Ireland The Brave
Sydney Morning Herald
Saturday August 7, 2004
He made a motza with Challenger before the Packers drove him off. Brian Robins reports on Bill Ireland's new mission.
It was little less than alchemy for the seller, with the value of the Powercor building in Melbourne rising by a third in a matter of months last November when it was sold for $40 million. Paying top dollar was Bill Ireland, keen to get his hands on a property with a solid income stream as he rolled out Challenger Mark II through his new vehicle, Mariner Financial. The quick turn was earned by Sydney investment bank Babcock & Brown. Ireland is a man in a hurry who is out to prove he was right. He's built one empire, which he lost to Kerry Packer early last year. Now he is out to do it again - and in double quick time. It took 10 years for Challenger to get traction, but he doesn't want to wait that long at Mariner. Over the next few years, he reckons he'll be selling $500 million of annuity product a year, along with a host of other products, from mortgage funds, property syndicates, receivables trusts and beyond. Ireland is seriously wealthy. So why not just take it easy? "I've got a young family, and I don't have the luxury of going to Tuscany for six months and pondering the universe," he says. Take it easy? The simple answer is that he can't - he has a score to settle. His pile of Challenger shares is worth more than $45 million and his Mariner holding is good for another $25 million. Then there are the trappings of wealth, from the $10 million floating gin palace, Mystery, on the harbour with a full-time staff of more than half a dozen, to the dark blue Porsche and the big property in the Southern Highlands. The former options trader and property developer doesn't like to have time on his hands. Known variously as the "mad scientist" or the "professor", epithets such as compulsive and driven tumble out when you talk to his associates about the man. He's an "incurable entrepreneur - he can't concentrate for more than three seconds" was the way one put it. "He's an entrepreneur who knows how to make money. He's not a traditional player. "He may not be formally educated with a university degree or an MBA, but he is a very good financial engineer - and a great marketer as well as being very charismatic." And he has made some long-time supporters heaps of money, which also helps. Stockbroker Colin Bell, through his Bell Securities, picked up the substantial shortfall from the Challenger float (30 per cent) when it was offloaded by underwriter Morgan Grenfell, which he has hung on to. "It is the only house position we have," Bell says. That original 30 per cent stake has been watered down to 3 per cent, which is worth more than $30 million."He thinks he is far too young to retire," says Bell, who reckons the 54-year-old Ireland is probably out to prove the sceptics wrong. "He is very innovative and financially very creative." Other investors, such as Kerry Packer's long-time business associate Robert Whyte, are also long-time holders of Challenger shares. Whyte is still also ranked among the largest Challenger shareholders. But while some of the fast-money set have felt very comfortable backing Ireland, professional money managers have always held back. As Ireland sees it, they just don't understand the business model. But then neither did the regulator, the Australian Prudential Regulation Authority (APRA), which queried the quality of assets behind Challenger, forcing a $400 million top-up - the reason Ireland was pushed aside early last year. Now he's back, eyeing an even bigger opportunity: growth pensions. "If you look at the $40 billion that already resides [in allocated pensions], which is growing at about $8 billion a year, my view is that as much as $20 billion could move out of allocated pensions and into growth pensions within a short period of time - 18 months," Ireland says. "This opportunity is a far, far bigger opportunity than the one in the original pension rule changes of 1998." Legislative change that takes effect from September means that, to sell these growth products, Ireland will not need a life insurance licence to do so, as he did at Challenger. (An allocated pension, or annuity, is usually issued through a life company with various strictures that do not apply to a growth pension.) The model is the same: buy property, and use the rental income stream to fund the annuity liability, although Mariner cannot use the word "annuity" without the life insurance licence, so he is selling "bonds" - lifestyle bonds. "It is precisely the same outcome, except it is issued as a bond under a trust deed rather than using an annuity from a life company," Ireland says. "There is an independent trustee which keeps the reserves within that company, to make sure it can meet its obligations, and the payment schedule on the bond is identical to an annuity, except the rates are higher." In the past, to sell these products you needed to hold a life insurance licence. Not any more. It is a change that has saved Ireland from having to pursue a licence, for which he had been negotiating with APRA since September. He denies the regulator had refused him a licence. "I have no personal issues with APRA. They've never said that to me," he says. "No life insurance licence has been issued since HIH." An APRA spokesman would not discuss applications in hand. Unlike at Challenger, where the annuities were issued through the parent company, Mariner will issue them through 80 per cent-owned Mariner Retirement Solutions, which is also listed on the stockmarket. Ireland argues the Government "will encourage people to put their money into these term-allocated pensions by giving them asset test-exempt status". In other words, retirees buying these annuity-style products can also get the old age pension. So, if the opportunity pans out the way Ireland reckons it will, this will be the perfect opportunity to do it all over again. Once more he is in the right place at the right time. That was the case in 1969 when Ireland first got his start. Fresh out of Newington College, where he knew the likes of Rob Millner (the chairman of Soul Pattinson) and David Leckie (who now runs Channel Seven), he went into stockbroking, earning $22 a week. Then, in the game barely long enough to get his feet wet, the nickel boom took off. "If you couldn't earn $1000 by 11am from trading, there was something wrong," he says. Like many who came out in front, he bought his first car with some of his winnings - a Volvo sports car, which he still owns. The launch of the options market in the mid-1970s gave Ireland the opportunity to learn about leverage, which he was to put to good effect later on at Challenger. He worked with Colin Bell at Option Investment in the second half of the 1970s, running the Sydney office. Ireland eventually quit the options market to work on the redevelopment of the family pub, which is just over the road from Warwick Farm racecourse. That large block of land has been held by the Ireland family since 1855, when forebear Thomas Ireland planted the Sunnybank vineyard there, at a time when western Sydney had dozens of vineyards, such as Seppelt's Minchinbury winery. Ireland returned to the financial markets in the mid-1980s, putting $175,000 of his own money, with investment bank Martin Corp putting up the same, into Challenger. The market minnow then raised $700,000 from the public, floating on the Hobart Stock Exchange just before the 1987 sharemarket crash. That $175,000 is now worth more than $45 million. Challenger really hit its straps only in the mid-1990s with the launch of endowment warrants. In 1997, Ireland paid $24 million for a life insurance licence, which was the vehicle for selling annuity products, using the income stream from commercial property to fund 15-year annuities. "We identified an opportunity the annuity market was going to offer. We bought a life company, Challenger Life. "In 1998 we saw the extent of the opportunity. Challenger was a small company without much profile. To capitalise on the opportunity of selling annuity contracts to retirees, we thought the opportunity was so fantastic we needed some substantial shareholders." After talking to ANZ and St George banks, the Packer family decided it wanted in, taking a fifth of the company for $41 million in late 1998. But the accounting treatment baffled professional investors, pressuring the Challenger share price, eventually resulting in Ireland being kicked out in early 2003."James Packer understood it," Ireland says. But then, James also understood the One.Tel business model, whose subsequent collapse cost the family $400 million. "The accounting treatment of the company was not understood by the market," Ireland says. "The accounting treatment was a life company's accounting treatment. What you have to do is give the present value all of the assets. "We had an asset, which was a profit emerging over a 15-year period. Using life company accounting standards, you have to put a present-day value on that. "So that meant if you had $100 million that you were entitled to in 15 years' time, the discount rates meant that you would make a $30 million profit upfront. That was not something we invented. That was life company accounting." Challenger never collapsed, although APRA went through Challenger with a fine-tooth comb, eventually arguing that it needed another $400 million to build up its reserves. "Challenger met all its legal obligations, its capital requirements, at all times," Ireland says. "What [APRA] said was that the liquidity of those reserves was debatable. They were uncertain about that."But you look at the portfolio today. All of it has been successful, with tenants who are paying their rents to fund the annuity; and 15,000 people who bought annuities are getting a better rate than would have been the case otherwise." The value of all of the properties in the portfolio has risen substantially since then, he says. "You'd probably find that the property portfolio is probably worth $500 million to $700 million higher than what the purchase price was," he says. "In addition, the income from those properties has retired the liabilities over that time as well, so each year it is extinguishing the liability to the annuities." And the beauty of the business model is that once the original annuities have matured, you can do it all again. "At the end of the 15 years, you simply relet [the building] and sell more annuities. "But this time, you don't have to buy the asset, since you already own it." Asset prices can go down as well as up, and the wariness of professional investors kept the Challenger share price under pressure, which became the trigger for the Packer family to push Ireland out by merging Challenger with their investment cashbox, CPH Investment. The Packers emerged with a quarter stake, worth more than $250 million."Would I do it again? I think in the same situation I would do it again," Ireland says of the negotiations that gave control to the Packer family. "It gave the extra credibility, and basically the whole thing took off from there." But as for losing control of Challenger, Ireland says: "It's not the script I would have written. I don't dwell on it too much." Even though it is in the box seat, the Packer family has found Challenger a continuing puzzle. Chris Cuffe, whom the Packer family installed to run Challenger at the start of 2003, was pushed aside last month, replaced by investment banker John Tilley. Cuffe - best known as Commonwealth Bank's $33 million man - pushed aside a number of Challenger's senior staff, many of who have turned up at Mariner ("They were pushed, I didn't steal them," Ireland says).Cuffe recently paid $100 million for Associated Planners, which raised eyebrows in financial planning circles, as it has negligible earnings. Yet as their appointees to run Challenger have shown, the Packer family don't quite know what Challenger is. It is a large life insurer with a big property-based annuity business, and a modestly sized funds management business tacked on. Cuffe knows little about property markets, and some critics have questioned whether Tilley does either. "Cuffe demonstrated he couldn't do it," says Ireland, who, as a large Challenger shareholder, has a lot of his wealth riding on Tilley getting it right. Asked about the future of his Challenger holding, which ranks him as the third-largest shareholder, Ireland says: "I'll hold it for the moment. "I'm disappointed, essentially," he says of Challenger's performance since he was pushed out. "I thought Cuffe might have done better. Tilly has a better understanding of markets but I'm not sure what his understanding of the annuity business is." Challenger "was a $1 billion company", Ireland says. "It's still a $1 billion company, and it owns the upside - and the downside - on $3 billion worth of well-tenanted property." To put people in to run Challenger who know little about the property market doesn't make much sense to him. Cuffe made his name building the Colonial First State funds management business into a behemoth during the long bull market of the 1990s, and caused a stir when he walked out the door with that $33 million in his pocket. Yet at Challenger, says Ireland, if the Howard Mortgage business is excluded, the funds management business is only about $300 million to $400 million. In Britain, life insurers linked their annuity contracts to the local sharemarket, and the continued decline in share prices has bankrupted almost an entire industry, costing Australian players such as AMP massively. "In the UK, they matched them with equities," Ireland explains. "Equities went down and many of the companies are now out of business. A lot of smart actuaries got it wrong." The first round of privatisation of the pension industry in 1998 - which opened the door to annuity products - gave Ireland his first real break when at Challenger. The big round of changes that take effect from next month is opening the door to a new round of entrants. "I used to say that if I've got to sell something to a pensioner, I'm in the wrong business, and that was the mainstay of the whole business," Ireland says, laughing.
© 2004 Sydney Morning Herald