A little discussed downside of a mandated sector allocations strategy is that it forces fund managers to allocate to sectors even when the sectors are exhibiting poor fundamentals. The alternative strategy is to be sector agnostic. A more flexible investment mandate allows the fund manager to invest in sectors and businesses that are attractive, when they are attractive, and to be able to avoid them when they’re not.
One of the most compelling features of Keyview’s strategy is its sector agnostic approach to investing. Being unconstrained and unbiased when it comes to sector preference allows Keyview to target sectors which offer the most compelling risk-adjusted returns in the market at any given time. While balanced diversification by sector remains a key pillar of Keyview’s portfolio construction ideology, Keyview’s sector weightings can fluctuate in response to market conditions such as:
How does this work in practice? This article uses a real estate transaction case study to illustrate.
Real estate’s shifting macro environment
The real estate sector has been historically favoured by private credit due to the well-established lending frameworks, liquidity of the underlying collateral, predictable cashflow streams and multi-year macroeconomic tailwinds supporting valuations and growth.
Wind back to late 2022/ early 2023 and the Australian residential and commercial property market was marked by strong demand, rising valuations and favourable lending conditions, driven by historically low interest rates and buoyant consumer sentiment. Private credit managers identified these dynamics as attractive, leveraging a market environment conducive to stable returns and robust collateral coverage.
This attractive environment coupled with increased capital flows to private credit resulted in significantly increased competition in lending to real estate as many private credit managers maintain a consistent allocation to the sector because of its traditional appeal.
At the time of writing, the saturation of available credit in the real estate market has compressed yields and loosened lending parameters thereby favouring borrower flexibility (rather than investor protections) as lenders compete to deploy capital.
Additionally, the real estate sector’s fundamentals have shifted. Rising interest rates, an uncertain macroeconomic outlook and cooling demand in key sectors, such as residential and commercial property, has altered the landscape. These changes have brought increased scrutiny to valuations and exposed managers with high real estate credit beta to heightened stress.
Figure: Shifting sector allocations over time
Keyview adopts a dynamic and opportunistic approach, prioritising flexibility and adaptability over rigid sector preferences. To this extent, Keyview’s sector weightings are observed to shift over time. Systemic risks such as capital saturation, compressed yields and heightened macroeconomic uncertainties can reduce the overall appeal of certain sectors and do naturally tilt portfolio weightings away from these sectors through time.
Illustration: Opportunities drive our portfolios' asset allocation
Keyview’s approach to real estate
While sector agnostic, Keyview also continues to recognise that pockets of opportunity persist within markets. These opportunities often emerge in areas overlooked by traditional capital—particularly where idiosyncratic complexities create barriers to entry. By remaining highly selective in its real estate investments, particularly in the current climate, Keyview focuses on transactions characterised by mispricing, market dislocation or unique fundamentals that continue to offer compelling risk-adjusted returns, rather than taking a broad approach to sector rebalancing in challenging conditions. Such opportunities often arise during periods of market stress, when volatility and uncertainty create pricing inefficiencies which in turn allows Keyview to capitalise on under-valued opportunities that may not be apparent to the broader market due to the generally limited appetite to traverse the complexities associated with sector stress.
The outcome of investing in a stressed real estate project
A strong example of Keyview’s ability to identify and execute on an idiosyncratic situation with the backdrop of sector stress was a loan made in March 2022 to a halted development of a 43 unit residential apartment building in suburban Sydney NSW. The transaction involved refinancing the incumbent financier and funding the project’s remaining cost to completion. It was a complex situation due to the prior builder’s insolvency, a major dispute between the three shareholders and halted construction (the site had been idle for 4-months by then).
The transaction saw Keyview funding a new builder to take over the remaining completion of works and assisting in the novation of material subcontractors to see the project to completion. This was an extensive due diligence process, involving the diligence of a new building absorbing past liabilities, as well as Keyview directly undertaking due diligence and interviews with 12 material subcontractors.
The following are issues that highlight the asset management intensity of the project:
The transaction demonstrates the DNA of Keyview’s investment strategy. We identifyed a situation where quality collateral paired with a complex situation arising from industry pressures presented a compelling opportunity heightened by the absence of market competition. This was complemented by an intensive due diligence process that thoroughly examined the highly nuanced situation, something other financiers were unwilling to invest the time to understand. Additionally, significant time was dedicated to ongoing asset management to maximize the value of the collateral. Despite challenging conditions, these efforts culminated in a pleasing outcome for our investors.
Keyview’s outlook is grounded in opportunism rather than sentiment. While real estate remains part of its opportunity set, the fund’s focus will be on identifying emerging trends and pockets of dislocation that can offer superior risk-adjusted returns and gold-standard protections.
