Private debt will assume a larger role in supporting NZ businesses as the economy moves out of pandemic emergency mode, according to Bob Sahota, Revolution Asset Management chief investment officer.
With mainstream banks facing capital constraints and government support for COVID-hit businesses due to end, ‘non-traditional’ lending would become increasingly important, Sahota said in a release.
“The good news is that private capital in the form of institutional and wholesale investors is available to fill the gap,” he said. “Generally, this comes in the form of long term, patient ‘buy and hold’ capital from investors who wish to access New Zealand private markets where it is otherwise difficult to do so.”
Launched about two years ago, the Australia-based Revolution has invested about A$550 million to date in private debt opportunities in Australia and NZ with a further A$500 million lined up. The manager, led by former Challenger head of fixed income Sahota, has two private debt funds in play: a closed-end product that allocates up to about a quarter to NZ; and, a newer open-ended vehicle that currently has about 30 per cent in NZ.
The group landed a significant mandate in September in a deal with Queensland-based investment giant, QIC. Post the QIC agreement, Sahota said Australian and NZ institutional investors were on the look-out for “reliable and defensive income in a backdrop of poor global growth, low inflation and falling yields”.
“Large investors are repositioning their portfolios for defence in this highly uncertain environment, and the qualities of Australian and New Zealand private debt offer patient investors with an appealing solution,” he said in September.
The Revolution NZ debt portfolio currently includes consumer-lending businesses, Latitude Financial Services and Q-Card. As well the manager has exposure to trans-Tasman non-bank mortgage supplier Bluestone and TradeMe.
Sahota said Revolution targets several classes of debt including leveraged loans, asset-backed securities and real estate.
“Investing in New Zealand private debt has provided investors with good risk-adjusted returns,” he said in the release. “Within corporate leveraged loans and private asset backed securities, we have been able to fund quality businesses through conservatively structured loan contracts, where the focus is always on ensuring that any investment has the ability to withstand a downturn, fully appreciating that there is little or no liquidity to be able to trade such investments in even normal markets.”
Revolution targets a long-term return of 4-5 per cent above cash before fees and expenses. The manager is not the only Australian firm plying the private credit asset class in NZ. Earlier this year the ASX-listed Metrics Credit Partners opened an Auckland office to source lending opportunities ahead of plans to roll out local investment solutions.
Like Revolution, Metrics is tapping into corporate and asset-based lending markets that capital-constrained traditional banks have backed away from.