In this interview, we explore portfolio manager Lucie Bielczykova’s insights into the emerging themes shaping the private debt market and its future path. She also discusses the expansion into new markets and shares her personal journey into private debt, and the motivating factors that influenced her career path.

How did you get started in private debt investing?

I came across private debt in my first role in the industry where I was working alongside my current colleagues and co-founders of Revolution Asset Management, Bob Sahota and David Saija. My very first exposure was learning about the asset class to come up with our pitch book for the strategy, and the very first deal I looked at was an infrastructure services company, Ventia. I developed a passion for this work from the very beginning, and what initially drew me to it remains just as compelling today. With every deal we assess and close, we are enabling the growth of local private business and as a financier, we become their critical business partner.

When I first got involved in Ventia, it was under the ownership of private equity firm, Apollo. The company had performed very well since Apollo’s acquisition and we financed a dividend recapitalisation on the back of strong earnings growth. Years later, Ventia acquired Broadspectrum and the Revolution Asset Management team supported the acquisition with a new financing package. So, when I eventually joined Revolution Asset Management, it was great to see Ventia in the portfolio yet again. We had really been along for the ride from its inception until it eventually entered the public company domain when it got listed on the ASX in late 2021.

I’ve had the privilege of learning from some of the most respected investors in the country. Bob and David, in particular, possess a wealth of experience in private debt, and they have generously shared their knowledge and allowed me to build my expertise under their mentorship.

Today, our Australian and New Zealand private debt portfolio comprises 18 private companies that we provide lending to, with several others having been financed and successfully repaid. We make sure to choose to finance market leading businesses in stable industries that can withstand any macroeconomic conditions, and it is incredibly satisfying to watch our companies expand and thrive through their lifecycle.

What are the key themes that you are seeing in the private debt market currently?

The biggest theme of all that we are seeing is the popularity and inflows into the asset class. This has been particularly pronounced in the last 18 months, as the RBA has gone through its rate hiking cycle. Because private debt assets are floating rate, rate hikes have translated into higher yields. Private debt investors typically earn 4-6% margin over the cash rate on defensive assets (although margins can range all the way to double digits for high-risk private credit such as construction and development financing, bilateral lending to SMEs and special situations ― although these sectors are not part of the core sub-sectors at Revolution Asset Management). So defensive portfolios are now earning north of 10% yield, which is very attractive in the current environment.

From a market perspective, we have had a relatively quiet 2023 in M&A transactions (which we would typically finance) on the back of the above-mentioned hiking cycle which brought uncertainty to the cost of capital for private equity sponsors. While we still kept very busy with bolt-on financing and secondary trades, now that the outlook for interest rates has stabilised somewhat, we expect M&A activity to rebound. A significant amount of dry powder (capital) remains uninvested, awaiting deployment, and discussions are already underway regarding upcoming primary transactions.

The outlook for 2024 for pricing and terms is yet to be seen, but the market certainly feels a bit bifurcated. The entrance of offshore funds into the Australian market, has led to the acceptance of more aggressive terms such as higher leverage and capitalised payment in kind (PIK) interest at a higher price. Meanwhile, local private debt funds including Revolution Asset Management have adopted a more defensive stance, pivoting to terms and pricing more akin to traditional bank financing, requiring covenant packages as a protection in the current uncertain economic environment.

What makes you constructive for the future of private debt?

Private debt will continue to be an important source of credit and is here to stay! Private debt is essentially non-bank lending and mostly provides financing to unlisted entities. While this lending domain was traditionally dominated by banks, it has gradually become accessible to investors in Australia and New Zealand over recent years. This shift occurred as banks withdrew from certain lending activities, particularly following the GFC when regulatory changes imposed high capital charges, making such lending activities challenging for them.

This shift has opened up the opportunity for institutional lending, fuelled by investments from various sources including superannuation funds, insurers, not-for-profits, family offices, and high net worth individuals. These investors are attracted to the potentially appealing risk/return profile offered by private debt, including floating rate yield, low volatility, and the potential for capital stability.

While it is now becoming more understood domestically, we still have a long way to go. You only need to look at the US where private debt has been a structural component of the US lending market for a long time. In fact, some statistics report that 80% of all lending in the US originates from private capital, with banks only accounting for about 20%. And it’s a similar trend in Europe. However, in Australia, we have yet to reach such levels, indicating that there’s still a significant distance to cover. As Australian investors become further acquainted with this ‘new’ asset class, I am confident that private debt will increasingly become a core part of long term structural asset allocation. Several factors contribute to this trend; investors are becoming more sophisticated, they continue to allocate to alternative assets, diversifying away from high beta and high duration traditional equities and bonds, and they are drawn to the potentially attractive characteristics that private debt can offer.

“The biggest theme of all that we are seeing is the popularity and inflows into the private debt asset class. Interest rate hikes have translated into higher yields and defensive private debt is now earning north of 10% yield, which is attractive in the current environment.”

To what extend do you see New Zealand as a growth market for private debt?

When it comes to investing, New Zealand is always a little bit behind Australia, just like Australia lags behind the US. So asset allocation to private debt in New Zealand is still quite nascent, but New Zealand investors are rapidly becoming interested in private debt, recognising the attractive characteristics that private debt offers. On the back of this growing interest, Revolution Asset Management has recently launched a New Zealand PIE (Portfolio Investment Entity) fund which provides New Zealand investors domestic access to our flagship Australian and New Zealand private debt strategy, with strong seed capital initially received.

From a deal perspective, we like investing in New Zealand, as the market has less competition and typically offers even larger illiquidity and complexity premia compared to Australia. We currently have over A$300m invested in New Zealand, which is around 14% of our A$2.2 billion flagship fund. The smaller size of the New Zealand market poses challenges for local investment strategies, mainly due to its focus on volatile sectors such as agriculture and forestry. This volatility makes leveraged investments less suitable. As a result, New Zealand investors prefer strategies that combine Australian and New Zealand exposures. These blended strategies allow for domestic investment support while ensuring access to a broader universe, more robust deal flow and overall diversification.

You are one of few female fund managers in the private debt market in Australia. How have you succeeded and what can the industry do differently to attract a more diverse workforce?

I believe by following your passion and doing what you really enjoy will always set you up well. No matter what that looks like, finding what it is, is the key to success in my view. When you’re genuinely interested in a subject, you’ll naturally invest the extra time in learning about it, driven by curiosity rather than obligation.

But passion may not be enough on its own, you also need to surround yourself with people that you can learn from, because that’s how you build your expertise.

I think we should all be more open and willing to share our time and knowledge with others. Whether though mentoring, early engagement at universities, or offering internships to inspire the next generation of female leaders to explore investment management. While the previous generation may have been drawn to careers as social media influencers, there is a lot of value in igniting interest in finance for the next generation! We each have a role to play in attracting talent and providing support along their journey. It has certainly been instrumental in my own career.

How do you consider sustainability and how does it continue to motivate you?

Sustainability is at the heart of every loan we make. Private markets are generally illiquid, which means that unlike traditional asset classes such as equities or bonds, you cannot trade in and out of a position. Once we commit to a loan, it typically spans 5-7 years, earning us a handsome illiquidity premium. So, we really need to make sure that our assets are sustainable and ‘future proof’. At the end of our holding period, there needs to be capital coming to refinance our loan, and that’s why sustainability is imperative in our investment decisions.

We maintain a robust responsible investment process with very strict criteria for loan selection in our portfolio. While we take pride in the loans that we have made, we take even more pride in the loans that we reject. Companies make headlines for the wrong reasons, and we have a strong track record of declining funding to such companies. Ultimately, we think about ESG risks as a part of a holistic credit assessment, and the performance of the overall portfolio evaluated from both financial and ESG perspectives, continuously provides feedback, informs and refines our approach.

What’s the best piece of investment advice you’ve ever been given?

The best investment advice I ever received (read) was from reading Howard Marks’ insights on tail risk. He has spoken about tail risk across an endless number of his articles and books and I really took his perspective to heart, that is, that in credit, all the risk that you face is in the tail.

Credit is all about the downside. There is no upside for us, we simply make a loan, collect interest and get repaid at the loan maturity – assuming all has gone to plan. So, there is no way to ‘make up’ for bad loans with good loans, like you can in equity investing. And that means that your best loans do not matter. It is the worst loans that do because that is what defines your risk of capital loss.

This principle guides me through every new deal and due diligence, to ensure that the portfolio remains robust throughout market cycles.