Credit

Private debt is similar to a loan in that it is capital provided (as an investment) to an entity in exchange for interest (and possibly other payments) and the return of the original principal at a defined point in the future. The debt is typically secured and has various protections/covenants in place. The debt is also not widely held (hence private), and is customised to the borrower’s requirements, therefore rendering it illiquid.

Private debt investments have existed for a number of years, but were, for a long time, the preserve of a minority of investors, of which banks and the ultra-wealthy were the most significant. Today, private debt is an asset class increasingly considered by a broad range of investors.

Private debt investments involve the sourcing and managing of loan portfolios that help to fill the current financing gap created by the long term decline in lending by Australian banks to Australian businesses. The new and evolving aspect of Australian and New Zealand private debt is the ability for institutional investors and high net worth individuals to access a larger portion of this market that historically has been the domain of banks.

Private debt can be classified into a number of different subcategories. The three most common methods are by seniority in the capital structure (senior, subordinated, unitranche), the type of lending transaction (corporate, infrastructure, or real estate), and geography. Private lending can be quite broad and covers different segments when looked at from a loan security perspective. Categories include:

Consumer or business loans which are generally smaller in size and where the lending is done against no security. This category tends to dominated by the banks historically but is now being disrupted by the peer to peer lending platforms.

Business or consumer loans backed against property. This is generally used for residential property purchases and is the domain of the big banks. More private loans are being made with property as security for other uses of the funding. This category can also include development loans which are utilised for the purchase and development of land into various real estate assets. While backed by property security these loans can carry a heavier level of risk due to the development nature of the asset.

Debtor finance is where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. Security is against the cash flow of the invoice.

Loans made to businesses generally to allow for the purchase of equipment. Loans are normally secured against the assets purchased.

Loans made against businesses or the cash flows of businesses. Occasionally these loans can also be secured by property as well or even personal guarantees from the owners of the business requiring the loan.