Market overview
The year 2020 will be remembered as one of the most extraordinary years in living memory. The world was gripped by a global pandemic which has threatened the very nature of what was considered to be ‘normal’ before it, in so many ways.
2020 began with unprecedented bushfires in Australia that led to significant losses of both lives and property and finished with the end of the Donald Trump presidency, not before being punctuated by racial tensions boiling over and far right extremism threatening the very core of US democracy. On 9 March, we witnessed the single worst one-day drop on the Dow Jones Industrial Average on record, followed by one of the most dramatic recoveries ever witnessed, with the index beginning 2021 at record all-time highs. Interest rates around the developed world remain at historical lows (and even negative rate territory) coupled with high levels of fiscal stimuli in an effort to kick-start economic growth and inflation.
Despite this challenging backdrop of 2020, Revolution begins 2021 with a renewed sense of hope and optimism. While the pandemic is far from being in the rear-view mirror, there is hope that the various approved vaccines that are being rolled out globally are able to arrest the impact that it is having on human lives, as well as economic and financial ones.
Revolution’s strong credit discipline and capital preservation focus in constructing Australian and New Zealand private debt portfolios has been rewarded with the confirmation that non-performing or distressed investments have not been retained since inception. This has contributed to the portfolio’s performance being ahead of stated targets. With the COVID-19 pandemic, it is essential to maintain credit discipline when making investment decisions in order to fully appreciate the potential longer-term impacts on different industries and sectors. As such, maintaining a high level of conservatism is very much warranted throughout 2021, being mindful that in private debt, there is no upside benefit for taking on additional risk and very limited liquidity.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$205m of which total investments that have been made as at 31 December 2020 was A$201m. The small undrawn portion of Fund I’s capital is due to two investments that have small amounts of committed but undrawn capital. There is also a small cash buffer retained in the Fund for hedging purposes which means that the Fund is largely fully deployed.
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 31 December 2020, Fund I held a total of 31 individual investments with an average life of the portfolio of 2.6 years. The credit spread of the portfolio above BBSW is 527 bps – which is above the stated target of the Fund and the average credit rating of the portfolio is BB with a yield to maturity of 5.29% (gross of fees and expenses).
Fund II – Portfolio and Pipeline Review
The Revolution Private Debt Fund II (Fund II) currently has total fund commitments of A$385m of which total investments that have been made as at 31 December 2020 was A$309m. If including investments that have been committed to and awaiting settlement in January, the total deployed capital for Fund II increases to A$356m, which is a pleasing rate of deployment since inception of Fund II in December 2019. Moreover, the performance of Fund II has benefited from higher yields being able to be generated as a result of the market dislocation caused by COVID-19.
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 31 December 2020, Fund II held a total of 41 individual investments with an average life of the portfolio of 2.5 years. The credit spread of the portfolio above BBSW is 567 bps – which is above the stated target of Fund II and the average credit rating of the portfolio is BB with a yield to maturity of 5.94% (gross of fees and expenses).
The deal pipeline remains robust across private and leveraged buyout loans and Asset Backed Securities both in Australia and New Zealand. Across these sectors, the pandemic has caused yields to increase by approximately 1.00% to 1.50% for similar credit risk and term compared to pre-COVID levels.
Real estate lending continued to be a sector where there were many transactions, however did not meet the appropriate risk/return parameters that Revolution considered to be consistent with our capital preservation philosophy. As such there have not been any investments made for Fund II to date.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 31 December 2020*
| Returns | 1 month | 3 months | 1 year | Since inception p.a. (11-Dec-2018) |
|---|---|---|---|---|
| Fund I (gross of fees) | 0.45% | 1.36% | 5.71% | 6.23% |
| RBA Cash Rate | 0.00% | 0.02% | 0.25% | 0.73% |
| Excess return | 0.45% | 1.34% | 5.46% | 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 31 December 2020*
| Returns | 1 month | 3 months | 1 year | Since inception (31-Dec-2019) |
|---|---|---|---|---|
| Fund II (gross of fees) | 0.52% | 1.62% | 6.51% | 6.51% |
| RBA Cash Rate | 0.00% | 0.02% | 0.25% | 0.25% |
| Excess return | 0.52% | 1.60% | 6.26% | 6.26% |
* 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 31 December 2020
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 5.29% | 5.94% |
| Credit Spread | 527 bps | 567 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.