For Wealth Managers: How to Introduce Private Debt to Your Investors?

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MARKET INSIGHTS

April 2nd, 2024

Although more and more wealth managers are exploring the opportunities presented by private debt, it remains an underutilised and unfamiliar asset class to many investors. This is largely because financial professionals struggle to effectively introduce their clients to private debt, let alone identify the right investors to introduce it to.

Being at the forefront of this emerging trend, we have numerous wealth managers confidently investing their clients’ money with Bowery. In guiding them through the process, we’ve determined the key steps in introducing private debt to investors.

Step 1. Arm yourself with knowledge.

The more informed you are, the more informed your clients will be.

If you’re relatively new to private debt yourself, start by learning everything you can about this asset class. Gain familiarity with this product and what it offers. For example, one of the main takeaways when investigating private debt is that there are two types of funds: contributory funds (what Bowery offers now) and pooled funds (stay tuned because we’ll be introducing this soon). 

Contributory funds and pooled funds are two distinct approaches, each with a unique structure and investment strategy.

Contributory debt funds at a glance – transparency & control.

In a contributory fund, investors have the opportunity to choose specific loans or debt offerings to invest in, allowing for a tailored investment experience. As a result, it’s easier for them to align investments with their risk tolerance and financial goals. 

This offers transparency and control over where their money is allocated, making it an attractive option for investors seeking direct involvement in their investment choices. 

Pooled funds at a glance – set & forget.

Pooled funds collect capital from multiple investors to invest in a diversified portfolio of loans based on a set of investment rules. This approach spreads the investment risk across a variety of assets, exposing investors to a broader range of opportunities without the need for them to select individual investments. 

Managed by fund managers, pooled funds offer a more hands-off investment experience. However, it’s worth noting that investors sacrifice a bit of return in a pooled fund because the fund must keep some money on hand for people who might want to redeem their units.

Complementary, not competing.

With a difference in returns being anywhere from 0.5-2%, contributory funds generally offer better returns than the pooled structure for the same level of risk

However, we see these funds as complementary — not one replacing the other — which is why Bowery will be offering a pooled fund structure in the future. For instance, let’s say an investor allocates 60% of their capital to a contributory model, with the remaining portion placed in a pooled fund. This setup ensures a degree of liquidity (should they need to withdraw funds) and allows the investor to benefit from the superior returns associated with the contributory model.

How Bowery lightens your admin burden.

With contributory funds, the capital is returned upon maturation (usually 6 – 18 months), necessitating reinvestment. This creates a minor admin burden, contrasting with investments that deliver a steady, annual income over decades without the need for active reinvestment. Understandably, this cycle of receiving and reinvesting funds is a slight drawback for many wealth managers — perhaps you’re one of them. 

Bowery addresses this concern by offering solutions that reduce the administrative hassle for wealth managers. Our approach includes facilitating the transition of investments from one contributory opportunity to the next, streamlining the process and mimicking the continuous income stream that wealth managers prefer. This is something that makes us a unique and favoured partner in the private debt arena. 

Additionally, we’re developing pooled fund options that promise to retain investments over the long term. These will automatically reinvest returns to generate annuity-like income without the need for constant oversight.

People Crossing the Street in Japan

Step 2. Choose the right investor.

Which investors are best suited to private debt?

Private debt presents a strategic opportunity to diversify and optimise your clients’ portfolios. Although private debt isn’t right for every investor, for the right investor, these investments can significantly strengthen their portfolio. In our experience, there are several investors best suited to private debt (who are new to the asset class). 

  • Investors who have directly invested in property in the past.
  • Investors using equity for income generation.
  • Investors looking for fixed income.
  • Investors willing to forsake liquidity for high returns.
  • Investors looking for a simple investment product.

The first two investor audiences in particular are worth pitching to. Take a closer look at which investors are best suited for private debt? and get an in-depth look at the draw cards and benefits for each party at the same time.

Step 3. Educate the investor on private debt.

Help them see a clear and direct investment pathway.

Help them see a clear and direct investment pathway.

Private debt is not as well-known as equities or bonds, so there’s a good chance the ideal investors you’ve identified won’t be familiar with private debt. Thankfully, this asset classes underlying principles are not difficult to understand, offering a clear and direct investment pathway

Start with an overview of this asset class before you dive into its nuances, how it complements their portfolio, and how it benefits them specifically. Even a basic, foundational knowledge will help them feel more comfortable and confident in exploring private debt as an investment avenue.

An overview of private debt benefits.

Income generation.

The majority of investors turn to equity for income generation, simply because it’s what they know. However, private debt offers better returns for the same investment or equivalent income with less capital. This frees up capital for growth investments, aligning with investors prioritising income or wealth managers seeking to diversify their clients’ income sources — without compromising growth potential.

Easier than property.

Landlords know that managing properties for a 2 – 5% rental yield is exceedingly demanding. With private debt, they can earn far more than that — between 9 – 12% with Bowery, optimising income with less hassle. This presents a natural segue into private debt, and their property experience means they come into the asset class with some familiarity and confidence.

Reliable fixed income.

With private debt, investors enjoy predictable cash flows — particularly useful to those who are retired or semi-retired. Investors can earn interest monthly, and stagger the earnings for different times of the month if they have multiple loans, receiving a regular income stream.

Higher return with a low risk profile.

Private debt, particularly when secured by a registered first mortgage and featuring a modest loan-to-value ratio (LVR), offers returns that often surpass those available from more liquid investment options. An LVR below 65% is considered highly favourable, presenting a solid risk profile while still delivering attractive returns. This suits a lot of investors, particularly those who value steady income generation above the flexibility of quick access to cash

Easy to understand.

Unlike some complex financial instruments, private debt — particularly its mortgage component — stands out for its simplicity and transparency. At its core, it involves an asset that serves as security and a loan that is repaid through the sale of the asset, if necessary. This straightforward structure ensures that investors can easily understand what they’re investing in.

Cheerful senior woman smiling in backyard

Step 4. Identify an income-generation portion.

Find a figure that’s right for them.

Help your investors determine what percentage of their portfolios should be aimed at generating income — a factor largely driven by their life stage and lifestyle. For instance, a self-funded retiree might allocate over half of their portfolio to income-producing investments, leaving the rest for growth. On the other hand, a married couple with two decades left in the workforce are likely to dedicate a smaller fraction to income, enhancing their portfolio’s diversity and potential for returns.

To ease into private debt investments, we suggest devising a transition strategy that allows them to start with a manageable sum. An investment of around $100,000 is a practical entry point, enabling them to become acquainted with private debt’s workings and benefits before committing further.

Step 5. Continue building investor confidence with Bowery.

Numbers don’t lie.

In any new partnership with wealth managers — and their investors by proxy — we encourage all parties to explore and scrutinise our history and past performance <link to examples / case studies /past opportunities on site>. Bowery has never not returned capital or interest, ever, and this excellent track record boosts assurance and confidence for the path ahead.

However, we’re not all about numbers. 

Our team of dynamic professionals have backgrounds across banking, corporate finance, economics and law, with a common purpose to serve clients like no other boutique fund can. We’re also set apart by our values, known for a people-first approach, quality investments, and integrity across our business — timeliness, transparency, communication, strong investment frameworks, and much more. 

All that to say, wealth managers just like you are confidently investing their clients’ money with Bowery. Just as we did with them, we encourage you to leverage our figures, experience, and industry-leading reputation when exploring private debt with your clients. They’re also welcome to contact us directly anytime for extra assurance or information.

Step 6. Assure them on what to expect.

A bright future ahead.

At Bowery, we streamline the investor on-boarding process, ensuring it’s straightforward and hassle-free. Our team is dedicated to guiding investors in selecting the ideal opportunity that aligns with their financial goals, followed by the seamless allocation of funds. 

Investors also enjoy a predictable return on investment with the benefit of earning interest monthly. Moreover, for those holding multiple loans, there’s the flexibility to stagger earnings across different times of the month. Investors will appreciate the simplicity of receiving easy-to-understand interest income statements, which are free from foreign tax credits, focusing solely on income and capital.

Ready to open doors for your clients?

We deliver good investments that make you look good.

You’re dedicated to securing the highest quality opportunities for your investors. So are we. Talk to our directors and start confidently introducing private debt to your clientele — we’ll even on-board your clients so everyone is on the same page.

Let’s do this.

You didn’t come here by chance.
You came here because you wanted to invest in your future. So, why wait?

Whether it was to invest or borrow, let’s take this first step together.

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