An all-weather asset class for risk-averse investors

Glenn Freeman

Livewire Markets

Having slipped under the radar of many investors so far, private debt is a relatively small but fast-growing asset class in Australia and New Zealand.

Ideally suited to conservative, income-focused investors willing to trade-off some liquidity in return for stable earnings, the local sector is valued at around $2.8 trillion in Australia and NZ$495 billion across the Tasman Sea.

In this interview, we discuss:

  • How private debt compares to fixed income more broadly
  • The best ways to assess opportunities
  • Why a narrow focus pays off
  • Some of the M&A plays on Revolution Asset Management's books and one that might end up there.

The local sector is dwarfed by the scale of the more mature markets in Europe and the US, where private capital underpins around 70% of commercial lending and banks cover the remainder. 

This scenario is reversed in Australia, but that’s a key part of the appeal for Lucie Bielczykova, CFA, associate portfolio manager at Revolution Asset Management. (And in case you're wondering, her surname is pronounced "Bee-el-chick-ova." It's a Polish name that apparently even gave Lucie's compatriots in her home country, the Czech Republic, some grief). 

“The Australia and New Zealand market is still quite immature, as reflected in the attractive risk and return profile here relative to the US and Europe, where the market is quite competitive,” says Bielczykova.

What is private debt?

The asset class spans many types of consumer and business credit. 

In Australia and New Zealand, some of the most attractive of these are private companies and leveraged buyout (LBO) funding; private and public asset-backed securities (ABS) and loans that are established to stabilise commercial real estate. 

Private debt isn’t generally well understood by end investors, being a specialised segment of the broader fixed income universe – which is itself quite complex and sometimes overlooked for this reason.

So, what drew Bielczykova to this sector? After graduating from university – around five years after relocating from her home country of the Czech Republic – she was weighing up the equities and credit areas of the market.

“I knew I enjoyed analysing corporates and businesses, and when applying for an internship I was tossing up between equities and credit,” Bielczykova says.“Rather than understanding just the high-level macro interest rates, FX and currencies, this drills into specific businesses, comparing them to others and understanding what they do.”

Having opted for an internship at fixed-income manager Kapstream – which became part of Janus Capital Group in 2015 and then of the merged entity Janus Henderson Group after 2017, it came down to people.

“After interviewing with several shops, I felt like Kapstream was a great fit, it just felt right,” says Bielczykova. And as it turns out, she met two of her current colleagues while at Kapstream – David Saija and Bob Sahota, executive director and managing director at Revolution Asset Management, who soon left to establish the company.

After working at Kapstream, she tried a few other roles, working at Challenger and at JANA.

 “But I eventually pivoted back to private credit, and ever since I first got involved in private debt, I always reflected on that as having been the most exciting work,” Bielczykova says.

The first major deal she worked on here was essential services and infrastructure services firm Ventia, which works primarily on toll roads and utilities. Revolution Asset Management has been a backer of the company for years, which is now tipped to be headed for an IPO. “We’ve been along on the journey for a long time, including when it bought Broadspectrum last year, which basically doubled the size of the business,” says Bielczykova.

Comparing the private credit space to fixed income more broadly, her field is highly illiquid, with capital usually wrapped up for between five and seven years. 

In seeking to explain how private debt works, she compares it to the distinction between public equity markets – listed companies – and the private equity or unlisted company space. “It’s a similar proposition, just in the debt part of the capital structure." 

Compared to traditional bonds, there's no duration in loans, where everything is floating rate.

 "Everything in our space is priced at a floating rate plus margin. If you’re worried about inflation going up or down, that’s not really a concern for us. We participate both on the way up and the way down,” Bielczykova says.

“Whatever we do in the leveraged buyout space is secured against the company’s assets, so if anything goes wrong, we’re one of the first in line to get our money back. We sit at the top of the capital structure.”

Loans have traditionally been dominated by big banks, but as Bielczykova notes, the changing environment of tighter capital requirements is creating further opportunities for private capital to fund businesses and transactions.

“Our key exposure is credit risk. The main things we look at are fundamental analysis – we focus on bottom-up research, we analyse the company and its operations to understand the company and its competitors." 

“As credit investors, we focus on the downside in asking what might go wrong. Rather than being top-down we focus very much on the underlying businesses. 

It’s an all-weather asset class if you play within the defensive space and get the companies right – our focus is on market-leading businesses in stable industries – so we don’t necessarily care whether there is a huge selloff in credit markets tomorrow because that doesn’t affect us at all." 

As long as the company itself is doing well, we don’t care where spreads are going. But you have that pure credit exposure and credit risk from the companies we pick. Selecting the right companies for the portfolio is really key”.

Bielczykova mentions this emphasis on understanding companies inside out several times during our conversation. And it comes up again when I ask whether Revolution Asset Management’s decision to focus solely on the less mature private debt markets of Australia and New Zealand – ignoring the far larger US and European markets – stifles its potential.

“We get paid for the illiquidity of the Australian market. And the reason we are focused on these countries is because we’re here on the ground, we understand these businesses inside out,” Bielczykova says.
“If we were investing in a European business from out here, we wouldn’t know the companies anywhere near as well.”

She also emphasises that the local market remains quite a niche versus the US and Europe and commercial lending is gradually becoming less bank dominated.

“As time evolves and banks pull out of this area, due to capital burden and as they might have caps on exposures, that creates opportunities for us. And that’s reflected in the risk and return profile when you compare it to the US and Europe, where the market is quite competitive,” Bielczykova says.

M&A: an alternative entry point

It might surprise some investors to know that private debt also provides a rich vein of access to the raft of mergers and acquisition activity that’s been a feature of 2021 so far. As an example of ways that Revolution Asset Management takes a role, Bielczykova again points to Ventia, which acquired Broadspectrum last year – a formerly ASX-listed company – and then took it private, which provided a huge scale boost to the merged entity.

“Now that it’s tapped to IPO, at that point it rolls off private equity ownership and enters the listed space, at which point we typically get our money back as the whole capital structure gets refinanced. 2021 has been particularly active in M&A with some mega-deals, including some large, listed companies that have been taken private".

Some recent examples here include:

  • Vocus Telecommunications (ASX: VOC) – delisted at the end of June
  • Bingo Industries (ASX: BIN) - which delisted in mid-July

The other mega deal in the pipeline for this year is Colonial First State – where private equity giant KKR is taking a 55% stake from CBA.

“These are all assets that we would look at in potentially funding the acquisitions.

There’s also been increased activity in refinancing – companies that are already owned by private equity. “That means they can look at what margins they’re paying on loans if they performed strongly and naturally de-levered, and whether they can consolidate or top up their debt. We have companies like Arnott’s Biscuits, which is owned by a private equity sponsor and recently refinanced its debt, in our portfolio.”

Looking to learn more about the role of private debt in a balanced portfolio?

Defensive, capital-protected, private debt is becoming increasingly appealing to investors as a viable asset class for a number of reasons. Unlike many assets, this strategy generates income through market cycles and it can provide diversification away from the publicly listed, big-four Australian banks and broader market movements.

For more information visit the Revolution Asset Management website or send an enquiry using the 'contact' button below.

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Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has almost 20 years’ experience in financial services writing and editing. Glenn’s journalistic experience also spans energy and automotive, in both Australia and abroad – including the...

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