Private debt investments let you sleep well at night

David Thornton

Livewire Markets

Volatility is a two-way street. It can mean quick asset appreciation, but equally can mean sharp asset devaluation.

What's more, those sharp rises and falls can about-face in an instant.  

Lowering the volatility of your portfolio helps you "sleep well at night," in the words of Revolution Asset Management Chief Investment Officer Bob Sahota.  

And this is where private debt comes in. 

It avoids cyclical industries, it avoids defaults, and also distressed assets. For Revolution Asset Management, this has resulted in a consistent return of cash plus 4-5% net of fees.

Watch or read below for a deep dive on exactly how Resolution Asset Management thinks about volatility, and how its risk management process helps to mitigate it. 

Edited transcript 

How do private debt investments provide a buffer against volatility?

So the listed markets, we expect to be much more volatile this year. Private debt really is one where if you choose a good manager that avoids cyclical industries and you can avoid defaults and you can avoid genuine stressed assets, you can actually have very low levels of correlation with being able to just provide loans in the most basic form, collect interest payments and income, and then distribute that to clients. So in that way, there's much less volatility. 

In fact, at Revolution Asset Management, we have a methodology where we don't mark to market if they are forming assets. This then acts as being extremely lowly correlated or not correlated to the general markets as long as we do what our skills and experience dictate, which is not be involved in distressed or defaulting assets.

How do you manage risk?

With private debt investments, the key risk that you really need to worry about is credit default risk. So, in everything that we do in terms of our investment process, we are looking to minimise the risk of default. How do we do that? And the way that we manage that risk is to be true to label. So the DNA and our investment philosophy at Revolution Asset Management is capital preservation. How that's manifest in the sectors and industries that we target. 

We really avoid those cyclical peak to trough sectors like retail, tourism, hospitality, mining, property development. 

The kinds of sectors that we love and the ones that are fit within our investment philosophy and DNA include areas like healthcare, like lending senior secured debt alongside many other lenders to Healthscope hospitals or Arnott's Biscuits providing the senior secured debt to the acquisition finance when KKR purchased that business. We've got mission critical software like MYOB that's occupied a number one market share for 30 years where we're providing senior secured debt with security over that operating business. As you can see in those three examples through the cycle, doesn't matter what macroeconomic shocks hit the markets. These are kinds of industries that really weather the storm extremely well, which then allows us to sleep well at night in delivering sleep at night credits with very, very good income and low risk of capital loss.

How consistent are the returns?

The target return for Revolution Asset Management is RBA cash rate plus 4% to 5% net of fees. This is a return target that we've really not stumbled across. 

It's one that I've had through the cycle since really 2005 onwards when I've been running these private debt strategies in previous roles. But at Revolution Asset Management, how's that performed? 

We've been able to handsomely outperform that target at above the upper end of that target through the cycle. 

It's really good for us to really test and prove out our strategy because we constructed portfolios pre-COVID. And then being able to demonstrate that we can provide this income on a quarterly basis right through that COVID period is really justification and validation for many of the clients that we talk to both existing and perspective that this is an asset class that is generally non-correlated and can provide that defensive income that people are looking for.

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

Unlike many assets, private debt generates income through market cycles and can provide diversification away from the publicly listed, big-four Australian banks and broader market movements. To learn more, visit the Revolution Asset Management website or send an enquiry using the 'contact' button below.

This content is designed for Institutional and Professional Investors only.

This article is for institutional and professional investors only and has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’). Past performance is not a reliable indicator of future performance. Revolution is not licensed in Australia to provide financial product advice or other financial services to retail investors. This information should not be considered advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling units and 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.

1 contributor mentioned

David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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