Investors FAQs

Many Australians are familiar with real-estate investing through home ownership or buying a rental property. But what about investing in real estate debt? Investing in private credit funds can be an attractive option for many investors seeking income and diversification to their portfolio. These FAQs provide an overview for investors considering private credit funds.

Each investor should perform thorough due diligence and consult with financial advisers to align such investments with their financial goals and risk appetite. Here are some common FAQs that potential investors might have:

General Questions

Private credit refers to loans and debt financing provided by non-bank financial institutions. Unlike shares, these loans are not issued or traded on public markets.

Private credit funds pool capital from investors to lend to companies or projects. The returns generally come from interest payments.

Institutional investors like super funds, insurance companies, as well as high-net-worth individuals and family offices, are typical investors.

Investment Structure and Returns

Common strategies include direct lending, mezzanine financing, distressed debt, and real estate debt.

Returns vary by strategy and risk level but generally range from mid-single digits to low double digits annually. Above all, remember the golden rule that higher returns involve higher risk.

Returns can be distributed periodically (monthly, quarterly, annually) or upon the loan’s maturity, depending on the fund’s structure.

Risk and Due Diligence

Risks include credit risk, liquidity risk, market risk, and operational risk. Since private credit is less liquid, it can be harder to sell positions quickly.

Evaluate the investment manager’s track record, the experience of the management team, the credit quality of the borrowers, and the diversification of the loan portfolio.

Fees and Costs

Fees typically include management fees (usually around 1%-2% of assets) and performance fees can be charged with some managers taking profits above a certain return threshold.

Liquidity and Redemption

Investment horizons can range from 3 to 10 years, with some funds offering periodic liquidity options.

Early redemption options are typically limited and may come with penalties. Some funds offer limited liquidity windows or secondary market sales.

Fund Management and Operations

It’s crucial to assess the background and track record of the investment manager, including their experience in credit markets and specific sectors.

Performance is generally measured using metrics like Internal Rate of Return (IRR) net of all fund costs.

Legal and Regulatory

Yes, private credit funds are regulated. These regulations are designed to protect both investors and borrowers and ensure the integrity of the financial system.

Vado Private operates under an Australian Financial Services License (AFSL #526189) issued by the Australian Securities and Investments Commission (ASIC). Holding an AFSL signifies that the licensee has met the regulatory requirements set by ASIC and is permitted to conduct specified financial services activities within the legal framework of the Australian financial system.

Tax treatment can vary, and it’s advisable to consult with a tax advisor to understand the implications based on your financial situation and the fund’s structure.

Investment Process

Investments typically require meeting the sophisticated wholesale investor threshold, completing an application process and paying the capital to the investment manager.

Consider your risk tolerance, investment horizon, liquidity needs, and overall portfolio diversification before committing to a private credit fund.

Private credit is lending to a variety of borrowers. And any sort of lending brings the risk of borrower default, and the security of the loan would need to be called to cover the loan proceeds.

Before issuing a loan, our credit team does a lot of due diligence to get comfortable that the loan can be serviced and repaid. We then structure the loan to ensure there are sufficient lending protections, and that the loan will still be paid if the borrower’s credit quality deteriorates.

It varies, but probably less than 15% of a portfolio. In some portfolios, private credit will be held in the alternative assets’ allocation as a driver of income for the portfolio. If you’re considering adding private credit to your portfolio, it’s essential to assess its potential impact on overall returns and risk-adjusted performance.