Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Private lender sees “significant pent-up demand”
Revolution Asset Management, one of Australia’s leading providers of financing to non-bank lenders and corporates, recently highlighted the strong health of Australia’s corporate sector in a portfolio update.
The group continues to move from strength to strength just a few years since founding, with the latest Private Debt Fund having deployed $700 million of $1.1 billion of capacity into what Revolutions sees as “prime” lending opportunities that are emerging in the wake of the pandemic.
One of the most powerful trends facing the lending market at the moment, it says, is the continued market share losses of the major banks, which are broadening to multiple sectors. Specifically, Revolution has seen non-bank lenders gaining market share across motor vehicle and personal loans, areas that have long been profit centres. Revolution’s patient capital base has allowed it to be an important source of funding to these non-bank lenders, without being involved in the lending process.
An under-appreciated benefit of lending in private markets, whether to non-bank financial groups or companies themselves, is the unique access to information it affords. As is typically the case, lenders are able to demand access to broader information than most equity investors in private markets.
This offers several benefits, but mainly it is about understanding the health and operational success of the groups to which they are lending. In a broader context, however, this private-side information gave Revolution special insight into how many different sectors of the economy were performing amid the lockdowns of the last two years.
With operations spanning Australia and New Zealand, but primarily focused on non-cyclical sectors, Revolution is looking towards 2022 with “cautious optimism,” despite suggesting that others “may be forgiven for having a negative view,” given the impact lockdowns.
Of particular importance for lenders is the quality of the underlying loans, with private-side information able to provide “real-time information on the financial health of consumers and borrowers,” and ultimately witnessing very low levels of loan arrears during the pandemic. This was put down to extensive government and monetary stimulus, the bringing-forward of infrastructure spending and in many cases, the “inability for consumers to spend,” which created forced deleveraging.
Looking forward, Revolution sees “significant pent-up demand” in the economy, with many businesses having been able to “rationalise” their operating expenses during the pandemic. This has been a key input into the record year for merger and acquisition activity, with private equity strategies, into which the team regularly lends, continuing to split its deals evenly between debt and equity.
As it stands today, the portfolio is yielding over 5 per cent, carries a BB+ credit rating across 62 investments, and is approving just 26 per cent of the deals the team receives, a reflection of its focus on quality.
