How to access private debt investment opportunities in private commercial real estate debt

Understanding private debt investments

A private debt investment refers to investors lending capital to private companies or individuals, often with the debt secured against collateral, such as real estate or other assets, to mitigate risk. Unlike public bonds or bank loans, private debt investments are typically not traded on public exchanges and involve direct agreements between lenders and borrowers. This asset class can include various forms of debt, such as mezzanine financing, bridge loans, and senior secured loans.

Why consider an investment in real estate private debt?

Considering a private debt investment can offer several compelling advantages for investors seeking to diversify their portfolios and achieve attractive returns. Some of the key reasons private debt investments is becoming increasingly popular amongst income-seeking investors include:

1.  Higher returns: Private debt investments can often provide higher yields compared to traditional public debt instruments like bonds. This is largely due to the illiquid nature of the investment which can translate into better returns for investors.
2. Steady, predictable income: Private debt investments typically offer regular interest payments, providing a stable income stream. This can be particularly attractive for investors seeking steady cash flow.
3. Diversification: Including private debt in a portfolio can enhance diversification. Unlike traditional asset classes like stocks and public bonds, private debt tends to have little to no correlation with the public markets which can help reduce overall portfolio risk.
4. Capital preservation: Many private debt investments are secured by collateral, such as real estate or other tangible assets. This security can help protect the principal investment and mitigate the risk of loss. Senior debt in particular sits as the highest, or most secured, layer of the capital stack. Senior debt is also commonly referred to as first mortgage secured loans, historically provided by traditional lending institutions such as banks and credit unions, but now also provided by non-bank lenders. Senior debt investors are given the highest priority in terms of repayment as the investment is secured by a mortgage over the property. This gives the senior debt lender recourse over the property in the event the borrower defaults on the loan.
5. Hedge against inflation: Some private debt investments, especially those with floating interest rates, can act as a hedge against inflation. As interest rates increase, the borrower’s rate also rises, leading to higher returns for investors.