. It's the feasibility study. You're looking at your financials, your business plan, your project metrics. You're looking at things like sensitivity analysis, which maybe most people don't know what it is.

37:49But essentially, two things that impact developments is your time or duration, as well as your exit price evaluation. So if you sell your dwellings at 5% higher or 5% lower, that's going to impact the end result. But if you sell it at the target price, but then it takes six months longer or six months earlier, that will also impact the exit price.

38:13So feasibility study is very, very important. Then the overall construction aspect, the due diligence of that. We're looking at the general contractor, the quantity surveyor. We're making sure there is a GMP in place or JCT is what it's called in the UK. And essentially, those terminologies just means a fixed contract or a maximum price, a maximum price contract in construction.

38:37So you're basically locking in the maximum that you want to pay, and it'll be basically between 90% to 99% fixed. Moving along, we also want to do due diligence on security. So first of all, you're looking at your LTVs, LTCs. You're looking at your senior lender. If you're in a mezzanine position, you're looking at who the senior lender is and what they have done.

38:58A lot of people get all caught up in due diligence, Mike. One thing I have to say to you is, let's say, recently we were looking at a deal in the UK, and the overall deal is £54 million. And the senior lender did a 30, I believe it was a £37 million construction deal. That's a senior position. And the MEZ was just going to be £4.2 million. So yes, that's a lot of money. That's a lot of money for us. That's a lot of money for anyone. But you don't want to get caught up in a small minuscule loan that you're doing when somebody, let's call them smart money or sophisticated money, they've done a massive due diligence process way before you doing every

39:38single angle of it and demanding a huge amount of transparency because they're lending 37 million pounds. And this is a private senior debt lender. This is not a bank. This is a family institution of some kind. It's more like a group of families that would invest into a fund. And then this is a company, a first tier senior lender. Got it. I'd rather not say any names, but they're a top five in the UK. And they typically do construction loans all over the place if it means their criteria. So they are doing a 37 million pound loan. And then several families, it was us, He was an investor out of Switzerland, a family office out of Switzerland, and he was also a family office out of Puerto Rico.

40:25And three of us were looking to do $4.2 million. But my point is, if a senior lender is doing $37 million, talk to them. Ask them about the due diligence because they're putting far more money than you are and they've done it all. And they have signed the contract, the heads of terms. Another important thing in security, and this is what most people maybe don't know if they're new to mezzanine debt, but that's the intercreditor deed. I cannot say that any slower.

40:53Basically, what it does is it makes sure there is an alignment of interest between, and there is a legal precedent there between senior and mezz debt. So if the deal goes into default, and we can talk about that later, you're not going to be forgotten and senior debt is not going to demand only their own money while you're left behind, right? So there's an intercredited deed making sure that there is a connect communication and legal precedent between senior and mayor's debt. Contract covenants, SPV structuring, you know, look at your terms of enforcement, contract milestones, personal guarantees, the security part of due diligence goes on and on. And then finally, which is the most important, that's the exit strategies.

41:36and I'm going to say exit strategy, I've said exit strategies. We don't do deals with any developer that doesn't have more than one exit strategy. If your exit strategy is only, I'm going to build it and sell it, or I'm going to build it and rent it, that's not good enough for us. Sales and marketing plans, bulk sales via discounts and proven hard evidence of that happening before. And one of our favorites as well is, especially in the UK, developer exit finance. So basically, once you, and we can discuss this, I'm sure you have some questions, but once you complete a PC that's known as practical completion, what will end up happening is that that site now gets turned into a tangible asset and there might be titles for all of those

42:21dwellings, houses or units and whatnot. And each of those can now be refinanced with a bridging loan at 60% to 70% LTV, and that capital is going to have far lower cost or far lower interest than the construction loans of senior and mares that are blended. We call that a blended construction loan. It makes sense for a developer to do that because they're reducing their cost of holding those assets while they sell them down, and that essentially buys us out. That's our exit strategy.

42:51So in a recent deal that we were looking at in London, in North Barrow of New Barnet, the scheme was 137 units. And they were all one-bedroom and two-bedroom. Essentially, out of 137 units, what was needed for senior and men's to exit, both at principal and interest, that's called a gross exit. So for us to have a gross exit, we needed 43 units sold out of 137, which is 29% of the building.

43:21So you sell 29% of the building and then you refinance the rest and we're out. And we made 20.8% return per annum if that happens. And to me, this is the critical piece.

Mike43:33And I was going to ask about duration, but you've touched on it beautifully. You're not sticking around to see through the success of the development. And you're not sticking around to even see the development necessarily completed and sold out. as a mezzanine finance provider, you're being paid out before the senior debt is being paid out and before the developer has had a return on their equity as well. Is that a fair statement?

Tiho43:58That's a fair statement. So yes, you do have to wait for the completion. It's called a PC in construction world. Practical completion essentially means the building is finished or the project is finished. And that's when you can have the handover of units and the handover of the cash that the customer is paying. So we are sticking around for that. So if you think about a typical deal that we're in, once we invest, there's three months mobilization, then there'll be anywhere between 16 to 20 months of construction. Let's say it's usually 18. So that's 21. By 21, you have PC, practical completion is reached. At that point in time, you have an exchange of anyone that's put down or reserved units or anyone that wants to buy them. That's

44:43you're having the exchange. If we sell 25 or 29, in this case, 29% of the building, and these units, 29% of them are sold, the developer will essentially refinance the rest and we're out. It's an alignment of interest that's very healthy for us and the developer. Developer will reduce his cost of finance, which is eating into his profits, and that's good for him. And guess what? What's good for him is good for us. Now, if we're part of equity, the way that some of the deals are structured, or a lot of the deals in the United States, this example, are structured and are talking about, once again, from a tax perspective, people love to be in equity. But it's actually not a very good deal for you as an LP. I'm just

45:23being honest. You want to have priority over the developer. Just as you said, Mike, you don't have to stick around and see him sell that one last unit. You know that corner unit that nobody can sell? The hardest one that's a one-bedroom and it's looking directly into some tree and it's on third floor and nobody wants it, that's the one that he needs to sell to do the whole thing and finish the whole project. But we don't have to be there. We can exit with, in some cases, like 29% of the building sold. So it really depends where you are at the LTV. But by the way, once you have invested and done the due diligence process, that's not the end of it. There is a

46:01whole another can of worms to open up, which is called monitoring process. And I'll go through the monitoring process as well. So look, what is monitoring process? The way I think about it off top of my head, it's first of all, weekly and fortnightly communication, right? We're getting pictures, we're getting videos, progress updates, and so forth. If you are very experienced, you're going to be doing frequent site visits. Before COVID, I was in London very often, and I love to go on sites. Not to stick around people and pop my head around the shoulder and annoy them, but actually to help them if we can help them in any way or to mitigate risk or create solutions to

46:40upcoming problems that are up and coming that we can see that are happening and there are delays. But if you're not very experienced, then third-party monitoring is very possible. Essentially, you can get real estate experts who will go there on a weekly or a monthly basis, and they will be doing the monitoring and the updating for you. Tracking of guard charts, so planned versus actual for three phases of the actual project so there's the pre-construction phase there is the construction phase and then there's the sales phase so i think that's also important and then finally you're going to get your monthly updates you know construction status updates and in this order first there'll be demolition and the soft strip you know softly

47:19stripping the building and maybe you're keeping the bones of it then there's going to be the groundworks you know the foundational works then there's going to be framing or if the buildings are very tall, there's going to be a super frame. Then the next milestone is show flat. Show flat essentially is once that first flat is finished, the sales are going to be going far, far faster.

47:39In places like Australia, show flats are finished even before construction starts, which is unlike the UK, just to put this out there. So in Australia, you need to get a certain amount of pre-sales that occur before senior or mezz will even come in. And that de-risks the project, not, yes, for the developer, but in particular for senior and the meads, which is fantastic.

48:02In the UK, they don't have that kind of, let's say, Asian influence or tradition where they do pre-sales off the plan. And what ends up happening is you are funding before any pre-sales. Now, there's going to be some pre-sales along the way during soft sale period. But when that show flat is finished, that's very, very important because that's when typically in the UK, traditionally, when people can walk it, feel it, see it, smell it, touch it, that's when they will buy it.

48:30And that's your big milestone there. So show flat. And then the final milestone is practical completion. And that's the handover of all the units. You want to be also tracking on monthly updates, your finance status, your facility drawdown. That is basically when senior does a big loan. It's not all given in one go like mezzanine debt usually is. It's drawn down on a monthly or a quarterly basis, depending on the contract. So you want to be tracking the cash flow projections and the accumulated interest. And you want to be seeing if there's any delays or if there's a lack of capital, the drawdown hasn't been going as fast as possible and so forth. You want to be tracking all those things. Budget status, construction budget versus actuals,

49:13quantity surveyor reports. In particular, senior debt will have what's known as bank QS, banks, quantity surveyor, and you want to be reading their reports. If you can't, you better make friends with them because if you're measuring debt, you want to be reading senior debts, quantity surveyor reports as well. They're going to have all the ins and outs of what's going on on a daily or even weekly basis. And then sales status makes sense, right? Pre-sales, deposits taken, negotiations of bulk sales. We don't want to work with developers who are not interested to reduce their price if they need to in case of a downturn, you see, because that doesn't help the developer. If they're going to do a bulk sale, they give a discount. So what's the purpose?

49:52The purpose is for us to exit, not for them to get a higher rates of return. And most developers won't do that, but we work with the ones that are open to that because essentially what they do is they might make less money, but they will pay everybody on time and they will maintain their reputation and track record. And that's what we call a clean track record without any defaults. There are plenty of developers out there who have done 12 or 13 projects and defaulted on three and have been successful on 10. Those three that they defaulted on, they didn't want to do what we would like them to do. And that's why they had a default. And then everybody got into

50:26trouble. And obviously, you're much more protected on mezzanine debt or senior debt. But we won't usually work with those developers. And so on and so forth. So that's your monitoring. So I'm sure you have a meaningful amount of questions now.

Mike50:36I do. And it's just incredible listening to you. This is clearly a language that you are more than fluent in. I have one main follow-up. You were mentioning earlier in the conversation about MEZ being a fixed return. It is an annualized return though, isn't it? It's not fixed for the estimated project timeline of 21 months or 24 months, but the rate that you're achieving is per year during that time. Is that right?

Tiho51:06That's correct. Just to come back all the way to the start, opportunistic real estate strategies do not have cash flow. So this is what you call pick, pay in kind. In the US, that's what they call it. In the UK, they call it rolled up interest. In some other places, they call it something else. Or balloon interest in Australia, I believe we call it. But that means that, yes, you're getting an annualized return. Sometimes it can be a flat interest. Sometimes it can be a compounding interest. Hint, hint. This is what you negotiate. You can do whatever you want there and depends on what the other party will accept, but usually you're paid at the exit.

51:44So you'll be returning your, your principal and interest will be returned in one go or not in one go, but it can be done in portions as sales happen. But essentially there'll be a block there of months where you are exiting near the end part after practical completion.

Mike52:00Yeah. And you mentioned also earlier, the benefit of investing in interest returns or investing via debt cross-border. And I want to get into that because the second most requested follow-up discussion to have with you, Tiho, was around your international man of mystery status and your experience living in a lot of different jurisdictions around the world, but more specifically around citizenship by investment, second passports, global taxation planning, residency programs, various incentives. And of course, tying that back to this Mez discussion, where in the world are you best placed to invest in the type of deal that you've just talked about in a jurisdiction like London? Is there advantages under double taxation agreements and other things in a cross-border environment that investors should be thinking about?

Tiho52:55Well, yeah, now we're going to be getting a little bit personal, but if you think about it, if I'm investing in London and I'm sitting in Malta, you've kind of figured that answer out. You don't need to be extremely intelligent to connect those two dots. But I've lived in Hong Kong before. We still have an office there. And I also live in Malta now. And look, I like the climate here, but it's also I'm in the Mediterranean, which I'm originally was born in Croatia. So that is kind of close to home. But it has those opportunities, as you said. And Malta, just like Cyprus, just like where you are, Mike, which is Singapore, where I lived before,

53:28which is Hong Kong or where we're from, Australia, these are all ex-British colonies and they have very good tax treaties with the UK. So look, if you're thinking about it, let's take a step back and think about how to answer that question. So there is your residence planning perspective. So the key question with residence planning is what's the task at hand or what's the purpose that we're trying to accomplish here? What is your end result? So some people are looking at new residences because of tax planning, which is what you just mentioned. They could be tax havens and so forth. Some are looking to increase mobility. And the famous one is, for example, the Portuguese golden visa that a lot of the Chinese and other high net worth investors out

54:15of North America as well did, which gives you a Schengen permit. And you can basically just spend a couple of days in Portugal a year, that's enough. And then you can travel the whole Europe without worrying how long you stay in each country. And others do it for diversification perspective, which is your flag theory kind of internalization.

54:35The way that you diversify your portfolio, you can also diversify your life. You're looking at getting, for example, if I was living in the US, the healthcare there is not very good and neither is education. I think they're ranking the bottom 50th percentile for both of those. So I would essentially be maybe sending my kids or doing or looking at healthcare if I was living in the United States elsewhere, maybe Canada is a better option. And for people who have both a Canadian and American passport or a Canadian residence with an American passport, that is a far easier execution to do. You're also looking at family protection, asset protection, wealth protection, banking. I know some people get Singapore residents just

55:14so they can use Singapore banking as Singapore banks continue in some cases to close to foreigners and they have world-class banking. So that's the way that I would really look at residence planning.

Mike55:26Yeah, I've certainly spoken to a few people here in Asia that have a very specific plan to educate their children in different parts of the world. Oftentimes that means boarding school in the UK or parts of Europe. Many are in the UK and Switzerland, and then often a tertiary education plan into the colleges in the US and things like that if they're on an academic path.

55:48But one of the things that a lot of wealthy families do here is attempt to attain a second passport in a European country simply for redundancy or a backup plan, essentially, as you say, flag theory. Now, the Singapore government doesn't allow it, doesn't allow dual citizenship, whereas other countries do. And there's other nuances. I know that the US, for instance, if you hold a US passport, you're taxed on worldwide income, regardless of where you live. Australia, the passport that I hold, very similar taxes worldwide income, but not if you're a non-resident, right? So if you're living in Australia, you're taxed as an Australian, but if you're a non-resident like I am, and I'm living in Singapore, I pay taxes in Singapore, despite

56:30holding an Australian passport. And so I'm free to collect a European passport or a Malta passport or something else. And that might actually help my children with their education path if they wanted to go and study in the UK later on or somewhere in Europe. Are you seeing that with other families or other people that you're interacting with? How many people that you're aware of holding second passports and have actively planned a strategy, whether it be residence or passport or specific flag theory?

Tiho56:56Well, I'm in certain circles that are like-minded. So the answer is just absolutely everybody. And that might be maybe shocking. I even have a lot American friends who have Caribbean passports, second passports, their own villas down there in places like, well, some islands, let's say, they're quite known, we can get into them. So yeah, just about everybody, Mike, to come back to what you stated about taxation, I just would like to add some caveats to that so that we have an OECD tax model, which is essentially the international taxation system. And it's divided into four different segments of how income is taxed.

57:37and I'm happy to share that. So first one is the no income tax. And typically, people will know jurisdictions, these are very rare jurisdictions, but you know, the ones that stand out, Monaco and United Arab Emirates and Cayman Islands and Bahamas and so forth, and etc. So there's a few of them around the place, but they are not very common.

57:57The second one that's very interesting is territorial tax system. And territorial tax means basically you pay the income that's sourced in the territory and anything that's sourced outside of the territory is not taxed where you live, but could be taxed elsewhere. These countries are Panama and Uruguay and Latin America. From top of my head, I think where you live, Singapore has it, Hong Kong, Taiwan. I mean, the whole Southeast Asia, really. Taiwan, Thailand, Malaysia. In Central Europe, you have Georgia, I remember as well. And also you have Costa Rica, if I recall correctly as well, near Caribbean. A couple of Caribbean islands do this as well. I believe Anguilla is one of them. But there's also territorial tax in certain countries

58:40just for foreigners. For example, Malta, people think that's a tax haven. Well, not really. 95 or 90% of the people who live on this island don't have any tax benefits and pay some of the highest taxes in the world. So for locals, citizenship holders of Malta, they don't get any benefits. So here in Malta, you have what's called a non-domiciled rule, which I'm not going to get into too much here, but Malta has copied that from the UK. So UK has a territorial tax system for foreigners. So does Malta, as an example. So does Spain. It's actually called the David Beckham Law. Most people don't probably know it, but it lasts for six years and it was

59:19created because of Beckham. He didn't want to move to play football or as they call it in America, soccer in Real Madrid. So then they created a special program. So footballers like him can be attracted. They pay taxes in Spain on the income that arises in Spain as a tax liability in Spain, but any other foreign sourced income, as long as it's not remitted to Spain, will not be taxed in Spain. Obviously, David Beckham had a lot of interest all around the world as an ultra high net worth individual, and he didn't want to be paying very high Spanish tax rates. And Spain, with those kind of tax laws and tax rates is not going to be attracting a lot of well-to-do people.

1:00:00So they have to do something about it. Israel is another famous one. I have a lot of Jewish friends and investors. And if you move back to Israel, you have a 10-year tax holiday, depending on how it's structured. So that's your territorial tax and territorial tax only for foreigners. Most people don't also know that Japan has this. If you're a foreigner in Japan, you're going to be taxed only on your locally sourced income same with China same with Vietnam both countries that I've spent a lot of time in Vietnam I lived in Philippines as well is a famous one and then we move to what you were talking about holding an Australian passport like I do that's called residence-based taxation so 90% of the countries around the world do this

1:00:40like Canada Australia New Zealand France Germany Spain etc etc and that essentially means that wherever you're living, you will probably be paying worldwide income tax. So if you're living in Spain and you are doing all kinds of things around the world and in Spain, you will pay taxes to Spain for all of it, potentially also to other countries. And hopefully there's a double tax treaty in place to make sure that you're not double taxed, right? And then finally, you have the fourth bucket. And there's only four countries actually to do this, but that's called citizenship based taxation. Believe it or not, United States is one of them. Hungary is another.

1:01:17Myanmar is one, and there's a small little country in Africa called, I believe, Eritrea that, well, I'm not so sure if that's important because I'm not sure how many wealthy people there are there. So if they move abroad and they start to do well for themselves, I highly doubt that Eritrea will have the capacity to chase them.

1:01:34But the United States does. They have FATCA, they have FBAR. President Obama implemented all this after the GFC. So US citizens attract all around the world. And it's very difficult actually to onboard them into hedge funds outside of the United States. It's difficult to onboard them into SPVs. For example, my bank that I bank with around the world is Citi Bank, which is an American bank.

1:01:59But ironically, they won't let US citizens have bank accounts outside of US in any jurisdiction. Or if they do, you're going to have to be a very big fish. We're talking about like maybe tens, if not hundreds of millions of dollars deposited just sitting with the bank. So that's a little bit about the OECD tax model. But coming back to the citizenship taxation planning, yes, I mean, look, dual citizenship is very, very interesting, as you mentioned.

1:02:25And you have to know which countries have restrictions and which don't. Citizenship by investment programs for me really fall into two buckets. There is the official and unofficial programs. And when I say unofficial, Mike, I don't mean, I'm not trying to make it sound like it's illegal. It's just not streamlined or advertised. But yes, one must consider dual citizenship laws before starting any of this.

1:02:50And dual citizenship laws, well, you know, there's a very big restrictions in Asia, as well as certain parts of Africa and Europe. Some countries have restrictions without any exception. And that's your Indias, Chinas, Japan, Indonesia, Saudi Arabia, Ukraine, Iran, and so forth. But you'll still notice a lot of affluent families from Iran, from China, they do carry more than one passport. And in China, they have this restriction without any exception.

1:03:20and yet you know Henley and Partners and all these big firms around the world, Arton Capital, they all come and advertise dual citizenship in these countries because affluent Chinese or even Indians who are not allowed to have that still want to have it. And then you have other countries that have restrictions as well but there is exceptions and that depends on your birth or your family or your parents or your marriage or something like that. A few good examples could be Germany, which doesn't allow dual citizenship unless you are married. Let's say you're married. I know a family that I used to manage their money in Germany. And the gentleman is German. The wife is Australian. And so the kids can have

1:04:03dual citizenship, you see. That's very interesting. South Korea is a famous one in Asia. And so is Philippines. But you also have, for example, South Africa, and you have Norway, which can have dual citizenship with exceptions. So yeah, it's a very interesting topic. I love talking about it. And I also, I'm happy to have a bit of transparency. I have several passports as well.

1:04:25So I'm able to travel to just about any country that you're allowed to travel to, visa-free. This is obviously before COVID. Now the world is a bit closed, including Russia and China and Cuba and yeah, except North Korea. I can't go there. I don't think anybody can.

Mike1:04:42Still working on that one, eh? Tiho, this has been a wonderful chat. I wish we had time to ask you lots more questions, but I'm sure there'll be even time for a third conversation that we'll have in the future. So I'll spring this on you because we always ask the final question to all guests and I've asked you before. So maybe a slight modification today on the final question. We always talk about, imagine you're writing a letter to your children. What's one lesson or idea you don't think others would mention, but you think is important to understand. I wonder if we modify that and consider one investing lesson or one investing idea that you would

1:05:19write in a letter to your children that you think is important to understand.

Tiho1:05:24Well, look, we've talked today about mezzanine debt investments, and let's keep it in that context because it might help some people. So if I'm actually writing some information here for the sake of how my kids might be doing mezzanine investments in the future, tips for successful mezzanine debt investments or ideas look stick around there's going to be a few of these ideas and i'm going to put them together mike stick around very experienced people who have been around for a long time who have survived the cycles you know who haven't made mistakes so no defaults who have skin in the game or hurt money a meaningful amount in the deal because they're going to speak with their they're going to put their money where their mouth is as we say

1:06:08in Australia, stick with a talented group of people who have a low personnel turnover, because that speaks a lot. If you're not paying your people well, they're going to leave. If you're not looking after them well, if there's problems in the company, that all gives you hints. And ask around and see what their reputation is. That's how I would say that. And any kind of experienced people, including like quantity surveyors on the outside, general contractors, make sure that they have ample cash and bank and liquidity, cash of bank and liquidity, make sure their staff, once again, they're paying their tradies on time, they have a strong balance sheet, and negotiate, negotiate, negotiate. Everything is negotiable in the world of finance

1:06:57and in the world in general. I mean, I've traveled on a motorbike throughout the whole Cambodia and I've negotiated everything. So now when I'm negotiating mezzanine debt deals in London, which are multi-million dollar deals, I use the same tactics as I did in Cambodia in a jungle. Negotiate your terms of enforcement, your project milestones, your interest rates.

1:07:16If the deal goes into a default, which we didn't even talk about, we didn't have enough time, what happens when mezzanine debt goes into default? But negotiate new interest rates in a default, which will go up and they'll be your incentive that's basically pressuring the sponsor or the GP. Negotiate the duration of the loan, the profit share, the preferred returns, negotiate everything and change the structure of the contract. Have your lawyers do that. So like I said, stick around with experienced people and also negotiate things in alternative investments. That's very possible. And that's what gives you the edge, the upper hand.

Mike1:07:53Tiho, it's an absolute privilege to learn from you every time we speak. Thank you again for so generously sharing all that you have today. It's been a blast. Thanks, mate.

Tiho1:08:03Thank you, Mike.

Mike1:08:05Thanks for listening to The Business of Family. You'll find the transcript and key ideas from this conversation at businessoffamily.net, along with the Business Family Diagnostic. It's free, and it shows you where your own family stands. And if someone in your family should hear this episode, please send it to them too. I'm Mike Boyd. Until next time, take care.