Market overview
The impact of COVID-19 continues to be felt throughout the global economy with many countries faring much worse than Australia and New Zealand in terms of loss of life, financial impact and free movement of people and trade. The Australian Government delivered the largest budget deficit since WWII, only to have boasted about returning to a budget surplus a matter of months ago. The unprecedented effect of the pandemic has been met with a concerted effort to ‘kick-start’ the economy and avoid the scenario of a long and protracted recession.
With the aid of low interest rates and a comparatively lower national debt to GDP than most other developed world counterparts, Australia and New Zealand are in a good position to support their respective economies with a wide-ranging set of initiatives designed to create jobs. These include fast-tracking of infrastructure projects, building of social housing, tax cuts for individuals, instant tax write-offs for business and extension of support payments for those directly affected by the pandemic to name a few.
Throughout the pandemic, Revolution’s core philosophy of capital preservation and inherent conservatism when approaching investment in private debt markets has been sternly tested. In the construction of portfolios, the focus was to ensure that any investment made had to be able to withstand a recession/downturn fully appreciating that there is little or no liquidity to be able to trade such investments in even normal markets. This approach has led to a higher allocation to stable and defensive industries with leading sponsors and to avoid pro-cyclical industries and smaller/less experienced sponsors.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) remains almost fully invested with total deployed capital of A$202m of the total fund size of A$205m. Any investment that matures within the initial reinvestment period to June 2022 will be able to be reinvested.
Fund I is performing well and is currently delivering above its target return, which is cash plus 4% to 5% p.a. (gross of fees and expenses). The objective of Fund I is to achieve this return with low volatility and with the benefit of having security over underlying assets.
As at 30 September 2020, Fund I held a total of 25 individual investments with an average life of the portfolio of 2.4 years. The credit spread of the portfolio above BBSW is 5.24% – above the original target of Fund I and the yield to maturity is currently at 5.33%. The weighted average credit rating of the portfolio is BB, which is in line with the initial target credit rating.
Fund II – Portfolio and Pipeline Review
The Revolution Private Debt Fund II (Fund II) remains almost fully invested with total committed capital of A$361m of which total investments that have been made (including those that are about settle) are a total of A$179m which is a faster rate of deployment than originally anticipated as a result of the strong pipeline of attractive opportunities that have been presented as a result of the current market dislocation.
Fund II is performing well and is currently delivering above its target return, which is cash plus 4% to 5% p.a. (gross of fees and expenses). The objective of Fund II is to achieve this return with low volatility and with the benefit of having security over underlying assets.
As at 30 September 2020, Fund II held a total of 25 individual investments with an average life of the portfolio of 2.6 years. The credit spread of the portfolio above BBSW is 5.85% – above the original target of Fund II and the yield to maturity is currently at 6.18%. The weighted average credit rating of the portfolio is BB, which is in line with the initial target credit rating.
The deal pipeline remains robust across private and leveraged buyout loans and Asset Backed Securities both in Australia and New Zealand. In both sectors the pandemic has caused yields to increase by 1.00% to 1.50% for similar credit risk and term compared to pre-COVID levels.
Real estate lending continues to be a sector where there are many transactions, however not in the appropriate risk/return parameters that we consider to be consistent with the capital preservation philosophy of Fund II. As such there have not been any investments made for Fund II to date.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 30 September 2020*
| Returns | 1 month | 3 months | 1 year | Since inception p.a. (11-Dec-2018) |
|---|---|---|---|---|
| Fund I (gross of fees) | 0.44% | 1.35% | 5.96% | 6.33% |
| RBA Cash Rate | 0.01% | 0.03% | 0.42% | 0.82% |
| Excess return | 0.43% | 1.32% | 5.54% | 5.50% |
* Performance is for the Revolution Private Debt Fund I and is based on month end unit prices before tax in Australian Dollars. Gross performance is stated excluding all fees, costs and taxation. This is historical performance data. It should be noted the value of an investment can rise and fall and past performance is not indicative of future performance.
Revolution Private Debt Fund II (CHN3796AU) – Performance as at 30 September 2020*
| Returns | 1 month | 3 months | 6 months | Since inception (31-Dec-2019) |
|---|---|---|---|---|
| Fund II (gross of fees) | 0.53% | 1.57% | 3.77% | 4.81% |
| RBA Cash Rate | 0.01% | 0.03% | 0.07% | 0.23% |
| Excess return | 0.52% | 1.54% | 3.70% | 4.58% |
* Performance is for the Revolution Private Debt Fund II and is based on month end unit prices before tax in Australian Dollars. Gross performance is stated excluding all fees, costs and taxation. This is historical performance data. It should be noted the value of an investment can rise and fall and past performance is not indicative of future performance.
Portfolio characteristics as at 30 September 2020
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 5.33% | 6.18% |
| Credit Spread | 524 bps | 585 bps |
| Interest Rate Duration (years) | 0.1 | 0.2 |
| Weighted Ave. Credit Rating | BB | BB |
Source: Revolution Asset Management. See below for defined terms.
For more information on performance and the portfolio of loans or about the Revolution Private Debt strategy, contact us.
^ The Net Internal Rate of Return (IRR) is the net return earned by investors over a particular period, calculated on the basis of the weighted cash flows to and from investors, after the deduction of all fees. ^^ Yield to Maturity (YTM) is the current total return anticipated on the portfolio if the portfolio is held until it matures. ^^^ Credit Spread is the weighted average credit margin over the bank bill swap rate (BBSW), which is the market benchmark rate. # Interest Rate Duration measures how much bond prices are likely to change if and when interest rates move and is measured in years. ## The Weighted Average Credit rating is used to indicate the credit quality of a portfolio and is an aggregate of the internal credit ratings of the portfolio’s holdings, weighted by exposure size. Internally rated by Revolution on the basis of ratings substantially equivalent to Standard & Poor’s ratings. Examples of ratings include credit ratings issued by Moody’s, Fitch and Kroll Bond Rating Agency.
This information is for institutional and professional investors only and has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’) who is the appointed investment manager of the Revolution Private Debt Fund I, the Revolution Private Debt Fund II and the Revolution Wholesale Private Debt Fund II (together ‘the Funds’). Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (‘CIML’) is the Trustee and issuer of units for the Funds. Channel Capital Pty Ltd ACN 162 591 568 AR No. 001274413 (‘Channel’) provides investment infrastructure services to Revolution and Channel and is the holding company of CIML. None of CIML, Channel or Revolution, their officers, or employees make any representations or warranties, express or implied as to the accuracy, reliability or completeness of the information, including forecast information, contained in this document and nothing contained in this document is or shall be relied upon as a promise or representation, whether as to the past or the future. Past performance is not a reliable indication of future performance. All investments contain risk. This information is given in summary form and does not purport to be complete. To the extent that information in this document is considered advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling units in the Funds please note that it does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice. For further information and before investing, please read the relevant Information Memorandum available on request.