MONTHLY MUSINGS – JULY 2023
PRIVATE DEBT’S ROLE IN AN INVESTOR’S PORTFOLIO
Private debt offers investors the ability to:
improve returns from allocations to fixed income
provide a source of income that is less correlated to other investments
provide greater downside protection
Ultimately, investors’ return comes from borrowers meeting their payment obligations under the facility.
However, the term “private debt” describes a broad range of debt offerings, from low-risk/low-return senior secured direct lending to higher risk/higher return lending such as distressed debt and special situations. Given this, it is necessary for investors to understand the type of private debt they are investing in so they can match it to their respective risk appetite and return objectives.
Specifically, lower risk/return strategies can be suitable for those investors seeking higher levels of capital preservation compared with higher risk/return strategies for those seeking to maximise total return.
What type of private debt does Roadnight invest in?
The cornerstone of every Roadnight investment is superior returns for a given level of risk across the return spectrum. As a result, Roadnight’s investments range from providing loans to high-quality farms on low LVRs to growth capital structured in the form of secured debt to smaller growing companies.
Across our pools of capital, our pipeline of opportunities extends to:
Companies seeking capital to grow
Pre and post-farm gate agriculture lending opportunities on a first-registered mortgage basis
Companies seeking bridge funding for 1-12 months
Companies recovering from financial stress and demonstrating an inflection point to sustainable profitability through successfully implementing turnaround strategies
High-quality businesses impacted by capital market dislocations that limit capital availability
What investments do we offer our partners?
Broadly our investment partners fall into two broad types. Those who:
Let us manage the private debt investments made on their behalf. For these investors we offer a pooled vehicle where Roadnight makes the decisions about which private debt investments to make, and...
Want a more tailored, be-spoke investment solution given they are more actively managing their individual investments. For these investors we offer the ability the ability to invest in individual private debt facilities.
The Roadnight Capital Diversified Income Fund (DIF) is a good example of a pooled set and forget fund, which is actively managing investor risk by ensuring diversity of borrower, loan size, loan type, geographic and industry allocation. The Fund currently has 22 investments, which are evenly spread across non-bank financial institutions, diversified SMEs, and agriculture enterprises, and has built up a first loss buffer. DIF has been structured to withstand and capitalise on the inevitable peaks and troughs of debt cycles.
Capital markets dislocations can provide private debt investment opportunities
We believe that financial markets are not always efficient and that the private debt markets are no different from the public capital markets, periodically producing mispriced investment opportunities when serious market dislocations occur.
As these markets can produce exceptional risk-adjusted returns, we are always looking to see if such dislocations impact the markets we invest in. We are seeing such an opportunity today with high-quality Australian non-bank finance companies, where we see the opportunity to generate equity-like returns from debt-type risk.
Recent bank failures, such as Credit Suisse, Silicon Valley Bank, and First Republic Bank, and the near implosion of the BNPL sector have led to a liquidity squeeze for Australian non-bank finance companies. Unlike the banks that are deposit funded, the non-banks are reliant on equity markets (listed and private), rated bond markets, private loans, and other sources to fund their businesses.
With equity markets effectively closed and a severe repricing/reduction of liquidity in rated debt and private loan markets, we have seen a material repricing of risk in the non-bank sector, with pricing for credit risk having widened by 5%+ in the past 10 months. Even allowing for unprecedented increases in defaults and arrears, parts of the non-bank capital stack produce exceptional risk-adjusted returns. Meanwhile, non-bank finance companies are an integral part of the Australian economy, having been around for 20+ years and with over $550b in funding requirements, they have substantial capital needs going forward.
The Roadnight Capital Diversified Income Fund is taking advantage of the liquidity squeeze for quality non-bank finance companies today. However, given the size and the returns available, we have set up a closed-end opportunistic fund – Roadnight Capital Opportunity Fund 1 – to capitalise on this opportunity. The Fund will be a more concentrated version of the Diversified Income Fund and is expected to generate income of at least 1.1% per month over the 3-year time horizon.
Should you have any questions about any of the funds, please do not hesitate to reach out to us at: investors@roadnightcapital.com
