Market overview
Throughout the course of 2022, global financial markets have grappled with a number of headwinds that have emerged after a long period of relatively benign market conditions. The key risks in the short to medium term include:
- Geopolitical risks with the conflict in Europe that has impacted energy prices, commodities and supply chains.
- Inflation dramatically accelerating in most developed countries.
- Sharp increases in interest rates as central banks attempt to tame inflation before it gets out of control.
In this environment where risk free rates are increasing as well as credit spreads widening, the orchestrated slowdown of developed market economies by central banks will likely cause businesses and consumers to come under increasing pressure. The risk of a global recession is now increasing as a result.
The above factors have resulted in many asset classes underperforming over the last nine months with higher levels of volatility.
Against this backdrop, Revolution’s strategy performed very well. The key attributes of Australian and New Zealand private debt have proven to be very attractive through this period, namely:
- Floating rate loans: as base interest rates have risen the yield of the portfolio has risen, thereby insulating performance against inflationary forces.
- Senior secured nature of loans: all loans in Revolution’s portfolios are senior secured which provides strong protection in periods of macro-economic downturn.
- Diversification and low correlation: private debt offers the ability to invest in industries and sectors that are not easily accessed through liquid markets.
Moreover, the low correlation to a volatile liquid market is also attractive to investors, as the allocation may provide much needed capital stability in an investor’s portfolio while continuing to deliver a steady income stream.
Existing investors have repeatedly asked about the ability of Revolution to be able to navigate through what appears to be a very challenging period over the next 12-18 months. The response is that the team at Revolution has always been focused on downside risks for all loans that have been advanced. Given the illiquid nature of the loans that are invested in by Revolution, it has always been imperative to ensure that there is demonstrated serviceability and repayment of all loans through any macro-economic downturn or recession.
While the future remains uncertain, the team at Revolution has the benefit of receiving very timely private side information on all portfolio loans, to assess how they are performing. This information is also shared with an independent valuation firm (Leadenhall) on a monthly basis for them to confirm that all loans are performing via independent sign off on all investments.
The current state of the portfolio is robust as a result of avoiding pro-cyclical industries and focusing on those industries that are best able to navigate through a more volatile period – industries such as healthcare, mission critical software and consumer staples. Furthermore, Revolution’s Asset Backed Securities are predominantly secured against prime borrowers with higher underlying credit scores. These borrowers have a much better ability to come through a recession than weaker borrowers.
Overall, Revolution’s private debt strategy offers many features that are very appealing in the current market conditions for clients as diverse as large superannuation funds, foundations, family offices, endowments and high-net-worth investors. The attributes of capital stability, high income component with low correlation across a diversified pool of loans are considered attractive in the current market backdrop.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$202.9m of which total investments (excluding cash and hedges) that have been made as at 30 September 2022 are A$193.9m. There is a cash buffer retained in Fund I for hedging purposes which means that Fund I is currently fully deployed.
Fund I is performing well and is meeting its target return of cash plus 4% to 5% p.a. (net of fees and expenses) with low volatility.
During portfolio construction, Revolution maintained strong credit discipline based on relative value across the three key focus areas of Fund I being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans. Fund I is now past its investment period with no new investments or reinvestments occurring.
As at 30 September 2022, Fund I held a total of 23 loans with an average remaining life of the portfolio of 1.0 years. The credit spread of the portfolio above BBSW is 536 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 8.23% (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$1,395m of which total investments (excluding cash and hedging) that have been made as of 30 September 2022 was A$1,378m. This is a pleasing rate of deployment since inception of Fund II in December 2019.
Fund II is performing well and is meeting its target return of cash plus 4% to 5% p.a. (net of fees and expenses) with low volatility.
During portfolio construction, Revolution maintained strong credit discipline based on relative value across the three key focus areas of Fund II being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans.
As of 30 September 2022, Fund II held a total of 43 loans with an average life of the portfolio of 1.5 years. The credit spread of the portfolio above BBSW is 586 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 8.65% (gross of fees and expenses).
The deal pipeline in Australia and New Zealand remains robust across LBO and ABS, which should allow for continued strong deployment. In LBO, activity has slowed down somewhat from an all-time high level of M&A activity to a more steady market state, however quality borrowers continue to access capital and issue debt. Revolution is seeing similar dynamics playing out in the ABS market. Additionally, Revolution is seeing attractive secondary market opportunities, which Fund II has been taking advantage of.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 30 September 2022*
| Return | 1 month | Rolling quarter | 6 months | 1 year | 2 years p.a. | 3 years p.a. | Since inception p.a. (11 Dec 2018) |
|---|---|---|---|---|---|---|---|
| Fund I (after fees) | 0.52% | 1.03% | 1.40% | 3.67% | 4.14% | 4.46% | 4.67% |
| RBA Cash Rate | 0.18% | 0.43% | 0.52% | 0.54% | 0.29% | 0.33% | 0.54% |
| Active Return (after fees) | 0.34% | 0.60% | 0.88% | 3.13% | 3.85% | 4.13% | 4.13% |
Revolution Private Debt Fund II (CHN3796AU) – Performance as at 30 September 2022*
| Return | 1 month | Rolling quarter | 6 months | 1 year | 2 years p.a. | Since inception p.a. (31 Dec 2019) |
|---|---|---|---|---|---|---|
| Fund II (after fees) | 0.58% | 1.58% | 2.78% | 5.59% | 5.69% | 5.64% |
| RBA Cash Rate | 0.18% | 0.43% | 0.52% | 0.54% | 0.29% | 0.29% |
| Active Return (after fees) | 0.40% | 1.15% | 2.26% | 5.05% | 5.40% | 5.35% |
* Performance is based on month end unit prices before tax. Gross performance (before fees) is stated excluding all fees, costs and taxation. Net performance (after fees) is calculated after management fees and operating costs, excluding taxation. This is historical performance data. The value of an investment can rise and fall and past performance is not indicative of future performance.
Portfolio characteristics as at 30 September 2022
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 8.23% | 8.65% |
| Credit Spread | 536 bps | 586 bps |
| Interest Rate Duration (years) | 0.1 | 0.1 |
| Weighted Ave. Credit Rating | BB | BB+ |
| Deal Approval Rate | N/A | 25% |
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.