Market overview
The global developed economy has moved from a period of being effectively paralysed by the Covid-19 pandemic, to a point where vaccination has allowed many countries to grant citizens greater freedoms in gradually opening up in an effort to adapt to living with the virus. The vaccines have proven to be extremely effective in dramatically reducing the incidence of serious illness and deaths to individuals who have elected to take up both doses. The implications of this have been that central banks in developed countries are now moving down the path of gradually reducing very accommodative fiscal and monetary policy settings, as inflation is set to rise off historical lows.
At Revolution, we are able to gain unique insight into the underlying economies of Australia and New Zealand through regular and timely private side information on all counterparties and sponsors across a range of different industries and geographies. While the initial aim was to eliminate the virus during the midst of a global pandemic, we have witnessed a shift in the government rhetoric to one of being able to safely reopen economies with the hope that the impact of the virus is largely contained. In living through this period of prolonged lockdown, you would be forgiven if you had a bearish view of the economic outlook for Australia and New Zealand. This outlook is not one that we share. Our view is one of ‘cautious optimism’ of the respective economies being able to bounce back strongly as individual and collective freedoms are restored.
Subdued default rates
Revolution is now one of the leading providers of financing to non-bank lenders across a wide range of securitisation programmes – including mortgages, auto loans, personal loans and credit cards in both Australia and New Zealand. This gives us access to real time information on the financial health of consumers/borrowers. Throughout the pandemic (of the past two years), we have witnessed very low levels of loan arrears and actual losses when compared to historical rates. This is partly due to being more focused on prime borrower pools, but also the significant levels of fiscal support the Federal and State government has provided to shore up the economy. At the same time, individuals have not had the same avenue to spend discretionary income due to long and rolling lockdowns such as domestic and international travel, eating out and going shopping (apart from online). There are also several fiscal initiatives such as bringing forward of large infrastructure projects that underpin the labour market and are expected to keep unemployment levels low. This leads to the view that there is significant pent up demand for all manner of goods and services that would benefit the broader economy as we emerge from the lockdowns.
In addition, through our investments in senior secured loans to large private companies, we also receive regular information on how these businesses have been performing across many varied industries/sectors – including healthcare, consumer staples, business services, mission critical software, infrastructure services, pet care and pest control. While we actively avoid pro-cyclical industries such as retail, hospitality, tourism, mining and property construction that have borne the brunt of the pandemic, we have witnessed the companies to which we have lent senior secured debt, weather the conditions extremely well. In most cases, operating expenses have been able to be rationalised with companies performing solidly over the last two years.
As such, we remain constructive of both the economic outlook and our portfolio of investments being able to continue to deliver strong, stable income with minimal volatility and deliver on our core objective through our disciplined process.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$204m of which total investments (excluding cash and hedges) that have been made as at 30 September 2021 was A$200m. There is a small cash buffer retained in Fund I for hedging purposes, which means that Fund I is 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, we 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 September 2021, Fund I held a total of 36 individual investments with an average remaining life of the portfolio of 1.4 years. The credit spread of the portfolio above BBSW is 521 bps – which is above the stated target of Fund I and the average credit rating of the portfolio is BB+ with an estimated yield to maturity of 5.33% (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$1,104m of which total investments (excluding cash and hedging) that have been made as at 30 September 2021 was A$628m. If we include additional capital committed to Fund II and investments awaiting settlement, the total deployed capital for Fund II will be well in excess of A$700m, 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 underlying assets.
In the portfolio construction of Fund II, we 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 September 2021, Fund II held a total of 62 individual investments with an average life of the portfolio of 1.5 years. The credit spread of the portfolio above BBSW is 576 bps – which is above the stated target of Fund II and the average credit rating of the portfolio is BB+ with an estimated yield to maturity of 5.94% (gross of fees and expenses).
The deal pipeline remains robust across private and leveraged buyout loans and ABS both in Australia and New Zealand. In fact, 2021 has proven to be the most active M&A year on record with a large number and volume of publicly listed companies being taken private. As a broad rule these acquisitions are funded 50/50 between debt and equity. At the same time both Australian and New Zealand banks continue to lose market share to non-banks in what were formally core products such as mortgages, auto and consumer loans. As non-bank lenders in these categories grow, they are increasingly looking to specialist private debt lenders such as Revolution to support their growth.
These factors have allowed the pace of capital deployment to increase for Revolution over the course of 2021 with these trends set to continue into 2022 and beyond.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 30 September 2021*
| Return | 1 month | Rolling quarter | 6 months | 1 year | 2 years p.a. | Since inception p.a. (11 Dec 2018) |
|---|---|---|---|---|---|---|
| Fund I (before fees) | 0.43% | 1.33% | 2.65% | 5.39% | 5.68% | 6.00% |
| RBA Cash Rate | 0.00% | 0.01% | 0.01% | 0.04% | 0.23% | 0.54% |
| Active Return (before fees) | 0.43% | 1.32% | 2.64% | 5.35% | 5.45% | 5.46% |
| Fund I (after fees) | 0.37% | 1.14% | 2.27% | 4.61% | 4.86% | 5.03% |
| RBA Cash Rate | 0.00% | 0.01% | 0.01% | 0.04% | 0.23% | 0.54% |
| Active Return (after fees) | 0.37% | 1.13% | 2.26% | 4.57% | 4.63% | 4.49% |
Revolution Private Debt Fund II (CHN3796AU) – Performance as at 30 September 2021*
| Return | 1 month | Rolling quarter | 6 months | 1 year | Since inception p.a. (31 Dec 2019) |
|---|---|---|---|---|---|
| Fund II (before fees) | 0.58% | 1.76% | 3.33% | 6.65% | 6.57% |
| RBA Cash Rate | 0.00% | 0.01% | 0.01% | 0.04% | 0.15% |
| Active Return (before fees) | 0.58% | 1.75% | 3.32% | 6.61% | 6.42% |
| Fund II (after fees) | 0.52% | 1.57% | 2.93% | 5.79% | 5.67% |
| RBA Cash Rate | 0.00% | 0.01% | 0.01% | 0.04% | 0.15% |
| Active Return (after fees) | 0.52% | 1.56% | 2.92% | 5.75% | 5.52% |
* Performance is based on month end unit prices before tax. Gross performance (before fees) is stated excluding all fees and costs. Net performance (after fees) is calculated after management fees and operating costs. Individual Investor level taxes are not taken into account when calculating returns. 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 2021
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 5.33% | 5.94% |
| Credit Spread | 521 bps | 576 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.