Market overview
The June 2022 quarter was a pivotal period for markets – whether for inflation prints, central bank actions, the ongoing volatility in risk assets, and M&A activity which transitioned from an all-time high to a much quieter period by the end of the quarter.
The second half of calendar year 2022 promises to deliver both challenges and opportunities in equal measure for investors. After such a long period of easy monetary policy and fiscal stimulus, financial markets are now having to grapple with inflation – an enemy of economic prosperity that the world has not had to contend with since the 1990’s. Under this environment, central banks around the world have adopted an aggressive stance of proactively tightening monetary policy to avoid inflation getting out of control while walking a fine line to not cause economic recession in their respective jurisdictions. Through tightening of monetary policy and a reversal of quantitative easing, there will be an inevitable drop in money supply, and this has traditionally led to liquidity shocks, with capital market activity falling. Under these conditions, it will be more difficult for companies and consumers alike to refinance existing debt as borrowing costs are expected to increase through higher base interest rates and credit margins demanded by lenders for the provision of debt capital. In these periods, we expect to see an overall higher level of corporate and consumer defaults in the market.
At Revolution, these are the exact scenarios that are modelled from a fundamental basis every time a loan is made. This is done to maintain the ethos and philosophy of the firm to focus on capital preservation through the cycle. In practice, this means that only those counterparties that display greater resilience through all market conditions are advanced loans by Revolution.
In relation to corporate and leveraged buy-out loans, these are companies that occupy high market leadership positions within their industries, with strong barriers to entry. Importantly, these companies have the ability to pass on higher input costs (labour, interest costs or raw materials) in order to preserve margins. The best examples include sectors such as consumer staples, mission critical software and healthcare. We actively avoid cyclical/discretionary sectors and weaker borrowers that have to bear the full impact of higher inflation such as retail, tourism, hospitality and mining.
In relation to Asset Backed Securities (ABS), we target the more established non-bank lenders that have high credit underwriting standards and target the prime end of borrowers. These borrowers have a greater ability to weather a period of higher living expenses as they have more savings and assets to draw on should a recession eventuate. Current performance for all ABS loans is very sound, being monitored by the Revolution investment team on an ongoing basis.
We have been extremely selective on the real estate sector and only sought to lend to established real estate with sound underlying tenant cashflows. We do not lend to property construction and development. The avoidance of this sector has been vindicated by the constant news flow of property developers entering receivership across Australia in the recent months.
Having had experience managing private debt portfolios through full market cycles and periods of volatility that lead to liquidity shocks in capital markets, we expect attractive opportunities to arise from this market backdrop. This reinforces Revolution’s philosophy of patient capital, which can be deployed in times of market dislocation. Where other managers or banks become forced sellers of otherwise sound loans or secured bonds at discounts, we are able to purchase these loans and bonds at very attractive prices/spreads. This was witnessed during the brief period of market dislocation in March/April 2020 when Covid-19 first emerged, where we were able to purchase high-quality assets at attractive prices as there was limited liquidity in the market.
We remain vigilant for such opportunities to emerge that will greatly assist in delivering our targeted return while maintaining a high credit quality and discipline.
Fund I – Portfolio and Pipeline Review
The Revolution Private Debt Fund I (Fund I) currently has a total fund size of A$200.8m of which total investments (excluding cash and hedges) that have been made as at 30 June 2022 are A$196.5m. 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). The objective of Fund I is to achieve this return with low volatility and with the benefit of having security over underlying assets.
During portfolio construction, we 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.
As at 30 June 2022, Fund I held a total of 23 loans with an average remaining life of the portfolio of 1.2 years. The credit spread of the portfolio above BBSW is 540 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 6.85% (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$1,352m of which total investments (excluding cash and hedging) that have been made as of 30 June 2022 was A$1,242m. This is a pleasing rate of deployment since inception of the Fund 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). The objective of Fund II is to achieve this return with low volatility and with the benefit of having security over underlying assets.
During portfolio construction, we maintained strong credit discipline based on relative value across the three key focus areas of the Fund II being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans.
As of 30 June 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 576 bps – which is above the stated target of the Fund and the average credit rating of the portfolio is BB+ with an estimated yield to maturity of 7.21% (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.
Revolution Private Debt Fund I (CHN7934AU) – Performance as at 30 June 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 (before fees) | 0.45% | 0.55% | 1.81% | 4.56% | 4.99% | 5.41% | 5.63% |
| RBA Cash Rate | 0.06% | 0.08% | 0.10% | 0.11% | 0.09% | 0.28% | 0.46% |
| Active Return (before fees) | 0.39% | 0.47% | 1.71% | 4.45% | 4.90% | 5.13% | 5.17% |
| Fund I (after fees) | 0.39% | 0.37% | 1.44% | 3.78% | 4.21% | 4.58% | 4.71% |
| RBA Cash Rate | 0.06% | 0.08% | 0.10% | 0.11% | 0.09% | 0.28% | 0.46% |
| Active Return (after fees) | 0.33% | 0.29% | 1.34% | 3.67% | 4.12% | 4.30% | 4.25% |
Revolution Private Debt Fund II (CHN3796AU) – Performance as at 30 June 2022*
| Return | 1 month | Rolling quarter | 6 months | 1 year | 2 years p.a. | Since inception p.a. (31 Dec 2019) |
|---|---|---|---|---|---|---|
| Fund II (before fees) | 0.53% | 1.36% | 2.92% | 6.35% | 6.40% | 6.42% |
| RBA Cash Rate | 0.06% | 0.08% | 0.10% | 0.11% | 0.09% | 0.15% |
| Active Return (before fees) | 0.47% | 1.28% | 2.82% | 6.24% | 6.31% | 6.27% |
| Fund II (after fees) | 0.47% | 1.18% | 2.55% | 5.58% | 5.57% | 5.56% |
| RBA Cash Rate | 0.06% | 0.08% | 0.10% | 0.11% | 0.09% | 0.15% |
| Active Return (after fees) | 0.41% | 1.10% | 2.45% | 5.47% | 5.48% | 5.41% |
* Performance is based on month end unit prices before tax. Gross performance (before fees) is stated excluding all fees and costs. 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.
Portfolio characteristics as at 30 June 2022
| Fund characteristics | Fund I | Fund II |
|---|---|---|
| Yield to Maturity | 6.85% | 7.21% |
| Credit Spread | 540 bps | 576 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.