Why RBA rate cuts have no impact on private debt investments (By Travis Miller, 5th June 2019)
Why the RBA rate cuts have no impact on yield for private debt investors.
Investors have been asking, "Will yields go down on iPartners private debt investments?"
Our first response has been, “Why?”
"Well, because of the RBA cut.”
Nope, risk free curves do not drive this market! We care about the underlying fundamentals driving the cut from a risk perspective, but not the cut itself.
Private debt yield is driven by the stickiest and flattest yield curve in the market, at iPartners we call it the "Private Wealth Curve."
Stating the obvious the clearing price of an asset is largely driven by the supply and demand of buyers and sellers, and subsequently the relative positions of negotiation leverage between them.
Taking a step back - What is private debt? Strangely it is hard to define as it means different things to different people, we grabbed a few below from a quick google search.
- "Private debt is the debt accumulated by individuals or private businesses." Literally True, it’s debt and it’s private - not really my definition.
- "The term ‘private debt’ is typically applied to debt investments which are not financed by banks." Syndicated bonds are largely not financed by banks - does that make it private debt? Nope, it's a bond.
- "Private debt involves the lending activity carried out by entities other than banks." Hmm, maybe above was right!
- "Lending to private companies." Well, public companies do private debt, maybe with a few extra disclosures, although looks like private debt to me.
Revolution Asset Management in their white paper in summary suggest it is "Debt that is not traded in the debt capital markets and is typically in loan or securitisation form." I like this one.
My view in short. Private debt is tailored for a borrower, typically with ‘off the run’ characteristics, bespoke documentation and funded directly by private syndicates, family offices, and/or directly by institutional investors.
That took longer than I would have hoped!
So why don't we care about the recent RBA move?
As private investors we have a cost of capital/yield hurdle that is required to part with our money. In a macro sense we care about large moves in base rates, although incremental moves are irrelevant.
To complete this loop I need to link back to the supply and demand of buyers and sellers. If I am investing/buyer of private credit where traditional buyers/banks have exited, then the seller/borrower has less negotiation leverage.
In any private debt relationship, as it tends to be personal, there needs to be the right balance between investor/borrower and a fair clearing price. However with a 25bp cut, as an investor I am unlikely, just after an announcement at 2.31pm, to call the borrower and offer them 25bp less as my personal cost of capital hurdle has fallen! To be fair, this likely occurs at the institutional investor size private debt as the negotiation leverage between buyer and seller is more balanced. They may price debt at cash+XXbp, there will also be multiple instos tendering for the deal.
In short sub institutional private debt (smaller deals) are priced off the private wealth curve (the stickiest rate curve). The private wealth curve is not driven by cash+XXbp, it's driven by trade offs in allocation of capital, access to investments, relative returns and is floored, not capped!
iPartners is a scalable online investment platform. We represent investors and focus on secured private debt. This is where the negotiating power for the investor is at its highest, competition at its lowest - value add from structuring critical and partnering with the borrower the key to the investment.