Private debt investments let you sleep well at night – David Thornton

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Volatility is a two-way street. This can mean a rapid appreciation of assets, but can also mean a sharp devaluation of assets.

Plus, those sharp ups and downs can turn around in an instant.

Reducing your portfolio’s volatility helps you “sleep well at night,” in the words of Bob Sahota, Chief Investment Officer of Revolution Asset Management.

And that’s where private debt comes in.

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

Watch or read below for a deep dive into 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 volatility protection?

As a result, listed markets are expected to be much more volatile this year. Private debt is really where if you pick a good manager that avoids cyclical industries and you can avoid defaults and you can avoid real stressed assets, you can actually have very low levels of correlation with the possibility to provide loans only in the most basic form. , collect interest payments and revenues, and then distribute them to customers. So that way there is a lot less volatility.

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

How do you manage risk?

With private debt investments, the main risk you really need to worry about is the risk of credit default. So in everything we do in terms of the investment process, we seek to minimize the risk of default. How do we do that? And the way we manage that risk is to be true to the label. Thus, the DNA and our investment philosophy at Revolution Asset Management is the preservation of capital. How this manifests in the sectors and industries we target.

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

The types of sectors we love and those that fit our investment philosophy and DNA include areas such as healthcare, such as senior secured debt lending alongside many other healthcare hospital lenders or Arnott’s Biscuits providing senior secured debt to financing the acquisition when KKR purchased this business. We have mission critical software like MYOB which has held a number one market share for 30 years where we provide top tier secured debt with security on this operating business. As you can see in these three examples throughout the cycle, it doesn’t matter which macroeconomic shocks hit the markets. These are types of industries that are weathering the storm really, really well, which then allows us to sleep well at night by offering overnight sleep credits with very, very good earnings and low risk of capital loss.

How consistent are the returns?

Revolution Asset Management’s target return is the RBA cash rate plus 4% to 5% net of fees. It’s a comeback goal that we really didn’t stumble on.

It’s one I’ve had throughout the cycle since really 2005, when I ran these private debt strategies in previous roles. But at Revolution Asset Management, how does it work?

We were able to significantly outperform this target above the upper end of this target throughout the cycle.

It’s really good for us to really test and prove our strategy because we built portfolios before COVID. And then being able to demonstrate that we can deliver that revenue on a quarterly basis throughout this COVID period is really vindication and validation for many customers we speak with both existing and confident that it’s is an asset class that is generally uncorrelated and can provide that defensive income that people are looking for.

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

Unlike many assets, private debt generates income throughout market cycles and can provide diversification away from the big four Australian listed banks and broader market movements. To learn more, visit the Revolution Asset Management website or send a request using the ‘Contact’ button below.

This content is intended for institutional and professional investors only.

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