In the first article of our two-part series, we unpack the answer to a question we are often asked about our investment performance: Can you achieve high returns without high risk?
To answer that question, we need to look beyond just risk / return and introduce a third lever – complexity.
A triangle, not a seesaw
When buying property, people typically understand the three balancing factors: location, price and quality. But in private market investments, people often consider only a two-factor relationship between risk and returns, viewing it as a binary trade-off and expressing skepticism that you can achieve equity-like returns while maintaining low risk.
A third factor – complexity – is often an overlooked factor which can present opportunities for investors to take low risks and still achieve high returns. Opportunistic private credit can allow the unusual, rather than the risky, to create value for investors.
Complexity in private credit might mean an investment opportunity is harder to find or analyse, has unusual aspects that require more detailed due diligence or requires more tailored structuring to manage risks alongside expert management – or a combination of all of these. Borrowers with these characteristics are often unattractive to traditional lenders and do not want to dilute their shareholders with even more expensive equity. Many of these borrowers are high quality, low risk and willing to pay a premium for fast, bespoke credit solutions.
Diagram 1: The risk, reward and complexity triad of private debt
Turning the unusual into value
In the private credit market, complexity can simply mean opportunities that don’t fit institutions’ standardised deal types or terms and are therefore not easily scalable. These are often the situations where strong returns can be achieved thanks to one or more of the following factors:
1. Mispriced: For example, many traditional lenders take a top-down view of sectors based on the macroeconomic environment despite widespread recognition that these forecasts can be notoriously inaccurate. A specialist private credit fund like Keyview’s is led by unique opportunity not broad brushstrokes, and instead looks to understand the idiosyncratic risk on each position – not just the general sector. This can mean low risk opportunities with high returns as the fund is not simply taking beta risk in the market but is generating alpha through extracting excess returns.
2. Mid-sized: Most lenders (banks and some large private credit funds) are looking to deploy at least $100 million or more on any single transaction. Keyview specialises in the mid-market, funding opportunities between $20-$75 million.
3. Out of step: Traditional lenders often have fixed and constrained mandates. Their debt funds usually need to be deployed within a certain window of time, with capital dedicated to specific sectors -often sectors where the consensus view is favourable. Keyview has an open mandate and is sector agnostic without specific allocations to fill. So rather than competing in over-fished waters where quality and returns are reduced, we can find quality all year round, wherever it presents itself, often in overlooked parts of the market.
4. Need speed: Borrowers that need capital fast will often find traditional lenders’ processes too slow. For example, if they have an opportunity for growth and profit through acquiring a valuable asset or making an acquisition, it is beneficial for them to pay a premium for faster funding. Paying more for the speed, bespoke structuring and funding certainty is an inherently rational thing for the borrower who is able to secure a strategic asset on attractive terms, rather than miss out on the opportunity altogether and have it taken by a competitor.
5. Need bespoke attention: Deals that need unique structuring or a technical understanding, additional due diligence, active management, or support with the funding pitch are often outside traditional lenders’ remits. These can offer great opportunities for investment, where a quality business can’t fit into the right box for traditional lenders and just needs additional attention to uncover great value.
The bespoke nature of Keyview’s offering and focus on opportunistic credit allows us to focus on quality companies and assets and negotiate enhanced credit protections which enable the investments to be less susceptible to general market movements. Ultimately, our ability to work through complexity and creatively solve business funding challenges allows us to achieve outsized returns for the relative risks, for the benefit of our investors. For example, our investments target returns are as high as 20% – double what some traditional lenders can achieve from more straight forward loans.
In our next article, we look at the role of capital preservation and how we manage risk, both during our investment process and throughout the life of the loan.
Click here to read part 2 of “High returns without high risk: is it possible?”
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