Private debt has emerged as a compelling alternative to traditional investments like equities and bonds, particularly for high-net-worth (HNW) investors seeking diversified opportunities. Unlike investing in public markets, like the Australian Stock Exchange, private debt involves loans or debt transactions provided by non-bank lenders to companies for projects, often structured to suit the specific needs of borrowers. This asset class can offer substantial benefits for both borrowers and investors.
The private debt market has been expanding rapidly. The International Monetary Fund recently reported the global market for private debt hit US$2.1 trillion in 20231. The current economic landscape—marked by market volatility and rising interest rates—has made private debt a timely and attractive option for investors. As traditional asset classes experience fluctuations, private debt provides a stable, income-generating alternative, often with secured backing like real estate.
Understanding private debt
Understanding private debt can deliver significant benefits for both borrowers and investors.
Many mistakenly believe non-bank loans (i.e. private debt) are inherently riskier investments than traditional bank loans. While it is undoubtedly important to work with a trusted, reputable investment manager, investors must separate fact from fiction when considering if private debt is right for them.
Understanding the Australian private debt market
Australia’s private debt market has experienced substantial growth, driven by a combination of regulatory changes and investor appetite for alternative investments. Private debt is gaining even greater traction, as a result of tightened bank lending standards.
This does not mean that the transactions, or the borrowers, being turned away by the banks, are not A-grade quality. It is simply a reflection of the banks skimming the top of a very deep pool.
Check out this case study of a recently completed deal where Zagga was able to meet the funding gap required to complete construction and assist the borrower, a highly experienced and successful developer, and meet the risk and return appetite of our investors.
The different types of private debt
Private debt can be structured in a variety of ways, depending on where it sits in the capital stack. The capital stack refers to the hierarchy of risk, with senior debt at the top of the stack (the most secure) and equity, or direct ownership (the highest risk) at the bottom.
Investors need to understand the capital stack so that they can adequately assess risk against reward. Knowing where their investment sits in the hierarchical order of repayment, security, and returns will help investors make more informed decisions on whether or not that investment will meet their needs.
Invest in real estate private debt with Zagga
Key considerations for investors
Before diving into private debt investments, it’s crucial to consider the following:
As with any investment, assessing your risk appetite is essential. Private debt can offer attractive returns, but understanding the risks associated with each deal is critical.
It is critical to work with a trusted, reputable investment manager who has a proven track record of delivering. At Zagga every loan has returned capital and interest to its investors. Learn more about Zagga.
Unlike public markets, private debt investments are less liquid, meaning they cannot be easily sold or traded. Investors need to be prepared to commit for the term of the loan.
Private debt investments may have specific tax consequences. Consult with a tax advisor to understand how these investments fit into your overall financial strategy.
For more details, check out Zagga’s FAQs.
The benefits of private debt
Private debt presents a unique opportunity for Australian investors looking to diversify their portfolios and achieve higher returns in today’s challenging economic environment. Whether you’re seeking diversification, defensive income or higher yields, private debt could be an invaluable addition to your investment strategy.
Ready to explore the possibilities? Zagga is here to help you get started on your journey.
- FINSIA | https://www.finsia.com/news-hub/infinance/asic-shines-light-private-credit
- As at 30 October 2024
