Private lending is not a new concept. It is a type of financial intermediation where investors provide capital to borrowers in one-on-one mortgage arrangements
Why Invest In Private Debt?
Investors have the discretion of deploying their capital into any asset class. The typical choices with comparative metrics are outlined at the table below:
Asset Class |
|||||
Metric |
Direct
|
Shares |
Government
|
Cash
|
Private
|
Stamp Duty |
4-5% | No | No | No | No |
Liquidity |
No | Yes | No | No | No |
Land Tax |
Yes | No | No | No | No |
Statutory Costs |
Yes | No | No | No | No |
Maintenance |
Yes | No | No | No | No |
Estate Agent Fees |
Yes | Yes | No | No | No |
Volatile |
Yes | Yes | No | No | No |
Capital Gain |
Yes | Varies | No | No | No |
There are advantages and disadvantages to all investment asset classes. Some of these are outlined below:
Direct Property
Direct property investment (equity) is typically a longer term play given the high entry (stamp duty) and exit (agent commissions) costs. Over the longer term or during a rising property cycle, direct investment in property can outperform most asset classes. Conversely, equity returns can be negative during periods where projected capital growth and rental yields are low.
Shares
Shares or equities as they are known, can offer liquidity and diversity. Income can be generated from a dividend or capital appreciation. Shares are considered to carry higher risk when compared to any other investments. There is limited control, and in being a minority shareholder, the investor has no voting rights. Furthermore, no collateral security is attached with the investment.
Government Bonds
Government bonds, particularly when issued by a stable sovereign are considered to be a highly secure investment. They are a liquid investment and generally perform well when other asset classes perform poorly. Whilst considered safe, the interest (yield) paid on bonds can be low. Bonds can lose value on the open market if interest rate or inflation expectations rise.
Cash at Bank
Investing money with the bank can either be at call or for a fixed term, with the latter typically attracting a higher rate of return. Bank accounts avoid market fluctuations that are typical of other investments, such as stocks, and typically pay fixed interest. The interest earned is typically lower than the returns of other investments. When you factor in income taxes on interest, the investment may fail to keep up with inflation.
Private Lending
An investment in private debt offers a predicable income stream secured against residential, commercial, retail and industrial real estate with geographic diversity. Security is further enhanced with personal guarantees provided by individuals and companies. Private money loans can provide a higher rate of return than either bonds or cash at bank investments. The current market presents arbitrage opportunities with an above average risk adjusted spread between cash/bond rates and the returns offering in private debt.
Disclaimer
This is for information purposes only and is not an offer, invitation or recommendation in respect of securities or financial products, or an offer, invitation or recommendation to sell, or a solicitation to buy securities or financial products in any jurisdiction. This information has been prepared without taking into account any investor’s particular objectives, financial situation and needs, you should consider its appropriateness having regarding to your own objectives, financial situation and needs and seek your own financial advice. This information is not intended to be relied upon by any person as financial advice. The information stated and any opinions expressed constitute best judgement at the time of writing and are subject to change without notice. We do not make any representation or warranty as to the accuracy, reliability or completeness of the information in this proposal.