"We're in an incredibly attractive macro environment" for this asset class

Hone: We are in an incredibly attractive macro environment for investing in opportunistic debt. Ultimately, what's happened over the last 12 to 18 months with the material rise in interest rates as well as a bit of liquidity getting pulled out of the system as a result, means that there's not the array of capital providers in the marketplace throwing large amounts of capital at potential investee companies. So they're a lot more open for innovative structures, and basically, just having to pay a higher cost of capital. 

We expect the environment that we're going to be in at the moment to last for at least another two to three years. But those strong double-digit returns that we've consistently generated over time, and the pipeline of investments that we are currently investing in and can see going for a long period of time, we think will be consistent with generating those very strong low-double-digit returns with a high degree of confidence around limited capital loss.

LW: What is Keyview's "north star" and how does this reflect in your investment process?

Hone: We don't like losing money. 

We never want to lose money on investments we make, and ultimately, that comes down to the quality of the counterparty, the quality of the assets, the quality of the cashflow streams that you are investing into, and in our instances, we're lending to. 

The North Star is an assiduous process that understands industry structure, understands company or asset components, understands management people, and understands basically security position. 

What can we get our hands on if things go wrong? 

Then finally, we take those commercial frameworks and we apply that into a deep legal documentation that gives us very strong security rights and protections to ensure that we get a return of our capital and the ability to take necessary steps to get a return on our capital.

LW: Your fund's documentation talks about "maximising idiosyncratic risk and minimising systematic risk". What does that mean?

Hone: What that ultimately is talking about is, for our clients, we offer them a portfolio of investments. So when you invest in our fund, you're exposed to 20 or 30 different loans. 

What we want to think about is not just that each individual loan is highly secure and very attractive in its rate of return that it's generating but when we put those together as a collective, we are not always investing or betting on the same thematic. 

We place limits on the amount of exposure we have to a single sector, to a single geography, to a single counterparty, and then over and above that, we think about the other factors or other elements that might come through the portfolio - be it inflationary risk or consumer target risk.

That's what we mean about we want to have as much diversification, or to use that language, as much idiosyncratic risk in the portfolio as possible so that if there's something that occurs, like COVID, that all the parts of your portfolio aren't impacted in the same way. 

If things come out of left field, as they always do, you are benefiting from this material diversification rather than your portfolio all getting impacted in the same way by the same market event.

LW: Can you give us an example of an investment that has produced an equity-like return?

Hone: Everything we do, by and large, adds up to an equity-like return. If you assume equities going forward will generate a high single-digit return (if they're fairly priced today), our portfolio of investments, all of them, are expected to generate double-digit returns.

The portfolio net of fees we expect collectively will generate double-digit returns certainly being consistent with what it's done historically, and the loan terms and the documentation that we have entered into is consistent with that rate of return. There's a relatively high degree of confidence around why we have that expectation. 

Then in addition to that, where possible, we seek to negotiate equity warrants as part of our loans and they provide an additional rate of return over and above that. We don't forecast those, but we consider those the cream on top. In essence, if we are expecting the portfolio to generate a net of fees return of say, 10% to 12%, that already materially exceeds equity markets forecast, and then in addition to that, equity warrants will be potentially returned over and above that again.

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The Keyview Credit Opportunities Fund is currently open for investment and is available for wholesale investors.

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Keyview Credit Opportunities Fund

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