The hottest trade in global finance that can deliver 8-12% returns (backed by hard assets)
Livewire Markets
Livewire Markets
Livewire Markets
July 8, 2024
July 8, 2024
July 8, 2024
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It is the hottest trade in global finance but what is the real risk-reward in private credit?
Stocks may be the perennial favourite destination for retail investors but institutional and wholesale investors have been chasing a very different kind of opportunity. Private credit has ballooned in the last few years, with the Australian market estimated to be worth close to $200 billion. Globally, Bloomberg estimates that the market could be worth as much as US$1.7 trillion and a whole slew of global and local firms want a piece of the pie.
But while it may be the hottest trade on the street, it's also one of the most difficult to understand. Luckily, for you dear Livewire reader, we have drafted in someone who can explain it all in plain English.
AltX co-CEO and co-founder Nick Raphaely has been running private lending businesses since 2005. When we asked Raphaely to explain what private credit means to him, this is how he put it:
You can be the bank," Raphaely explains. "What that means is that when you think about how a bank lends money to a borrower - they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end. It all comes to the bank."
"But when you do it as a private investor, it's exactly the same except the investor puts up the capital ... the investor literally gets to be in the position of the bank. The bank model has been successful for so long and our proposition to investors is that you get to enjoy the riches that the banks have enjoyed for so long," he adds.
But when you become the bank, you also take on the risk. To explain this asset class and how they are making sense of its place in today's markets, Raphaely joined me for an episode of The Pitch.
Edited Transcript
Firstly - in plain English - what does private credit mean to you as an investor?
Raphaely: We like to describe it very simply as you can be the bank. What that means is, if you think about it, when a bank lends money to a borrower, they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end all comes to the bank.
When you do it as a private investor, it's exactly the same except the investor puts up the capital, the investor gets the benefit of the valuation, the benefit of the loan documents receives the interest and the capital back at the end, the investor gets to be in the position of the bank.
So, it's very simple. The bank model has been successful for banks for so long. Our proposition to investors is you get to enjoy the riches that the banks for so long have enjoyed.
What is your risk-reward profile in private credit investing?
Raphaely: Obviously, we're in a higher rate environment than we were previously. In the current environment, with our set of products, investors can be earning a net return of anywhere between, I would say low-8%s on the low end, all the way up to 11 or 12%.
For that, they're getting a transaction that is secured by a mortgage, a first mortgage over a property, which they can read the valuation of. They can visit the property, they can assess, they get the better of the loan docs, and they get guarantees from the sponsors. So in a downside scenario, they're protected by hard assets and they're earning a high single-digit or low double-digit return. So we think it's very compelling in any environment, but particularly in this environment because elevated rates have improved the rates to investors.
We’re seeing a higher for longer interest rate environment, insolvencies in the construction space, and although contradictory, an upswing in house prices. How do you parse all these macro signals into your investment process?
Raphaely: Because the loan is backed by a hard asset in the form of building a house, a commercial property, an industrial property, or some land, in a worst-case scenario, as the investor in the deals, the lender to the borrower, the asset can be sold and the capital can be repaid to the investor that way.
If everything else goes bad, the borrower disappears, et cetera, you can foreclose on the property, sell the property, and return the capital. So absent things like fraud and gross negligence and mismanagement, we think that the prospect of an investor suffering a material loss is very, very low.
Compare that to the equity markets, for example, where anything can happen to equities on any given day. In the example of secured asset lending, you've got this buffer between the amount you lend and the amount that the asset is worth. So that provides an inherent built-in buffer for investors.
Where are you finding your most profitable opportunities right now?
Raphaely: I think construction funding provides a really good opportunity simply because it requires an experienced team to execute. And so the barriers to entry as a lender are higher, which means less competition, which means you can charge borrowers more and it means borrowers will come to you if they see value in your expertise so you attract the best deals and therefore you can pass on those opportunities to your investor clients.
We've been in the construction space since 2017, so we have a seven-year track record. We funded many hundreds of millions of dollars worth of deals. And so that allows us to attract what we think are really good opportunities.
Sometimes you see fantastic deals. We're doing a deal in Palm Beach at the moment. So a borrower's got a virtually completed home. The broad metrics are properties worth $12-13 million. They want to loan for $5 or $6 million. They've substantially done all the work themselves and they just need money to finish off the construction.
So we can send our team in, they can look at the deal, and we can get comfortable. They've done a good job on building so fast, that they'll be able to get all the certificates to get the occupation certificate, and therefore we can provide that funding.
So what does that mean to an investor? You get to put $5 million into an asset, which is worth 12 or 13, which the borrower is going to sell once they've finished completion. It's very, very difficult not to get a good outcome as an investor in a deal like that. So people bring those deals to us because they know we do construction [funding] well, and I think being able to offer that as part of our suite really helps the business and attracts good opportunities, which we can then pass on to our investors.
Published by Livewire Markets on 8th July 2024.
Stocks may be the perennial favourite destination for retail investors but institutional and wholesale investors have been chasing a very different kind of opportunity. Private credit has ballooned in the last few years, with the Australian market estimated to be worth close to $200 billion. Globally, Bloomberg estimates that the market could be worth as much as US$1.7 trillion and a whole slew of global and local firms want a piece of the pie.
But while it may be the hottest trade on the street, it's also one of the most difficult to understand. Luckily, for you dear Livewire reader, we have drafted in someone who can explain it all in plain English.
AltX co-CEO and co-founder Nick Raphaely has been running private lending businesses since 2005. When we asked Raphaely to explain what private credit means to him, this is how he put it:
You can be the bank," Raphaely explains. "What that means is that when you think about how a bank lends money to a borrower - they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end. It all comes to the bank."
"But when you do it as a private investor, it's exactly the same except the investor puts up the capital ... the investor literally gets to be in the position of the bank. The bank model has been successful for so long and our proposition to investors is that you get to enjoy the riches that the banks have enjoyed for so long," he adds.
But when you become the bank, you also take on the risk. To explain this asset class and how they are making sense of its place in today's markets, Raphaely joined me for an episode of The Pitch.
Edited Transcript
Firstly - in plain English - what does private credit mean to you as an investor?
Raphaely: We like to describe it very simply as you can be the bank. What that means is, if you think about it, when a bank lends money to a borrower, they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end all comes to the bank.
When you do it as a private investor, it's exactly the same except the investor puts up the capital, the investor gets the benefit of the valuation, the benefit of the loan documents receives the interest and the capital back at the end, the investor gets to be in the position of the bank.
So, it's very simple. The bank model has been successful for banks for so long. Our proposition to investors is you get to enjoy the riches that the banks for so long have enjoyed.
What is your risk-reward profile in private credit investing?
Raphaely: Obviously, we're in a higher rate environment than we were previously. In the current environment, with our set of products, investors can be earning a net return of anywhere between, I would say low-8%s on the low end, all the way up to 11 or 12%.
For that, they're getting a transaction that is secured by a mortgage, a first mortgage over a property, which they can read the valuation of. They can visit the property, they can assess, they get the better of the loan docs, and they get guarantees from the sponsors. So in a downside scenario, they're protected by hard assets and they're earning a high single-digit or low double-digit return. So we think it's very compelling in any environment, but particularly in this environment because elevated rates have improved the rates to investors.
We’re seeing a higher for longer interest rate environment, insolvencies in the construction space, and although contradictory, an upswing in house prices. How do you parse all these macro signals into your investment process?
Raphaely: Because the loan is backed by a hard asset in the form of building a house, a commercial property, an industrial property, or some land, in a worst-case scenario, as the investor in the deals, the lender to the borrower, the asset can be sold and the capital can be repaid to the investor that way.
If everything else goes bad, the borrower disappears, et cetera, you can foreclose on the property, sell the property, and return the capital. So absent things like fraud and gross negligence and mismanagement, we think that the prospect of an investor suffering a material loss is very, very low.
Compare that to the equity markets, for example, where anything can happen to equities on any given day. In the example of secured asset lending, you've got this buffer between the amount you lend and the amount that the asset is worth. So that provides an inherent built-in buffer for investors.
Where are you finding your most profitable opportunities right now?
Raphaely: I think construction funding provides a really good opportunity simply because it requires an experienced team to execute. And so the barriers to entry as a lender are higher, which means less competition, which means you can charge borrowers more and it means borrowers will come to you if they see value in your expertise so you attract the best deals and therefore you can pass on those opportunities to your investor clients.
We've been in the construction space since 2017, so we have a seven-year track record. We funded many hundreds of millions of dollars worth of deals. And so that allows us to attract what we think are really good opportunities.
Sometimes you see fantastic deals. We're doing a deal in Palm Beach at the moment. So a borrower's got a virtually completed home. The broad metrics are properties worth $12-13 million. They want to loan for $5 or $6 million. They've substantially done all the work themselves and they just need money to finish off the construction.
So we can send our team in, they can look at the deal, and we can get comfortable. They've done a good job on building so fast, that they'll be able to get all the certificates to get the occupation certificate, and therefore we can provide that funding.
So what does that mean to an investor? You get to put $5 million into an asset, which is worth 12 or 13, which the borrower is going to sell once they've finished completion. It's very, very difficult not to get a good outcome as an investor in a deal like that. So people bring those deals to us because they know we do construction [funding] well, and I think being able to offer that as part of our suite really helps the business and attracts good opportunities, which we can then pass on to our investors.
Published by Livewire Markets on 8th July 2024.
Stocks may be the perennial favourite destination for retail investors but institutional and wholesale investors have been chasing a very different kind of opportunity. Private credit has ballooned in the last few years, with the Australian market estimated to be worth close to $200 billion. Globally, Bloomberg estimates that the market could be worth as much as US$1.7 trillion and a whole slew of global and local firms want a piece of the pie.
But while it may be the hottest trade on the street, it's also one of the most difficult to understand. Luckily, for you dear Livewire reader, we have drafted in someone who can explain it all in plain English.
AltX co-CEO and co-founder Nick Raphaely has been running private lending businesses since 2005. When we asked Raphaely to explain what private credit means to him, this is how he put it:
You can be the bank," Raphaely explains. "What that means is that when you think about how a bank lends money to a borrower - they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end. It all comes to the bank."
"But when you do it as a private investor, it's exactly the same except the investor puts up the capital ... the investor literally gets to be in the position of the bank. The bank model has been successful for so long and our proposition to investors is that you get to enjoy the riches that the banks have enjoyed for so long," he adds.
But when you become the bank, you also take on the risk. To explain this asset class and how they are making sense of its place in today's markets, Raphaely joined me for an episode of The Pitch.
Edited Transcript
Firstly - in plain English - what does private credit mean to you as an investor?
Raphaely: We like to describe it very simply as you can be the bank. What that means is, if you think about it, when a bank lends money to a borrower, they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end all comes to the bank.
When you do it as a private investor, it's exactly the same except the investor puts up the capital, the investor gets the benefit of the valuation, the benefit of the loan documents receives the interest and the capital back at the end, the investor gets to be in the position of the bank.
So, it's very simple. The bank model has been successful for banks for so long. Our proposition to investors is you get to enjoy the riches that the banks for so long have enjoyed.
What is your risk-reward profile in private credit investing?
Raphaely: Obviously, we're in a higher rate environment than we were previously. In the current environment, with our set of products, investors can be earning a net return of anywhere between, I would say low-8%s on the low end, all the way up to 11 or 12%.
For that, they're getting a transaction that is secured by a mortgage, a first mortgage over a property, which they can read the valuation of. They can visit the property, they can assess, they get the better of the loan docs, and they get guarantees from the sponsors. So in a downside scenario, they're protected by hard assets and they're earning a high single-digit or low double-digit return. So we think it's very compelling in any environment, but particularly in this environment because elevated rates have improved the rates to investors.
We’re seeing a higher for longer interest rate environment, insolvencies in the construction space, and although contradictory, an upswing in house prices. How do you parse all these macro signals into your investment process?
Raphaely: Because the loan is backed by a hard asset in the form of building a house, a commercial property, an industrial property, or some land, in a worst-case scenario, as the investor in the deals, the lender to the borrower, the asset can be sold and the capital can be repaid to the investor that way.
If everything else goes bad, the borrower disappears, et cetera, you can foreclose on the property, sell the property, and return the capital. So absent things like fraud and gross negligence and mismanagement, we think that the prospect of an investor suffering a material loss is very, very low.
Compare that to the equity markets, for example, where anything can happen to equities on any given day. In the example of secured asset lending, you've got this buffer between the amount you lend and the amount that the asset is worth. So that provides an inherent built-in buffer for investors.
Where are you finding your most profitable opportunities right now?
Raphaely: I think construction funding provides a really good opportunity simply because it requires an experienced team to execute. And so the barriers to entry as a lender are higher, which means less competition, which means you can charge borrowers more and it means borrowers will come to you if they see value in your expertise so you attract the best deals and therefore you can pass on those opportunities to your investor clients.
We've been in the construction space since 2017, so we have a seven-year track record. We funded many hundreds of millions of dollars worth of deals. And so that allows us to attract what we think are really good opportunities.
Sometimes you see fantastic deals. We're doing a deal in Palm Beach at the moment. So a borrower's got a virtually completed home. The broad metrics are properties worth $12-13 million. They want to loan for $5 or $6 million. They've substantially done all the work themselves and they just need money to finish off the construction.
So we can send our team in, they can look at the deal, and we can get comfortable. They've done a good job on building so fast, that they'll be able to get all the certificates to get the occupation certificate, and therefore we can provide that funding.
So what does that mean to an investor? You get to put $5 million into an asset, which is worth 12 or 13, which the borrower is going to sell once they've finished completion. It's very, very difficult not to get a good outcome as an investor in a deal like that. So people bring those deals to us because they know we do construction [funding] well, and I think being able to offer that as part of our suite really helps the business and attracts good opportunities, which we can then pass on to our investors.
Published by Livewire Markets on 8th July 2024.
Stocks may be the perennial favourite destination for retail investors but institutional and wholesale investors have been chasing a very different kind of opportunity. Private credit has ballooned in the last few years, with the Australian market estimated to be worth close to $200 billion. Globally, Bloomberg estimates that the market could be worth as much as US$1.7 trillion and a whole slew of global and local firms want a piece of the pie.
But while it may be the hottest trade on the street, it's also one of the most difficult to understand. Luckily, for you dear Livewire reader, we have drafted in someone who can explain it all in plain English.
AltX co-CEO and co-founder Nick Raphaely has been running private lending businesses since 2005. When we asked Raphaely to explain what private credit means to him, this is how he put it:
You can be the bank," Raphaely explains. "What that means is that when you think about how a bank lends money to a borrower - they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end. It all comes to the bank."
"But when you do it as a private investor, it's exactly the same except the investor puts up the capital ... the investor literally gets to be in the position of the bank. The bank model has been successful for so long and our proposition to investors is that you get to enjoy the riches that the banks have enjoyed for so long," he adds.
But when you become the bank, you also take on the risk. To explain this asset class and how they are making sense of its place in today's markets, Raphaely joined me for an episode of The Pitch.
Edited Transcript
Firstly - in plain English - what does private credit mean to you as an investor?
Raphaely: We like to describe it very simply as you can be the bank. What that means is, if you think about it, when a bank lends money to a borrower, they do a valuation, they write loan documents, they register a mortgage, the borrower pays monthly interest and capital back at the end all comes to the bank.
When you do it as a private investor, it's exactly the same except the investor puts up the capital, the investor gets the benefit of the valuation, the benefit of the loan documents receives the interest and the capital back at the end, the investor gets to be in the position of the bank.
So, it's very simple. The bank model has been successful for banks for so long. Our proposition to investors is you get to enjoy the riches that the banks for so long have enjoyed.
What is your risk-reward profile in private credit investing?
Raphaely: Obviously, we're in a higher rate environment than we were previously. In the current environment, with our set of products, investors can be earning a net return of anywhere between, I would say low-8%s on the low end, all the way up to 11 or 12%.
For that, they're getting a transaction that is secured by a mortgage, a first mortgage over a property, which they can read the valuation of. They can visit the property, they can assess, they get the better of the loan docs, and they get guarantees from the sponsors. So in a downside scenario, they're protected by hard assets and they're earning a high single-digit or low double-digit return. So we think it's very compelling in any environment, but particularly in this environment because elevated rates have improved the rates to investors.
We’re seeing a higher for longer interest rate environment, insolvencies in the construction space, and although contradictory, an upswing in house prices. How do you parse all these macro signals into your investment process?
Raphaely: Because the loan is backed by a hard asset in the form of building a house, a commercial property, an industrial property, or some land, in a worst-case scenario, as the investor in the deals, the lender to the borrower, the asset can be sold and the capital can be repaid to the investor that way.
If everything else goes bad, the borrower disappears, et cetera, you can foreclose on the property, sell the property, and return the capital. So absent things like fraud and gross negligence and mismanagement, we think that the prospect of an investor suffering a material loss is very, very low.
Compare that to the equity markets, for example, where anything can happen to equities on any given day. In the example of secured asset lending, you've got this buffer between the amount you lend and the amount that the asset is worth. So that provides an inherent built-in buffer for investors.
Where are you finding your most profitable opportunities right now?
Raphaely: I think construction funding provides a really good opportunity simply because it requires an experienced team to execute. And so the barriers to entry as a lender are higher, which means less competition, which means you can charge borrowers more and it means borrowers will come to you if they see value in your expertise so you attract the best deals and therefore you can pass on those opportunities to your investor clients.
We've been in the construction space since 2017, so we have a seven-year track record. We funded many hundreds of millions of dollars worth of deals. And so that allows us to attract what we think are really good opportunities.
Sometimes you see fantastic deals. We're doing a deal in Palm Beach at the moment. So a borrower's got a virtually completed home. The broad metrics are properties worth $12-13 million. They want to loan for $5 or $6 million. They've substantially done all the work themselves and they just need money to finish off the construction.
So we can send our team in, they can look at the deal, and we can get comfortable. They've done a good job on building so fast, that they'll be able to get all the certificates to get the occupation certificate, and therefore we can provide that funding.
So what does that mean to an investor? You get to put $5 million into an asset, which is worth 12 or 13, which the borrower is going to sell once they've finished completion. It's very, very difficult not to get a good outcome as an investor in a deal like that. So people bring those deals to us because they know we do construction [funding] well, and I think being able to offer that as part of our suite really helps the business and attracts good opportunities, which we can then pass on to our investors.
Published by Livewire Markets on 8th July 2024.
