Market overview
The first calendar quarter has been somewhat of a wild ride for financial markets with investors oscillating between greed and fear in equal measure. The rapid withdrawal of easy monetary and fiscal policy over the last 12 months has led to some very high-profile bank failures like Silicon Valley Bank, Signature Bank and Credit Suisse being forcibly acquired by UBS. Furthermore, the threat of inflation getting further outside of central bank target ranges means that there is a constant debate between rising interest rates versus sending economies into deep protracted recessions.
Recently the consensus has moved firmly in the direction of the US economy going into recession later this year with Europe following. In Australia, there is more optimism, but this is fading in light of the RBA pausing on further interest rate rises at the April meeting. While this is a near term relief for many that are already feeling the effects of sharply higher cost of living pressures, it means that Australia will be importing inflation from other countries and that it will take longer to tame inflation in the long run.
In this environment where we expect there will be higher volatility and uncertainty, many have chosen to allocate to the relative calm that the private debt asset class offers as many private debt managers correctly point out key positive attributes of private debt being floating rate, less correlation to public markets, steady income, security over companies/assets and loan covenant protection. However, one should be acutely aware that with higher inflation and interest rates there is also a higher level of default risk of companies no longer able to maintain profitability and hence meet their debt obligations. Therefore, not all private debt strategies will perform in the anticipated environment.
The fact that private debt investments in Australia and New Zealand are illiquid means that a considerable amount of credit discipline must be exercised in constructing portfolios that are able to withstand periods of macroeconomic weakness, as there is no ability to trade out of loans should the manager become uncomfortable with the outlook of a company or investment. As such, being able to select only those loans that remain faithful to a stated risk/return and investment philosophy will thrive in the current environment, hence manager selection is paramount in private debt.
Revolution seeks to deliver an investment objective of RBA cash plus 4% to 5% p.a. (net of fees and expenses) through the full cycle. Investments in Revolution portfolios are carefully selected in non-cyclical industries and businesses where the company is a market leader with high barriers to entry from a leveraged buyout perspective. In Asset Backed Securities (ABS), loans are made to dedicated special purpose vehicles originated by profitable and well-established non-bank lenders across a variety of loan types including mortgages, auto loans, personal loans, credit cards, equipment and invoice finance.
In its due diligence, Revolution thoroughly analyses the prospective borrower’s financial information, model projections and conducts downside sensitivity analysis to assess how resilient the loan is to various external and internal input shocks. As such, all loans are subject to rigorous testing to be able to withstand the deterioration of macroeconomic conditions, higher interest rates and inflation.
Furthermore, there is a strong level of governance embedded in the Revolution process. A third-party valuation expert is retained by the responsible entity of the funds to report on the health of each loan monthly based on timely private side information.
As we approach a period of deteriorating economic conditions, Revolution remains confident that its conservative and disciplined approach to portfolio construction will continue to underpin strong performance through the cycle.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$193.4m. There is a cash buffer retained in the Fund for hedging purposes which means that Fund I is currently fully deployed.
The objective of Fund I is to actively invest in a portfolio of Australian and New Zealand loans and ABS with the target return of cash plus 4% to 5% p.a. (net of fees and expenses) with low volatility and with the benefit of having security over the underlying assets.
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.
Fund I held a total of 21 loans as at 31 March 2023, with the average expected life of the portfolio being 1.2 years. The portfolio yield is 9.05% and the credit spread of the portfolio above BBSW is 538 bps. The average credit rating of the portfolio is BB.
Fund II – Portfolio and Pipeline Review
The Revolution Private Debt Fund II (Fund II) currently has a total fund size of A$1,640.6m.
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.
Fund II held a total of 45 loans as at 31 March 2023, with an average expected life of the portfolio being 1.6 years. The portfolio yield is 9.55% which is above the stated target of the strategy, with a credit spread of the portfolio above BBSW of 602 bps. The average credit rating of the portfolio is BB+.
The deal pipeline in Australia and New Zealand remains robust, which should allow for continued strong deployment. In LBO, activity has rebounded strongly after a slowdown in primary activity towards the end of 2022 and very early 2023. The ABS market has continued its slower activity on the back of lower non-bank origination in some sectors such as mortgages, offset by strong origination and growth in areas like auto. Additionally, Revolution continues to find and capitalise on attractive secondary market opportunities.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 31 March 2023*
| 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) | 0.67% | 0.76% | 2.15% | 3.58% | 4.07% | 4.27% | 4.63% |
| RBA Cash Rate | 0.30% | 0.82% | 1.52% | 2.04% | 1.04% | 0.72% | 0.83% |
| Active Return (after fees) | 0.37% | -0.06% | 0.63% | 1.54% | 3.03% | 3.55% | 3.80% |
Revolution Private Debt Fund II (CHN3796AU) – Performance as at 31 March 2023*
| Return | 1 month | Rolling quarter | 6 months | 1 year | 2 years p.a. | 3 years p.a. | Since inception p.a. (31 Dec 2019) |
|---|---|---|---|---|---|---|---|
| Fund II (after fees) | 0.75% | 1.92% | 3.85% | 6.74% | 6.24% | 6.22% | 5.98% |
| RBA Cash Rate | 0.30% | 0.82% | 1.52% | 2.04% | 1.04% | 0.72% | 0.72% |
| Active Return (after fees) | 0.45% | 1.10% | 2.33% | 4.70% | 5.20% | 5.50% | 5.26% |
* Performance is based on month end unit prices before tax. 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. ** The comparison to the RBA Cash Rate is displayed as a reference to the target return for the fund and is not intended to compare an investment in the fund to a cash holding. Loans held by the fund are subject to borrower default risk and as such the fund is of higher risk than an investment in cash.
Portfolio characteristics as at 31 March 2023
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 9.1% | 9.6% |
| Credit Spread | 538 bps | 602 bps |
| Interest Rate Duration (years) | 0.1 | 0.1 |
| Weighted Ave. Credit Rating | BB | BB+ |
Source: Revolution Asset Management. See below for defined terms. These ‘forward-looking statements’ are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed. Although we believe that the Fund’s anticipated future results, performance or achievements expressed or implied by those forward-looking statements are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements.
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. Annualised Net Return is the monthly net return of the Fund annualised for the next 12 months.
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.