Market overview
Financial markets seem fixated on a “soft landing” scenario for most developed economies, fuelled by the US seemingly winning the battle against inflation. The US Federal Reserve’s 50 basis point rate cut in September, followed by a similar move from New Zealand, has acted as a catalyst for equity markets, pushing them to once again test all-time highs. In Australia, the peak in interest rates was not has high as other countries so there has not been the impetus for the RBA to cut rates, with Governor Michele Bullock signalling no prospect of a rate cut this side of Christmas. Overall, it seems very unlikely that we will see a return to a period of ultra-low interest rates, as policy “neutral” rates are expected to remain materially higher than the near zero levels maintained over a protracted period.
Meanwhile private credit has entered a “golden age”, gaining widespread attention from both institutional and retail investors due to its defensive, non-correlated nature, particularly in the context of rising and higher interest rates. However, not all private credit strategies are built the same. We believe that long-term success in this asset class depends on strong investment principles and avoiding the temptation of short-term, high-risk tactics.
Private credit managers operating in Australia and New Zealand face unique challenges compared to their US and European counterparts due to the illiquid nature of the market. Unlike in other regions, private credit loans in Australian and New Zealand cannot be easily traded on secondary markets. As a result, and hence private credit managers must conduct even more rigorous and robust due diligence before committing to loans, especially in the current environment of slowing economies with record high corporate insolvencies. This careful selection process by Revolution is crucial for our investors to achieve their desired returns in the asset class.
We strongly believe that fees generated from lending activities belong to our investors, not fund managers. That’s why we pass on all lending / upfront / structuring / establishment fees (and any other creative names it would go by) directly to investors, ensuring alignment of interests. We don’t charge a performance fee either because we focus on stable, non-cyclical businesses and believe performance fees can create misaligned incentives, encouraging higher risk strategies. Our approach is about stability and transparency, not chasing high risk returns.
Our strategy benefits from a focused investment universe, and diversifies across senior secured loans, Asset Backed Securities, and real estate loans (non-construction or development). This allows us to target returns of RBA Cash Rate plus 4% to 5% p.a. (net of fees and expenses) since inception while building a portfolio of over 50 loans. Unlike many new or global players, we focus on more conservative opportunities that align with our capital preservation philosophy.
We also stand out because of our experience through full economic cycles. Since 2005, we’ve navigated challenging conditions like the GFC, while maintaining strong credit discipline. In Australia and New Zealand’s illiquid loan markets, this experience is crucial to avoid poor lending decisions that can result in losses during economic downturns.
Unlike some private credit managers, we don’t “barbell” our portfolio with high risk, high return loans. Our focus is to maintain a non-barbell strategy, targeting loans in a range that balances risk and return without stretching into unnecessary risks.
As private credit continues to grow, we welcome greater scrutiny and regulatory oversight. Revolution’s approach is built on strong governance, transparency, and a solid foundation – principles that ensure long-term success for our investors.
For a detailed explanation on our risk averse approach, read our latest article, The Importance of Rock-Solid Foundations vs Sandcastles in Private Credit Strategies.
Portfolio and pipeline review
The Revolution Private Debt Fund II (the Master Fund) has a total fund size of A$2.60 billion, as at 30 September 2024. The Master Fund has been performing well, meeting its target return of cash plus 4% to 5% p.a. (net of fees and expenses) since inception. The objective of the Master Fund 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 the Master Fund being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans.
The Master Fund held a total of 53 loans as at 30 September 2024, with an average expected life of the portfolio being 1.1 years. The portfolio yield to maturity is 10.3%, with a credit spread of the portfolio above BBSW of 577 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 second half of the year. The ABS market also remains active. Revolution has been focused on upsizing many of its existing private warehouse investments as the size of facilities and fund’s appetite grows in tandem. Additionally, Revolution continues to find and capitalise on attractive secondary market opportunities across sectors.
Source: Revolution Asset Management. See below for defined terms.
Revolution Private Debt Fund II (CHN3796AU)*
Performance as at 30 September 2024.
| Return | 1 month | Rolling quarter | 1 year | 2 years p.a. | 3 years p.a. | Since inception p.a. (31 Dec 2019) |
|---|---|---|---|---|---|---|
| Fund II (after fees) | 0.71% | 2.24% | 9.47% | 8.72% | 7.67% | 6.92% |
| RBA Cash Rate | 0.37% | 1.12% | 4.42% | 3.97% | 2.81% | 1.83% |
| Active Return (after fees) | 0.34% | 1.12% | 5.05% | 4.75% | 5.86% | 5.09% |
* Performance is for the Revolution Private Debt Fund II – APIR: CHN3796AU, and is based on month end unit prices before tax. 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. The comparison to the RBA Cash Rate is displayed as a reference to the target return for Fund II and is not intended to compare an investment in Fund II to a cash holding. Loans held by Fund II are subject to borrower default risk and as such Fund II is of higher risk than an investment in cash.
Portfolio characteristics as at 30 September 2024
| Fund characteristics | Fund II |
|---|---|
| Yield to Maturity | 10.2% |
| Credit Spread | 577 bps |
| Interest Rate Duration (years) | 0.1 |
| Weighted Ave. Credit Rating | 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 Master 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.
Definition of terms
- 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.
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 has been prepared by the Investment Manager, Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’). Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (‘CIML’) is the trustee and issuer of units in the Revolution Private Debt Fund II and Revolution Wholesale Private Debt Fund II (collectively ‘the AU Funds’). Channel Capital Pty Ltd ACN 162 591 568 AR No. 001274413 (‘Channel’) is Revolution’s non-investment services provider and the holding company of CIML.
FundRock NZ Limited is the issuer of units in the Revolution Private Debt PIE Fund (NZD) (the ‘NZ Fund’). Public Trust is the independent trustee of the Scheme of the Fund. Revolution is the appointed Investment Manager for the NZ Fund. Refer to fundrock.com/fundrock-new-zealand for more information. The NZ Fund is intended for the exclusive use of wholesale investors, as defined by the Financial Markets Conduct Act 2013.
This information is supplied on the following conditions which are expressly accepted and agreed to by each interested party (‘Recipient’). The information is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. The information is not intended for any general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of Revolution and respecting Revolution and its investment activities; its use is restricted accordingly. All such information should be maintained in a strictly confidential manner. This information does not purport to contain all of the information that may be required to evaluate Revolution, or its investment strategy and the Recipient should conduct their own independent review, investigations and analysis of Revolution and its investment strategy and of the information contained or referred to in this document. Neither Revolution, Channel, CIML, FundRock NZ nor their related bodies corporate, representatives and respective employees or officers (collectively, the Beneficiaries) make any representation or warranty, express or implied, as to the accuracy, reliability or completeness of the information contained in this document or subsequently provided to the Recipient or its advisers by any of the Beneficiaries, including, without limitation, any historical financial information, the estimates and projections and any other financial information derived there from, 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 indicator of future performance. The information in this document has not been the subject of complete due diligence nor has all such information been the subject of proper verification by the Beneficiaries. Except insofar as liability under any law cannot be excluded, the Beneficiaries shall have no responsibility arising in respect of the information contained in this document or subsequently provided by them or in any other way for errors or omissions (including responsibility to any person by reason of negligence). An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. For further information and before investing, please read the offer document which is available upon request.