Feeder funds vs. direct investments in Australian commercial real estate private credit
Australia’s commercial real estate market is a powerhouse, attracting investors seeking attractive returns and long-term growth.
But within this market lies a niche – private credit: financing real estate projects that require more flexibility, commerciality or turnaround times that fall outside traditional bank lending capabilities. Here, investors generally have two primary options: direct, single-asset investments or through feeder funds.
In this article, we’ll explore the features between these two investment options to help you make informed decisions if you decide to invest in commercial real estate private credit. We’ll uncover the advantages and disadvantages of each investment method and will consider factors like risk, diversification, and liquidity.
The Australian landscape: Feeder funds gaining traction
While direct investments have traditionally been the dominant approach in Australian commercial real estate private credit, income-generating feeder funds are gaining significant traction. This is driven by a growing investor appetite for diversification and a desire for professionally managed exposure to this asset class.
Feeder funds: Channeling capital for broader exposure
Feeder funds play a crucial role in the realm of real estate private credit by channeling capital from multiple investors into a single fund, which then invests in a diverse portfolio of real estate projects. This approach offers investors broader exposure and diversification, reducing risk compared to direct, single-asset investments. By aggregating resources, feeder funds enable participation in larger, high-quality projects that might otherwise be inaccessible to individual investors.
Benefits of feeder funds:
- Diversification: Feeder funds offer the primary advantage of diversification. By investing in a single feeder fund, you gain exposure to a diverse portfolio of commercial real estate private credit opportunities, helping to mitigate the risk associated with any single investment.
- Accessibility: Depending on the investment manager, feeder funds can have lower minimum investment requirements than compared to some direct investments. This presents an opportunity for a wider range of investors to gain exposure to commercial real estate private credit.
- Professional management: Master funds are typically managed by seasoned professionals with expertise in commercial real estate finance, credit analysis, fund management and deal structuring. Investors benefit from their knowledge and experience, reducing the time and onus on individual investors to complete their due diligence and project selection on each individual investment opportunity that is made available.
- Liquidity: Again, depending on the investment manager and the type of fund, feeder funds can offer more flexible liquidity compared to some direct investments, allowing investors to exit their position more readily.
Direct investments: Your own, tailored portfolio
Direct, single-asset investments involve investing capital directly to a specific commercial real estate private credit opportunity. Commercial real estate private credit loans cover a wide range of loan purposes and are generally for the purchase, improvement or development of property. This could be to fund a development project, property and/or site acquisition or land subdivision.
Benefits of direct investments:
- Control: Investors who choose to invest in direct, single-asset commercial real estate private credit opportunities maintain full control in the selection opportunities that they determine would best meet their individual investment objectives and preferences. Factors such as estimated term, investor return, risk, location and loan purpose can all be part of the selection criteria. This allows for a tailored portfolio aligned with their specific risk tolerance and investment goals.
- Potentially higher returns: Direct investments can potentially offer higher returns as the investor can opt for opportunities that are higher up the risk curve in the capital stack, such as mezzanine, junior debt or even preferred equity positions.
Choosing the right approach: Risk and resource considerations
The choice between investing in real estate private credit through a feeder fund or direct, single-asset investments hinges solely on personal preference. Investors should consider their individual risk tolerance, investment experience, and desired level of control.
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking groups in South Africa, CEO of South Africa’s third largest private client wealth manager, Director of a Superannuation Risk and Operations consultancy, a consultant to Westpac, and as MD of a ‘home loan over the phone’ business established for Real Insurance and Macquarie Bank. He has consulted widely to owner-managed businesses across strategy, technology and operations and co-founded Zagga in 2016, where he is a Member of the Zagga Investment Risk Committee, Zagga Credit Oversight Committee, and Zagga Compliance Committee, and a Responsible Manager (AFSL / ACL).
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This article is for information purposes only. It does not take into account your objectives, financial situation or needs. Any opinion expressed in this article are of the author and is subject to change without notice. Readers are reminded to exercise caution and use their own judgment when interpreting and applying the information contained in this article.
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
Expertise
No areas of expertise
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