The "special situations" strategy driving alpha for Keyview

Note: the interview was filmed on 6 June, 2024. You can watch the video or read an edited transcript below.

As private credit funds proliferate in Australia, one firm has carved out a niche by focusing on "opportunistic and special situations deals" in the mid-market space. 

Miki Cvijetic, Investment Director at Keyview Financial Group, explains the differentiated approach:

"When we say opportunistic, what we mean by that is we typically look to do things that the market isn't doing. 

Sectors of the market where there's lots of capital, are often going to be situations where the lender has to accept terms that are set, and that means worse protections and lower returns because there's more competition from lenders to lend money to that counterparty", says Cvijetic.

He adds that the spaces where there is less capital fighting for the deal often overlap with greater complexity - but that's also where there is greater opportunity for those willing to do the work.  

"We're not trying to fish in overfished ponds, we're trying to find the pockets where we can get the best returns for our investors, but get the best protections". 

Cvijetic cites three key factors that set Keyview apart: an experienced team from "complex special situations-type credit backgrounds", a flexible mandate to invest across industries and capital structures, and an alignment of incentives where the team co-invests alongside clients.

In the following episode of The PItch, Cvijetic explains why opportunistic private credit returns have generally outpaced regular private credit, and then hones in on exactly the type of opportunities the team has been pursuing lately. 

Edited Transcript

Ally Selby: Hey, how are you doing, and welcome to The Pitch, brought to you by Livewire Markets. I'm Ally Selby. Today we're taking a deep dive into the private credit landscape, and to do that we're joined by Keyview investment director, Miki Cvijetic.

Thank you so much for joining us today, Miki.

Miki Cvijetic: Thanks for having me.

Ally Selby: Okay. There's obviously been a proliferation of private credit funds that have been made available to Australian investors. What makes Keyview different?

Miki Cvijetic: Good question. So what makes Keyview different is our focus. Our focus as a firm is on what we call opportunistic and special situations deals. Within private credit our focus is on the mid-market, specifically within the mid-market where we differentiate ourselves is focusing on opportunistic credit and special situations.

Ally Selby: What do you mean by mid-market?

Miki Cvijetic: So mid-market for us we define as opportunities where companies are looking for between $20-75 million of capital. That's what we call mid-market. Special situations and opportunistic credit is an industry that's been around for 20 to 30 years, typically dominated offshore by the large hedge funds that specialise in that space, but they target opportunities that are north of $100-150 million in Australia, and particularly for us, our focus on that allows us to execute on our strategy of generating excess returns for our investors.

The three key things that I think differentiate us in the market are firstly, our team. So our team all come from what we call complex special situations-type credit backgrounds. We've worked in restructuring, we've worked in complex private equity or special situations-type sectors and roles, and therefore we do have the in-house expertise to assess complicated situations and manage for that risk.

The second thing I'd say is our mandate. So our mandate is actually really flexible. We invest throughout the capital structure. We invest across industries, so we're sector agnostic, and that allows us to really be opportunistic and find the best pockets of opportunity throughout the market and throughout sectors.

And the third thing is alignment. As the late Charlie Munger often said, "Show me the incentive and I'll show you the outcome." The incentives that we have set up in the firm are really aligned and geared towards generating excess returns for investors, and that's because we eat our own cooking, so we're all personally invested in the funds that we work in. Our IC's [Investment Committee] heavily invested, and what that means is we've got an IC with such expertise and capability across capital structures and across sectors and such experience with Chris Cuffe and Ian Gibson and Alex Hone and Kevin Hua who you recently spoke to. They just have such a breadth of experience and depth of experience that we can bounce ideas off them all the time, and we think incentives always drive outcomes in our opinion. The incentives in the fund, and the fact that we're aligned with investors by being invested, allow us to focus on delivering those outcomes.

Ally Selby: Do those opportunistic opportunities outperform normal private credit opportunities?

Miki Cvijetic: Opportunistic credit has outperformed, more generally, private credit, both recently and throughout history, and that's because there is complexity to actually operating in that space. The deals themselves typically take a bit more work upfront to realise the assets, and so we have seen outperformance from opportunistic or special situations players in the market versus the private credit deals.

Ally Selby: Can we go a little bit more granular than that? What do you like? What are you not liking? Are there any examples that can give a little colour to what you've said today?

Miki Cvijetic: Sure. So we at our heart are just value investors in the team. We're really passionate about investing. We're comfortable looking up and down the capital structure and trying to find where the best opportunity is.

When we say opportunistic, what we mean by that is we typically look to do things that the market isn't doing, and so we often find sectors of the market where there's lots of capital, are often going to be situations where the lender has to accept terms that are set, and oftentimes that means worse protections and lower returns because there's more competition from lenders to lend money to that counterparty.

Conversely, in opportunities where there's less capital, trying to fight for the deal is oftentimes where there's a bit of complexity to them and where the lender is in a better position to pick and choose the best opportunity within that kind of pool. So we will often talk about it as we're not trying to fish in overfished ponds, we're trying to find the pockets where we can get the best returns for our investors but get the best protections.

So a really good example that we've been playing a lot in recently is real estate, and to give you an example of how that's transpired and what we mean by opportunistic is 18 to 24 months ago real estate was going through, particularly residential real estate, going through a really, really strong bull market and we saw property prices going up 20-30% in some instances. What that led to is a lot of lenders getting very, very active within that space and oftentimes getting worse protections and lower returns than ordinarily would happen throughout a cycle.

That was also in the context of COVID. We had supply chain shortages, we had with labour and materials, and then we had interest rates and inflation. That resulted in a lot of the construction projects that were being funded by those lenders actually blowing out on both cost and time and therefore taking longer to actually complete, and so we then looked at that situation and realised that there were quite a few projects that were stranded, where the lender had spent all their money that they had, the borrower was potentially over-levered on some other projects. We could step in and actually provide a rescue financing essentially to that project to get it to that completion and finish line, and step in at the back end generating better returns and taking less risk than had we been there from the start.

But that's an example of what we mean by opportunistic. We weren't necessarily playing in that space that actively 24 months ago, so we didn't have a portfolio of troubled positions that we had to work through. We could take advantage of the gap in the market currently with actually providing that capital and getting those returns.

Ally Selby: Okay. Well, thank you so much for your time today, Miki. It was awesome to feature you on The Pitch.

Miki Cvijetic: Pleasure. Thank you so much.

Ally Selby: If you enjoyed that too, don't forget to subscribe to Livewire's YouTube channel. We're adding so much great content just like this every single week.