Private lending provides business borrowers the ability to get capital on less stringent terms, and with less prerequisites than major banks. This means that if a borrower doesn’t meet bank criteria, or requires urgent capital, they are able to source funds from a private lender. Typically, these loans are for short to medium term use, and are for business transactions or property development.
Private lending covers a wide range of financial products, from mortgage-backed lending, to invoice financing and to asset finance. Basically, anything where a debt instrument can be created against an asset class.
Private lending allows borrowers to save time, take advantage of business opportunities and mitigate the effects of opportunity cost had they not had access to funding. For this convenience and ease of funding, pricing is higher than a traditional bank, as the provider is taking a higher risk.
Sometimes borrowers can have a perfect credit history, but the asset class they are seeking a loan against, such as petrol stations or land banks, are not bankable. Or it could it be just as simple that the bank will take 3 months to approve a loan, but a private lender can have it settled in 8 days. Another example might be where a bank won’t lend more money to an existing business customer because they don’t meet serviceability requirements and the business has urgent need for funds.
The entire banking system in Australia is reliant on the private lending market or shadow banking market to survive, as it provides liquidity in situations that the banks can’t. This helps to reduce default rates with banks, provides exits for banks, and ensures customers can access liquidity when they otherwise wouldn’t be able to get it. This liquidity provided by the shadow banking system is integral to the economy, especially when it comes to business ventures with higher risk profiles, than a typical consumer home loan.
What is private credit?
Private credit, which is from an investor perspective, is when an investor, family office, fund or company provides funds to a business for the purpose of a private loan. In Australian most private credit deals are in the form of mortgage-backed private credit. Meaning these transactions have property as security, either in the form of a first mortgage or second mortgage.
The returns of private credit.
Returns vary based on the underlying asset class as security for private credit transactions, the nature of the borrower and the transaction type. A deal could be as simple as providing credit against a property asset, or as complicated as providing credit for an M&A transaction.
Typically, regarding mortgage baked transactions, where property is provided as security, first mortgages will provide a return of 8% to 14% p.a and second mortgages with a range of 18% to 26% p.a. This is subject to the prevailing BBSY rate at the time, risk, borrower history, loan size, lvr, loan duration and the underlying security type.
Private credit has several advantages compared to public debt transactions. Firstly, beyond the risk adjusted rate, there is also the illiquidity premium as private credit is a private transaction. This requires a degree of active management / skill on behalf of the investor, fund manager or agent representing the investor to find such opportunities. Because these opportunities have to be found, developed and managed, there is less money going after these transactions than publicly traded debt instruments, thus increasing the yield.
Additionally, there is an “inconvenience premium” which can be gained without taking on additional risk. Borrowers are willing to pay above the risk adjusted rate, if credit can be provided in an urgent fashion, so they can take advantage of market opportunities or solve business problems at hand. This allows investors to make a premium by solving the inconvenience of borrowers, if they can provide urgent liquidity, without taking on additional risk. This tends to be the key advantage of private credit, and to realize this, investors must have direct access to deals through the proper intermediaries such us as.
Returns will also vary whether an investor is directly lending their funds to a borrower, has an agent representing them or is putting their funds into a fund. For smaller investors (sub $500k) they are better off putting their money into a fund, for larger investors they may wish to consider directly lending themselves.
At Royce stone capital we specialize in mortgage-backed private credit, representing family offices and professional investors (who have $1M to $10M liquid). We do not run a fund model and instead we act for our investors. This means we take care of deal origination for our investors and loan management.
The direct lending model means an investors name will be on the mortgaged property being provided as security, they will have deal overview and above all deal control. This direct model provides higher net returns to investors versus a fund model! It also makes deals more competitive in market, to attract more borrowers, to ensure a win for all parties.
Disclaimer: This press release may contain forward-looking statements. Forward-looking statements describe future expectations, plans, results, or strategies (including product offerings, regulatory plans and business plans) and may change without notice. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements.
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City: Melbourne
State: Victoria 3000
Country: Australia
Website: https://www.roycestonecapital.com.au/
