Revolution Asset Management Chief Investment Officer, Bob Sahota and Associate Portfolio Manager, Lucie Bielczykova discuss the latest trends and developments in the Australian and New Zealand private debt market, including:
- The positioning and performance of the portfolio and how Revolution Asset Management has deployed capital in Q2 2021.
- An overview of developments in Revolution’s ESG practices.
- A leveraged buy-out case study – back to the future, revisiting a transaction that was completed during the first half of 2020.
- The outlook for Australian and New Zealand private debt and M&A activity.
Key takeaways: Mid-year private debt market update
Private debt has the potential to deliver value through both income and capital preservation in an environment in which interest rates are tipped to rise. This asset class has been extremely valuable through the more volatile periods of the pandemic, providing stability in portfolios and consistent income, and has the potential to play an important future role in well-diversified portfolios.
In its recent update regarding the private debt market, the Revolution Asset Management investment team (Revolution) highlighted the importance of understanding the current environment. Throughout the COVID-19 period, the RBA has been focused on monetary stimulus by maintaining a record low cash rate and quantitative easing. This has fuelled the Australian and global equity markets in reaching all-time highs and has been an important driver for other asset classes, including private debt.
“The market for asset-backed securities, non-bank lenders and leveraged loans has been extremely strong as interest rates have fallen. These investments should also be attractive in an environment of rising interest rates, when yields from private debt rise in line with upward movements of the cash rate,” said Bob Sahota, Chief Investment Officer.
Investment options along the risk spectrum
Revolution invests in the three key focus areas of private debt:
- Australian and New Zealand Leveraged Loans
- Asset Backed Securities (ABS)
- Real Estate loans
When looking at the private debt risk return spectrum, one end of the spectrum is lower-risk, low-return strategies like infrastructure debt and investment grade debt. At the other end are higher-risk strategies such as venture debt, construction lending to real estate and bilateral lending (being the only lender to a typically smaller company). These higher-risk strategies do have the potential to deliver higher rates of return, but it’s important to understand the risks involved. Avoiding these sub-sectors of the market and focusing on areas that allow construction of a ‘sleep at night’ portfolio while delivering strong risk adjusted outcomes is a part of the value Revolution delivers to clients.
Within the three key asset classes that Revolution invests in, the lowest-risk returns come from senior real estate lending to established commercial office, retail shopping centre or industrial properties, that have good tenant cash flow through lease payments.
“This quarter the Revolution Private Debt Fund II made its first real estate debt investment. Few deals in the real estate market fit our investment criteria terms, so it’s pleasing we have been able to do our first deal in that sector,” Sahota says.
The portfolio also targets company and leveraged buyout debt, lending to top-end private equity acquisitions of debts issued by large Australian businesses, such as Arnott’s Biscuits and Healthscope Hospitals. The portfolio also invests in private ABS warehouses, where Revolution has backed some of the large established non-bank lenders such as Bluestone and Latitude, by lending against the originated pools of loan and mortgage assets.
Revolution continues to focus on exposure to private debt deals originated in New Zealand as the mechanics of that market begin to shift. At the moment, Australian banks are looking to reduce their involvement in New Zealand private debt transactions as capital charges increase. This is an opportunity for Revolution to increase its exposure to New Zealand assets.
Prudent risk management
It’s important to understand the quality controls the investment team applies to the portfolio. The team turns down approximately three quarters of all deals with which it is presented, and the deal approval rate remains at just 26%.
“It’s important to have the credit discipline to only accept deals that fit within the fund’s core philosophy and meet all our criteria. This is especially important for us because it’s much harder to trade out of illiquid asset classes like private debt. So, we do a lot of work upfront to make sure deals align with our core philosophy,” says Sahota.
During the session, associate portfolio manager Lucie Bielczykova delivered an update on Revolution’s ESG journey. Responsible investing has always been embedded into the investment process and is a key part of risk management.
“Revolution takes ESG very seriously. It has been a key building block of the investment process since the firm’s inception. We recognise we have an important role to play directing our investors’ capital responsibly. From a fundamental credit perspective, ESG risk is a core component of overall credit risk. So, ESG gives us another lens to highlight any additional credit risk and helps us to holistically assess credit,” says Bielczykova.
“We also recognise ESG is a rapidly-changing field, and we are committed to continuously advancing our approach. Ultimately, this strengthens our investment process and outcomes for clients,” she adds.
Current market conditions
One of the most attractive features of private debt in this part of the market and business cycle is the asset class’s potential to deliver capital preservation coupled with reliable income.
There is now a substantial opportunity for private debt investors such as Revolution to deliver value to investors. At the moment, there are few if any private debt investors in Australia and New Zealand with Revolution’s scale and processes – who remain committed to scouring the market for opportunities and rigorously applying its processes for the benefit of investors.
Recorded 28 July 2021.
For more information on performance and the portfolio of loans or about the Revolution Private Debt strategy, contact us.
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.