We are writing to provide an update on our performance and the near-term market outlook.  COVID-19 has triggered an unprecedented period of market volatility – a steep global sell-off in risk assets as the extent of the pandemic was realised, followed by a significant rally as governments around the world responded to the burgeoning economic and health crises.  Investors have needed to rebalance portfolios due to losses brought on by lockdowns, heightened demand for liquidity, market distortions from government monetary and fiscal largesse, and now must prepare for a potentially prolonged period of economic uncertainty. 

TCP’s investment approach, combining strict bottom-up due diligence, overarching macro analysis and experience developed over numerous cycles, has been proven out by our strong AP Fund I performance and a high quality portfolio that is weathering the impacts of the pandemic well. 

TCP’s Asia-Pacific Fund I continues to deliver spreads in excess of 500 bps over BBSY from a modestly-leveraged, tightly-structured, 100% senior secured portfolio, including consistent monthly returns of 0.5% for March and April, respectively.  Every Australasian-based company has been affected by the lockdowns to some degree, but our intentional focus on cyclically defensive sectors (i.e. avoiding property, mining/energy, and consumer discretionary) means our portfolio continues to perform in the current environment, with all borrowers continuing to cash pay their interest, without the significant restructuring affecting many of our peers.

Portfolio valuation has been a topic of much discussion among Australian private credit managers and investors in the wake of COVID-19.  TCP believes transparency is key and that it would be irresponsible to ignore the heightened risk environment that the pandemic has created.  Accordingly, we have adopted an approach that we believe accurately adopts fair value accounting policies; this is to discount loans to acknowledge movements in broader market pricing and (where appropriate) to reflect re-ratings due to increased credit risk.  While most of these COVID-related impacts are only expected to be relatively short term in nature, we do not think the right approach is to conveniently overlook the current risk/return equation.  This is at odds with many of our peers who have opted to leave affected investments at par by ignoring relative market price movements and only mark down investments if they are of the belief that all interest and principal will not be repaid at maturity.  This artificially inflates returns in the near term.  We believe that our approach is the appropriate one as it provides our investors with a holistic and realistic point-in-time valuation of the portfolio.  This approach aligns with that of the global accounting firm which provides a third party assessment of our valuations on a quarterly basis.

Going forward, in spite of global central bank stimulus, our view is significant downside risk remains for the Australian and New Zealand economies, so TCP will continue to take a cautious approach in deploying into defensive, cash generative investments.  As an example, this month we completed an add-on senior secured loan to a strong performing data centre operator which we initially invested in 18 months ago.  Pricing on this investment is at a ~1.5% premium to pre-COVID levels and we believe market dislocation will continue to deliver compelling investment opportunities at attractive returns in the near to medium term.  TCP’s team boasts 90+ years of experience through multiple credit cycles, making us a great partner to take advantage of these market conditions.

TCP is preparing to launch its Asia-Pacific Fund II and would welcome discussions on how we can assist you in investing in this challenging, but opportunistic period.  Despite the uncertainty that lies ahead, we remain confident in our abilities to continue to originate a high quality direct lending portfolio delivering attractive and recurring risk-adjusted cash flows to Investors.

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