Investors

Nine reasons why investing in private lending is a compelling proposition

Posted on by Simon
private lending compelling
27
Dec

Asset classes are the building blocks of a good investment strategy when it comes to private lending, and these classes can be broadly divided into two types.

  1. Defensive
  2. Growth Assets

The first of these, as the name suggests, entail lower risk and therefore relatively low rates of stable return. With the RBA cash rate now at a historic 0.1% low, the rate of return is to say the least, underwhelming.

To quote one of Warren Buffett’s many pearls of wisdom, “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

Inflation is a cruel tax.

The second type of asset class has the potential to deliver significantly higher returns but that comes with a higher level of risk due to increased exposure to market volatility. This includes shares, property and alternative investments.

This is where private lending comes in.

There are overlaps between the asset classes, but one cannot serve as a perfect substitute for another, and choosing the right one (or right combination) depends on your own personal needs and preferences, and your appetite for risk.

So why invest in private lending?

Institutional lenders have tightened lending criteria, thereby limiting sources of capital, thus pushing up demand for alternative sources of finance, particularly in the commercial and constructions sectors. Private financing is now estimated to be worth over $1.7 trillion.

If originated and managed well, investing in private financing is a compelling proposition, and these nine reasons demonstrate why. Vado Private’s risk mitigation includes:

  1. Risk before return. The common capital deployment objective is preserving the capital of real estate private lenders. Only transactions considered low risk will be offered to investors. Higher yielding opportunities that potentially elevate risk and compromise capital are not entertained;
  2. First mortgage security over real estate assets. Subordinated security positions are not considered;
  3. The Directors of Vado Private personally invest in each and every transaction, which takes the form of credit support as a first loss position. This demonstrates a clear alignment of interest across our real estate investor partners;
  4. Conservative private lending ratios based on security type, facility type, demand and supply dynamics, location and other key metrics;
  5. Personal and company guarantees and charges;
  6. Transacting only with sponsors that demonstrate track record and ability to perform;
  7. Identifying an exit strategy. Circumstances can change suddenly and unexpectedly, so if there’s no clear way out, we won’t enter into the transaction;
  8. An uncompromising conviction in saying ‘no’ to transactions that are not within our metrics;
  9. Portfolio diversification with no single transaction or borrower exposure comprising more than 10% of the private lenders portfolio.

Vado Private has operated in Australia’s private lending market since 2017 and we have circulated north of $173 million into the market, settling 53 transactions for borrowers and real estate private lenders with zero losses.

I welcome you to get in touch for a confidential discussion or an Information Memorandum on our investment opportunity, annual returns and strategy.