De-myth Private Debt Investing
People either call it private debt, private credit or private lending. It's one of the fastest-growing asset classes for sophisticated investors, and an excellent form of diversification that often generates cash flows, as a risk-adjusted yield-based investment strategy.
Property-backed private debt is a popular investment in Australia due to its established and enormous real estate market. Therefore it's becoming an increasingly important asset class with exposure to Australian property market.
In this article I want to instead discuss a few objections or myths in private credit investing:
Pooled investors could be in trouble if loans default occurred. Therefore investing into a credit fund that has a diversified portfolio is important, it's pooled investors aligned to pooled loans portfolio. N1 currently runs on an average loan size of only about $1mil.
Real estate bubble, and risks of value slump especially at pandemic times. Private debt is usually short term in nature, ranging from three months to twelve months in tenure, an indication of agility to market fluctuations. And it's essential to invest in a fund that has strict credit policy and control that ensures independent valuation is instructed for every loan origination.
Default risks. As per discussed in point 1, a diversified loans portfolio is critical to spread risks. And managing leverage ratio is of paramount importance as a risk management tool. Most lenders' policies allow a maximum of 65% to 70% LVR (leverage ratio). N1 currently runs an average of slightly below 60%.
If the firm goes under, where does the money go? Hence investing into a fund is a way to protect your money, a fund is a separate entity of the fund manager, just like how a trustee manages the money while the fund manager (in this case the lender) makes investment/lending decisions. In the event the lender/investment manager goes down under, the fund owner is protected.
Illiquidity or unable to sell a portion just like shares, due to property-backed nature. That's when investing into a fund with multiple options of lock-up period is helpful. N1 offers six months to two years lock-up options.
Lenders or private debt companies' decision making process is opaque. Fund management is a regulated activity. N1 is an ASX-listed entity with compliance and transparency, answering to the board of directors, and independently audited.
Disclaimer: Some funds are available only to Wholesale Investors. Speak to your accountant or financial planner for more information. This is not an investment advice.