MARKET BACKDROP AND YEAR IN REVIEW
Throughout the course of 2018, the global financial markets have witnessed a gradual and sustained increase in volatility due to a combination of China/US trade tensions, geopolitical risks emanating from North Korea, various scandals in the White House coupled with high profile resignations /terminations, Brexit negotiations and implications for the UK and the EU, end of quantitative easing and Fed rate rises as well as a general change in sentiment regarding global growth prospects. The perception of what is considered to be a ‘good’ return has changed dramatically over the course of the year. In fact, 2018 is considered one of the worst years across asset classes over the past 20 years, with so many negative returns, as shown below. It is a very rare occurrence to have most asset classes from defensive to the high growth all underperform in one year, as we witnessed in 2018.
The Revolution Private Debt Fund I target return is cash plus 4% to 5% p.a. (before fees) which currently equates to an all-in yield of 6% to 7%. It is targeting to achieve this with low volatility and with the benefit of having security over assets. This targeted return is attractive in the context of the current market volatility and the performance of most asset classes in 2018.
Performance of global asset classes 2018
AUSTRALIAN AND NEW ZEALAND LEVERAGED LOANS
Against a backdrop of heightened volatility in equity markets, Revolution expect a more active M&A pipeline in 2019 compared with last year. This is also supported by the significant amount of capital that has been raised and yet to be deployed by domestic and international private equity funds that are active locally. In fact, there is in excess of $9bn of capital that is yet to be deployed in Australia by private equity. As a general rule, every dollar of this equity is usually matched by a dollar of debt, therefore Revolution expect a strong pipeline of transactions to review in 2019 and beyond.
ASSET BACKED SECURITIES (ABS)
Despite weakening conditions in broader credit markets in 2018, demand for ABS investments remained strong as spreads drifted modestly wider over the course of the year. The combination of the Royal Commission and tighter regulations has significantly impacted the risk appetite and overall credit growth within the banking sector. Consequently, public issuance in the Australasian ABS market was down around 20% in 2018, but this has been offset by significant growth and activity in the private ABS warehouse space, driven by the non-bank originators. On this front, Revolution has already signed NDAs and commenced due diligence on three private ABS warehouses investments in Australia and New Zealand and we expect the opportunities to remain compelling in this sector going forward.
REAL ESTATE LOANS
Revolution will be focussed on lending to completed and fully stabilised cashflow producing real estate assets in commercial office, retail shopping centres and high quality industrial sectors. There will be no lending to construction or development in residential properties. The real estate lending sector has been subject to the most acute concentration risks for the Australian banks. This has resulted in banks significantly changing their underwriting criteria to reduce loan to value ratios for new transactions and not being able to refinance loans that were formerly considered comfortable core investments. As a result of this Revolution again expect that real estate lending will provide some very attractive investment opportunities for Revolution throughout 2019 and beyond.
AUSTRALIAN PRIVATE DEBT OPPORTUNITY
The fundamental thesis for the establishment of Revolution Asset Management was that global banking reforms would significantly impact local Australian banks appetite to hold as much credit risk on their balance sheets as they had in the past. The banking Royal Commission in 2018 helped to speed up the adoption of these reforms – which are permanent. Given Revolution is a non-bank lender, they are not subject to the same regulatory capital changes or pressures. As a result, Revolution have witnessed a significant increase in the pipeline of new transactions in their chosen sectors: Australian and New Zealand leveraged loans, Asset Backed Securities and real estate loans. With the current number of non-bank lenders in Australia being less than ten, Revolution expect to have a very active 2019 and to effectively deploy capital for the Fund in these high risk adjusted return sectors.
This information has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’). Channel Investment Management Limited ACN 163 787 353 AFSL 439007 (‘Channel’) is the Trustee and issuer of units in the Revolution Private Debt Fund I. This email (including attachments) is subject to copyright, is only intended for the addressee/s, and may contain confidential information. Unauthorised use, copying, or distribution of any part of this email is prohibited. Any use by unintended recipients is expressly prohibited. To the extent permitted, all liability is disclaimed for any loss or damage incurred by any person relying on the information in this email. Although every effort has been made to verify the accuracy of the information contained in this document, Revolution, Channel, its directors, officers, representatives, employees, associates and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by any person directly or indirectly through relying on this information. The information in this document is not financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular person. All investments involve risk. Past performance is not a reliable indicator of future performance. For further information and before investing, please read the offer document which is available upon request.