The fund opening the door to previously inaccessible opportunities

When considering an investment, most investors think about buying a piece of something that is expected to grow in value – shares in a business, property, or commodities.

Rarely do they think about investing in debt, the lifeblood of the growth engines listed above. When a company wants to expand its operations or runs into funding issues due to an external shock – such as a global pandemic – funding is sought.

If the company is not listed, it must raise that capital in the private debt market. This is where companies that focus on private debt step in to provide the funding, securing suitable terms for their investors in the process. One such company is Keyview.  

Keyview runs the Keyview Flagship Fund and focuses on finding what they call ‘opportunistic debt’.

This is a space that has become increasingly competitive in recent years, given the potential to generate strong returns and the fact that investors are becoming increasingly sophisticated and aware of the opportunities that lie beyond buying the banks, the big miners, and investment property (not that there is anything wrong with that!). 

I recently had the opportunity to engage the Managing Director of the Keyview Flagship Fund, Justin Lal, to take me through how the team defines opportunistic debt and the key pillars to Keyview Flagship Fund mandate. 

Lal also shared the team's thoughts on current market conditions and how they are taking advantage of opportunities right now. 

So, what is opportunistic debt?

When talking about opportunistic debt, Lal explains that Keyview Flagship Fund's focus is “identifying loans where we believe we are extracting a material return premium for the relative risk of the underlying investment”.

In other words, getting paid more for taking the same level of risk. And whilst the opportunity list is smaller than the traditional private credit space, the level of speciality and skill required to service the space means that Keyview Flagship Fund can command a higher overall return, whilst often extracting better credit protections in the process.

Keyview's three key pillars

Lal highlights three key pillars that Keyview Flagship Fund utilises to generate the types of returns.

First and foremost, there is typically some complexity in the opportunities that it pursues. That said, complexity does not necessarily mean higher risk. Instead, it means that more time and energy are spent during the due diligence process, and more work and expertise are required. In doing that work and providing that expertise, they can command a higher price.

Secondly, these are bespoke solutions that are designed specifically for the borrower. They are not off-the-shelf solutions that can be provided by anyone. The financial covenants and credit protections are tailored, which means the Keyview Flagship Fund can again command a higher return.

And finally, it can deliver prompt execution. The team boasts experts in the field who can construct and close those tailored transactions promptly, whilst at the same time, securing the best quality and highest price possible.

Three major themes shaping debt markets 

Whilst not specifically macro experts, Lal and his team are cognisant of the world in which they operate and the dislocations that are occurring – they have to be.

At this point in time, they are focused on three major themes that could have a significant impact on the shape of debt markets.

The first is the reduction in asset valuations, such as falling house prices and the re-rating of growth companies. Lal suggests the impact will be felt in private debt markets over the next 12-24 months and notes that “there are lots of credit products in the market that have chased higher returns (mezzanine debt/preferred equity with limited credit protections) to be impacted by falling asset values.”

The second issue is earnings and margin pressures and Lal notes that we “are early in the journey of the impact on companies”. He contends that a lower earnings base will increase refinancing risk in debt markets and there could be covenant breaches and serviceability issues.

Finally, Lal points to the impact on the consumer, SMEs, and household spending as another major risk. At the end of the day, we’re all feeling the impact of higher prices right now and this is placing pressure on consumers. As such, this will undoubtedly result in a flow-on effect for those companies which rely heavily on the consumer.

Despite the doom and gloom of the aforementioned three themes, Lal takes a different view. With dislocation comes opportunity, he argues, and a greater set of investments to pursue. Provided you have a disciplined approach to sort the good opportunities from the bad, then there is the potential to generate strong returns, he added. 

It’s a gas

To highlight the types of opportunities Keyview Flagship Fund pursues, Lal points to a recent investment in a mid-market gas producer. Keyview facilitated a $65 million senior secured loan (plus equity warrants), with Lal and the team putting in approximately $28 million and arranging co-investment through their network.

The company, as well as being a leading mid-market gas production and exploration company, is a high-quality and sophisticated borrower. The capital was required to expand and provide material cost savings, but fell outside of bank risk parameters.

Keyview Flagship Fund stepped in to fill the breach, focusing on its three pillars:

• Complexity – brownfield CAPEX, technical, energy market dislocation. 
• Bespoke solutions – tailored funding package to align with CAPEX requirements. Strong credit protections (better than incumbent financier). Security over all assets and contracted cash flows; the loan will be fully amortised from cash flow. Tightly wound financial covenants (minimum cash flow, gas production etc). Greater than 100% loan coverage from reserve base. Outsized risk-adjusted returns. Total internal rate of return (IRR) of 20% (assuming a three-year hold with equity warrants). Debt IRR of 14% (floating rate and cash)
• Speed of execution – delivering a highly customised deal that benefits the client in a timely fashion.
• Perhaps most importantly, the deal fulfilled Keyview’s focus of identifying loans where they believe they are extracting a material return premium for the relative risk of the underlying investment.

Open the door to new opportunities

Keyview was established to provide sophisticated investors, in Australia and overseas, with unique access to the highest quality direct commercial property and private debt opportunities. For further information, please visit the Keyview website.