Market overview
The world continues to muddle through the current macroeconomic environment that is seeing higher interest rates, still-elevated pricing pressures and generally weaker (and weary) consumers. However, some countries have seen a sharper deterioration in the economic environment than others, with New Zealand already in recession and many others around the world expected to follow suit.
Closer to home, the Reserve Bank of Australia (RBA) maintains its wait and see approach – having not raised the overnight cash rate since the June hike of 25 basis points, which brought it to 4.10%. As the Consumer Price Index (CPI) trended lower over the last few quarters, the key question is whether this trend will persist. This uncertainty arises from the sharp increase in the oil price over the quarter and the current geopolitical instability in the Middle East, which not only has the potential to trigger additional oil price increases, but also contributes to market volatility and potential inflationary pressures. While inflation has been softening in Australia, a key risk is that it remains sticky and takes longer to moderate to the RBA’s target of 2-3%, which could see interest rates stay higher for longer.
While consumer sentiment remains weak, the general health of the consumer remains sound. Residential mortgage arrears have stabilised at pre-COVID levels, the housing market has rebounded from its previous lows, and unemployment rates remain very low. The expectation is that the unemployment rate will increase over the next few quarters and economic conditions will soften somewhat, particularly as low fixed mortgage rates offered during the COVID-19 period continue to run-off and households revert to much higher variable or fixed rate mortgages. Consequently, this shift is expected to result in moderated spending patterns and a deceleration in economic growth.
The uncertain economic backdrop and the expectation of further weakness and volatility ahead have prompted investors to adopt a risk-averse approach, favouring defensive assets like private debt. These assets offer a combination of stable, non-correlated income streams and a strong emphasis on security and capital preservation. This has led to strong capital inflows during the quarter, as witnessed in previous quarters. Revolution has been able to readily deploy this capital into opportunities that meet our strict investment criteria.
Maintaining a rigorous credit approach
Revolution continues to exercise a high degree of credit discipline to ensure all portfolio investments can withstand periods of economic weakness. Our due diligence process for leveraged buyout investments continues to focus on market-leading businesses in non-cyclical industries with strong barriers to entry, where extensive financial analysis and significant downside modelling is undertaken to determine the overall resilience of the borrower under various circumstances. In Asset Backed Securities, we focus on well-established non-bank lenders across mortgages, auto loans, personal loans, credit cards, equipment and invoice finance, with a detailed due diligence process that assesses underlying loans to ensure stringent lending standards are upheld and exposure to prime borrowers is maintained.
Furthermore, Revolution takes pride in its robust governance framework, whereby an independent third party conducts monthly assessments of each loan, in accordance with the Revolution Credit and Valuation Policy, to determine its carrying value. We are confident that our strict credit discipline and stringent investment process have led to the formation of high-quality portfolios that are expected to deliver the target yield for our clients.
Fund II – Portfolio and Pipeline Review
The Revolution Private Debt Fund II (Fund II) currently has a total fund size of A$1,915.4m. Fund II has outperformed its target return of cash plus 4% to 5% p.a. (net of fees and expenses) since inception. The objective of Fund II is to achieve this return 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 II being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans.
Fund II held a total of 49 loans as at 30 September 2023, with an average expected life of the portfolio being 1.2 years. The portfolio yield is 10.0%, with a credit spread of the portfolio above BBSW of 580 basis points (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 increased heading into the last quarter of the year. The ABS market also remains active. Revolution has been focused on upsizing and repricing many of our existing private warehouse investments. Additionally, Revolution continues to find and capitalise on attractive secondary market opportunities across sectors.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$125.6m. There is a cash buffer retained 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 17 loans as at 30 September 2023, with the average expected life of the portfolio being 1.3 years. The portfolio yield is 9.8% and the credit spread of the portfolio above BBSW is 567 basis points. The average credit rating of the portfolio is BB-.
Source: Revolution Asset Management. See below for defined terms.
Revolution Private Debt Fund II (CHN3796AU)*
Performance as at 30 September 2023. Open for investment.
| 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) | 0.47% | 1.98% | 3.97% | 7.98% | 6.78% | 6.45% | 6.26% |
| RBA Cash Rate | 0.32% | 1.02% | 1.98% | 3.53% | 2.02% | 1.36% | 1.15% |
| Active Return (after fees) | 0.15% | 0.96% | 1.99% | 4.45% | 4.76% | 5.09% | 5.11% |
Revolution Private Debt Fund I (CHN7934AU)*
Performance as at 30 September 2023. Closed to new investors.
| 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) | -1.31% | -0.82% | -0.86% | 1.27% | 2.46% | 3.17% | 3.95% |
| RBA Cash Rate | 0.32% | 1.02% | 1.98% | 3.53% | 2.02% | 1.36% | 1.16% |
| Active Return (after fees) | -1.63% | -1.84% | -2.84% | -2.26% | 0.44% | 1.81% | 2.79% |
* 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 30 September 2023
| Fund characteristics | Fund II | Fund I |
|---|---|---|
| Yield to Maturity | 10.0% | 9.8% |
| Credit Spread | 580 bps | 567 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.