Market overview
The news flow continues to be dominated by the Covid-19 pandemic and the impacts it has had and ongoing risks it poses to the world economy. The transmissibility of the Delta variant of the virus has proven to be a serious challenge the world over and time will tell how quickly we might be able to return to a somewhat ‘normal’ state. Closer to home, Australia and New Zealand have effectively given up the early advantage that we had in the early stages of the pandemic when there was minimal transmission of the virus for long periods of time from the middle of 2020 until June of this year. Australia and New Zealand have been severely impacted by a slow vaccine rollout, constrained by lack of adequate supply and in Australia’s case, the lack of a better quarantine program for those returning from overseas.
In other developed economies, the rate of vaccine rollout has been very effective with high rates of adult immunisation achieved in many economies including the US, UK and continental Europe. The impact on financial markets as these large economies effectively reopen has been the rhetoric around the very accommodative monetary and fiscal policy emergency support being gradually lifted. Under this scenario, as bond purchasing is tapered and central banks look to debate raising interest rates, financial markets have been faced with contemplating how their asset class would behave in a higher inflation and higher interest rate world. There have been some early signs of wobbles in long duration asset classes such as bonds, real estate and some increased volatility in the equity markets. Australian and New Zealand private debt is a floating rate asset class that has the key benefit of participating in any increase in interest rates, should this eventuate.
In Australian and New Zealand private debt markets, Revolution has observed a far healthier pipeline of opportunities that has been aided by two key factors; increased activity in mergers & acquisitions of large public companies in Australia; and non-bank lenders continuing to gain market share from banks in all collateral types (mortgages, auto loans, personal loans, credit cards) in both Australia and New Zealand.
The larger pipeline of attractive private debt investments and further capital raised by Revolution has led to an increase in the deployment rate of funds managed by the firm. At the same time, the level of credit discipline (which forms the backbone of our investment philosophy) has been maintained. This is evidenced by regular independent scrutiny of all investments, utilising private side information, by Leadenhall, Revolution’s valuation service provider. Throughout the whole Covid-19 affected period, all investments have been confirmed as performing with no requirement to write-down any valuations of any Revolution investment since inception.
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 30 June 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 the underlying assets.
In the portfolio construction of Fund I, Revolution maintained a strong credit discipline based on relative value across three key focus areas being: Australian and New Zealand Leveraged Loans, Asset Backed Securities (ABS) and Real Estate loans.
As at 30 June 2021, Fund I held a total of 34 individual investments with an average life of the portfolio of 1.8 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 5.35% (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$597m of which total investments that have been made as at 30 June 2021 was A$522m. If including additional capital committed to Fund II and investments awaiting settlement in July, the total deployed capital for Fund II will be in excess of A$600m, which is a pleasing rate of deployment since inception of Fund II in December 2019.
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 the 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 being: Australian and New Zealand Leveraged Loans, Asset Backed Securities (ABS) and Real Estate loans.
As at 30 June 2021, Fund II held a total of 51 individual investments with an average life of the portfolio of 1.7 years. The credit spread of the portfolio above BBSW is 578 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 5.99% (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.
During the quarter, Fund II made its first Real Estate backed loan which is secured by commercial property. This has been a sector where there have been few opportunities that have met Revolution’s strict risk/return parameters, so it is pleasing that the first investment has been made in this sector.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 30 June 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) | 0.43% | 1.30% | 2.62% | 5.42% | 5.84% | 6.06% |
| RBA Cash Rate | 0.00% | 0.01% | 0.02% | 0.07% | 0.36% | 0.60% |
| Excess return | 0.43% | 1.29% | 2.60% | 5.35% | 5.48% | 5.46% |
* 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 30 June 2021**
| Returns | 1 month | 3 months | 6 months | 1 year | Since inception (31-Dec-2019) |
|---|---|---|---|---|---|
| Fund II (gross of fees) | 0.52% | 1.54% | 3.14% | 6.45% | 6.47% |
| RBA Cash Rate | 0.00% | 0.01% | 0.02% | 0.07% | 0.18% |
| Excess return | 0.52% | 1.53% | 3.12% | 6.38% | 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 30 June 2021
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 5.35% | 5.99% |
| Credit Spread | 523 bps | 578 bps |
| Interest Rate Duration (years) | 0.1 | 0.1 |
| Weighted Ave. Credit Rating | BB+ | BB+ |
| Deal Approval Rate | 18% | 26% |
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.