Market overview
Against the macroeconomic backdrop of ‘higher for longer’ interest rates, Revolution has experienced an increase in inflows primarily from wholesale high net-worth clients. These clients are seeking a high and steady income stream that is not correlated to the broader public markets, with a high degree of capital stability. Revolution fulfills this need through a well-diversified and carefully originated pool of loans, thoroughly vetted and stress-tested through recessionary scenarios to ensure resilience.
With increased interest rates, there has been a proliferation of new entrants looking to establish private debt/credit funds which have a full spectrum of risk and returns that they aim to deliver to clients. In fact, Revolution has noted the emergence of over 200 private debt managers now active in Australia – a staggering number from a very low base only two years ago. A vast majority of these managers are focused on real estate construction and development loans and are sub-A$200 million in size.
Capital preservation drives our investment approach
At Revolution, we have always had a core philosophy of capital stability and hence cyclical industries have never been part of the investment thesis of the firm. Consistent with this philosophy, Revolution has not made any real estate construction loans in the history of the firm and will not do so in the future. This conservative approach has held the firm in good stead as the number of property developers and builders entering administration and liquidation has increased over the past two years. There is considerable stress in this sector as well as other sectors such as hospitality and retail where inflationary pressures have significantly impacted profitability.
Overall, Revolution’s strategy dictates maintaining a strong level of discipline in only making those loans that are able to withstand a full market cycle in order to achieve our stated target returns for investors. The fact that all 54 loans within the portfolio are performing as separately and independently verified by a third-party valuation firm every month is a real point of differentiation of Revolution’s robust governance relative to the myriad of other funds that are operating in Australia and New Zealand.
Fund II – Portfolio and Pipeline Review
The Revolution Private Debt Fund II (the Master Fund) has a total fund size of A$2.3 billion, as at 31 March 2024. The Master Fund has been performing well, outperforming 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 Fund being: Australian and New Zealand Leveraged Loans (LBO), Asset Backed Securities (ABS) and Real Estate loans.
The Master Fund held a total of 54 loans as at 31 March 2024, with an average expected life of the portfolio being 1.1 years. The portfolio yield 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 quarter. The ABS market also remains active. Revolution has been focused on upsizing and repricing many of its existing private warehouse investments. 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 31 March 2024. Open for investment.
| 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) | 0.72% | 2.33% | 8.51% | 7.83% | 7.13% | 6.67% |
| RBA Cash Rate | 0.33% | 1.07% | 4.16% | 3.10% | 2.07% | 1.52% |
| Active Return (after fees) | 0.39% | 1.26% | 4.78% | 4.73% | 5.06% | 5.15% |
* 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 31 December 2023
| Fund characteristics | Fund II |
|---|---|
| Yield to Maturity | 10.3% |
| 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 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 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.