Market overview
The Australian and New Zealand economies have begun 2021 in far better shape than most other countries, having had the benefit of governments that took hard decisions early in the proliferation of the pandemic. The tough lockdown measures coupled with significant fiscal and monetary stimulus has guided both economies into an enviable position on a world stage where the vast majority of citizens are able to enjoy a way of life similar to pre-pandemic, compared with most other countries.
The market for private debt in the specific sectors that Revolution focuses on has begun the year strongly aided by an optimistic economic backdrop where many asset classes have recovered to levels at or exceeding their pre-Covid-19 levels. Australian banks (that are also the dominant lending players in New Zealand) continue to feel the constraints of global banking reform and regulation with lending opportunities and the pipeline for Revolution being very strong at attractive yields for the level of risk.
Revolution’s strong credit discipline in selecting only the opportunities that represent the most defensive industries and sectors according to strict criteria is paramount when investing in an illiquid asset class where there is limited upside potential. Capital preservation is a core philosophy and has led to the construction of portfolios that are in the most non-cyclical industries such as healthcare, infrastructure services, consumer staples and mission critical software. Sectors that have been actively avoided due to their pro-cyclicality have included retail, tourism, property construction and hospitality. On the Asset Backed Securities (ABS) side, Revolution has favoured lending to larger, well established non-bank lenders that focus on the higher quality prime and near prime borrowers across a range of loan types including mortgages, auto loans, credit cards and personal loans, in both Australia and New Zealand.
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 March 2021 was A$200m. There is also a small cash buffer retained in Fund I for hedging purposes, which means that Fund I is now fully deployed.
Fund I is performing well and continues to deliver 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.
In the portfolio construction of Fund I, Revolution maintained a strong credit discipline based on relative value across the three key focus areas of Fund I being: Australian and New Zealand Leveraged Loans, Asset Backed Securities (ABS) and Real Estate loans.
As at 31 March 2021, Fund I held a total of 34 individual investments with an average life of the portfolio of 2.1 years. The credit spread of the portfolio above BBSW is 523 bps – which is above the stated target of Fund I 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$417m of which total investments that have been made as at 31 March 2021 was A$325m. If including investments that have been committed to and awaiting settlement in April, 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 as a result of the market dislocation (caused by Covid-19).
Fund II is performing well and continues to deliver 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.
In the portfolio construction of Fund II, Revolution maintained a strong credit discipline based on relative value across the three key focus areas of Fund II being: Australian and New Zealand Leveraged Loans, Asset Backed Securities (ABS) and Real Estate loans.
As at 31 March 2021, Fund II held a total of 44 individual investments with an average life of the portfolio of 2.0 years. The credit spread of the portfolio above BBSW is 577 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 6.04% (gross of fees and expenses).
The deal pipeline remains robust across private and leveraged buyout loans and ABS both in Australia and New Zealand. Real estate lending continues to be a sector where there are many transactions, however not in the appropriate risk/return parameters that Revolution considers 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 31 March 2021*
| Returns | 1 month | 3 months | 6 months | 1 year | 2 years p.a. | Since inception p.a. (11-Dec-2018) |
|---|---|---|---|---|---|---|
| Fund I (gross of fees) | 0.45% | 1.30% | 2.67% | 5.47% | 6.11% | 6.14% |
| RBA Cash Rate | 0.00% | 0.01% | 0.03% | 0.10% | 0.54% | 0.66% |
| Excess return | 0.45% | 1.29% | 2.64% | 5.37% | 5.57% | 5.48% |
* Performance is for the Revolution Private Debt Fund I – APIR: CHN7934AU, and is based on month end unit prices before tax. 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 March 2021**
| Returns | 1 month | 3 months | 6 months | 1 year | Since inception (31-Dec-2019) |
|---|---|---|---|---|---|
| Fund II (gross of fees) | 0.59% | 1.57% | 3.21% | 7.10% | 6.50% |
| RBA Cash Rate | 0.00% | 0.01% | 0.03% | 0.10% | 0.21% |
| Excess return | 0.59% | 1.56% | 3.18% | 7.00% | 6.29% |
** Performance is for the Revolution Private Debt Fund II – APIR: CHN3796AU, and is based on month end unit prices before tax. 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 March 2021
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 5.29% | 6.04% |
| Credit Spread | 523 bps | 577 bps |
| Interest Rate Duration (years) | 0.1 | 0.1 |
| Weighted Ave. Credit Rating | BB | BB |
| Deal Approval Rate | 18% | 24% |
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.
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.