For Wealth Managers: Which Investors are Best Suited for Private Debt?

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MARKET INSIGHTS

April 16th, 2024

If you’re a wealth manager, you know investment opportunities are constantly evolving. You also know it’s important to stay on top of emerging trends so you can offer your investors the best opportunities and outcomes, which is probably what brought you here.

A significant trend capturing the attention of wealth managers and financial advisors is private debt. Although this asset class has historically flown under the radar, its growing prominence is undeniable today.

As more wealth managers seek to diversify and enhance their investors’ portfolios, an interest in incorporating private debt is on the rise. But, should you start weaving private debt through every portfolio? Let’s consider which investors stand to benefit most from the opportunities this fixed interest investment class presents.

Understanding what private debt offers for your investors.

You know your investors well, and once you’re familiar with private debt For wealth managers: How to introduce private debt to your investors?>, you’ll no doubt have a few key clients springing to mind who would be an ideal fit. However, it’ll be difficult to “convert” your investors to private debt if you don’t know how it benefits them specifically. A key step to better understanding private debt yourself lies in understanding the nuances and opportunities it presents to your investors.

In our experience, there are two types of investors best suited to private debt (who are new to the asset class):

    • Those currently using equity for income generation.
    • Those who have directly invested in property in the past.

Let’s take a closer look at why private debt is an excellent option for these investors.

Why private debt is ideal for these parties.

A property cycle has four phases — Boom, Stability, Bust, and Recovery — which are influenced by economic, social, and political factors. In the past, a single cycle would last about seven years. However, Perth has seen about four cycles in the last 10 years. For a property developer, these shorter cycles can affect project duration, impose planning challenges, create cash flow issues, and reduce profit margins.

Investors using equity for income generation.

Although private debt falls under the income investments umbrella, it’s very different to other income generation investment options, such as dividend paying shares and bonds.

Investors and wealth managers often turn to equity investments because they want income, but many only do so simply because they are familiar with them. While equities can offer substantial returns, they come with high costs, significant risks, and volatility. This makes them less than ideal for income generation, despite their effectiveness in fostering long-term growth.

It’s important to clarify that we’re not anti-equity. Equities have their place, particularly in growth-oriented strategies, and investors can maintain a portion of their portfolio in equities for this very reason. But, for those specifically aiming to generate income, the equity market is not the most efficient path.

The private debt market presents an appealing alternative, offering better returns for the same investment or equivalent income with less capital. This frees up capital for growth investments, aligning with investors prioritising income — without compromising growth potential.

Investors who understand direct property investment.

Individuals with a background in direct property investment bring a nuanced understanding to the table, as opposed to someone who’s been in a managed fund where they’re mostly invested in equities. Landlords, for instance, are well aware that managing properties for a 2 – 5% rental yield can be exceedingly demanding. With private debt, they can earn far more than that — between 9 – 12% with Bowery.

This presents a natural segue into private debt, and their property experience means they come into the asset class with some familiarity and confidence.

At Bowery, many of our investors have come from that background or are still active in that area. Rather than abandoning real estate entirely, they often use private debt to supplement their rental income, drawn by the higher returns and reduced operational burdens. This allows them to diversify their investment portfolios and optimise income while minimising hassle.

A broader look at ideal investors for private debt.

So far, we’ve gone specific in our answer to “which investors are best suited for private debt?”. However, while these primary investor audiences are ideal for private debt, the asset class is appropriate for any investor who aligns with one or more of the below characteristics.

1. Investors looking for fixed income.

Private debt appeals to investors seeking fixed income because the return frequency is very predictable. Investors can earn interest monthly, and stagger the earnings for different times of the month if they have multiple investments. These payments continue until the investment’s maturity date, upon which, investors are fully repaid. In receiving a regular income stream, investors enjoy predictable cash flows — particularly useful to those who are retired or semi-retired.

2. Investors willing to forsake liquidity for 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 prioritise income over liquidity and have no immediate plans to liquidate their investments. In fact, a significant number of our investors have no intention of cashing in their investments at all, valuing steady income generation above the flexibility of quick access to cash.

3. Investors looking for a simple investment product.

Financial instruments have become increasingly complicated, and that often makes it challenging for investors to understand their investments. As a result, some investors commit to these products without a clear grasp of their actual holdings. In contrast, private debt — particularly its mortgage component — stands out for its simplicity and transparency.

While some investors may not be initially familiar with private debt, its underlying principles are not difficult to understand, offering a clear and direct investment pathway. 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.

All-in support for visionary wealth managers.

And flexible funding for your visionary investors.

With a unique blend of benefits (particularly its ability to complement traditional equity and real estate investments) private debt is an asset class worth exploring. As a wealth manager, it presents a strategic opportunity to diversify and optimise your clients’ portfolios — that’s something we’d like to support you with.

Bowery has never not returned capital or interest, ever — we invite you to explore and scrutinise our history and past performance. When you’re ready, talk to our directors to learn more about a partnership with us and discover how we can help you on-board your clients.

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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