The benefits of private debt: Beyond traditional investment
Discover the intricacies of private debt, its role in the Australian market, and how it can benefit your investment strategy.
Private debt has emerged as a compelling alternative to traditional investments like equities and bonds, particularly for high-net-worth (HNW) investors seeking diversified opportunities. Unlike investing in public markets, like the Australian Stock Exchange, private debt involves loans or debt transactions provided by non-bank lenders to companies for projects, often structured to suit the specific needs of borrowers. This asset class can offer substantial benefits for both borrowers and investors.
The private debt market has been expanding rapidly. The International Monetary Fund recently reported the global market for private debt hit US$2.1 trillion in 20231. The current economic landscape—marked by market volatility and rising interest rates—has made private debt a timely and attractive option for investors. As traditional asset classes experience fluctuations, private debt provides a stable, income-generating alternative, often with secured backing like real estate.
Understanding private debt
Understanding private debt can deliver significant benefits for both borrowers and investors.
For Borrowers:
- Flexible and tailored solutions: Private debt providers can offer more flexible terms and tailored loan structures than traditional banks, allowing borrowers to secure loans that better meet their needs.
- Faster funding decisions: Without the lengthy approval processes common in traditional banking, private debt lenders can make quicker decisions, which is vital for businesses requiring timely access to capital.
For Investors:
- Potential for higher returns: Private debt typically offers higher yields than traditional fixed-income products, such as government bonds or corporate bonds.
- Diversification and downside protection: For HNW investors, private debt can serve as a prudent diversification tool, providing a buffer against stock market volatility while delivering steady returns.
- Access to niche markets: Private debt allows investors to enter specific sectors, such as commercial real estate, that may be less accessible through public markets or direct investment.
Many mistakenly believe non-bank loans (i.e. private debt) are inherently riskier investments than traditional bank loans. While it is undoubtedly important to work with a trusted, reputable investment manager, investors must separate fact from fiction when considering if private debt is right for them.
Understanding the Australian private debt market
Australia’s private debt market has experienced substantial growth, driven by a combination of regulatory changes and investor appetite for alternative investments. Private debt is gaining even greater traction, as a result of tightened bank lending standards.
This does not mean that the transactions, or the borrowers, being turned away by the banks, are not A-grade quality. It is simply a reflection of the banks skimming the top of a very deep pool.
The different types of private debt
Private debt can be structured in a variety of ways, depending on where it sits in the capital stack. The capital stack refers to the hierarchy of risk, with senior debt at the top of the stack (the most secure) and equity, or direct ownership (the highest risk) at the bottom.
Investors need to understand the capital stack so that they can adequately assess risk against reward. Knowing where their investment sits in the hierarchical order of repayment, security, and returns will help investors make more informed decisions on whether or not that investment will meet their needs.
Key considerations for investors
Before diving into private debt investments, it’s crucial to consider the following:
- Risk tolerance: As with any investment, assessing your risk appetite is essential. Private debt can offer attractive returns, but understanding the risks associated with each deal is critical.
- Due diligence: It is critical to work with a trusted, reputable investment manager who has a proven track record of delivering.
- Liquidity: Unlike public markets, private debt investments are less liquid, meaning they cannot be easily sold or traded. Investors need to be prepared to commit for the term of the loan.
- Tax implications: Private debt investments may have specific tax consequences. Consult with a tax advisor to understand how these investments fit into your overall financial strategy.
The benefits of private debt
Private debt presents a unique opportunity for Australian investors looking to diversify their portfolios and achieve higher returns in today’s challenging economic environment. Whether you’re seeking diversification, defensive income or higher yields, private debt could be an invaluable addition to your investment strategy.
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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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1. FINSIA | https://www.finsia.com/news-hub/infinance/asic-shines-light-private-credit
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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