Private credit Investments that provide confidence
Private credit investments that give you certainty.
We work with multi-generational family offices that want certainty of income, without the uncertainty of capital fluctuations or unknown dividends, that equities typically suffer from. Private credit can provide the fixed income certainty you need to grow your wealth and maintain your lifestyle, that other asset classes struggle to provide.
Private credit returns vary from 8% p.a. to 60% p.a., depending on the transaction type, security, structure and product demand. What makes private credit unique, is that higher returns don’t always have to come from taking on more risk. At RSC we specialise in creating asymmetric return risk products, where higher returns can be obtained without taking on more risk.
Private credit Investments
How to invest in private credit?
You can invest in private credit, either through exclusive direct lending opportunities that we provide, or via investment into a partner private credit fund.
Private credit funds provide you with reduced deal concentration risk and quarterly distributions, without the headache of having to manage your funds (albeit at much lower returns than direct lending). Alternatively, direct lending provides you with deal control, higher net returns than a fund and your name on loan documents (but requires you to be co-involved in managing your money).
Most of our HNW clients do a combination of the two. Firstly, they use our direct lending opportunities for high return deals where they can co-manage risk and for low-risk deals to net higher returns than a fund. Simultaneously they will invest funds into low to medium risk private credit funds, that put idle capital to work.
Read more below, or click here for direct lending opportunities
Private credit Investments that are unique
Private credit returns
Below is a high level overview of the net returns you can make with our direct lending investments or the returns you can expect form our partner funds.
RSC direct lending
- First mortgages, 8% to 14% p.a.
- Second mortgages, 16% to 24% p.a.
- Heritage plate lending, 12% to 20% p.a.
- Lender warehouse facilities, 9% to 30% p.a.
- Special situations working capital, 30% to 60% p.a.
Click here to learn more about our direct leding products.
Private credit funds
- First mortgage funds, 7.5% to 9.5% p.a.
- Second mortgage funds, 14% to 16% p.a.
- Construction funds, 10% to 11.5% p.a.
private credit Investments with high yields
How we achieve alpha returns at RSC?
An alpha return is obtained by getting a higher return without taking on addittional risk, (when compard to a similar investment), or by achieving the same return as a similar investment but with less risk. We achieve alpha through our direct lending opportuntiesin five ways ways (read our latest article here).
Speed to market: Borrowers are willing to pay a premium for urgent funds.
Unique products: Heritage plate loans and specialised underwriting.
Underwriting risk :We achieve second mortgage returns, with first mortgage risk, by underwriting the first mortgage position.
Micro deals: Deals sub $200k, command a premium.
Special relationships: We have deep relationships with certain clients, allowing us to do deals others can't.
Private credit with high yields
How does RSC direct lending work?
Our private credit investments are made for wholesale investors who want to be the direct funder without syndication. What does our model entail?
- Deal origination: We originate deals to match your individual preferences.
- Due diligence: We conduct initial DD and provide recommended deals terms. After a letter of offer is executed by the borrower, formal DD takes place to your satisfaction.
- You have control and legal claim: All loan and mortgage documents are done under your lending entity's name. You have direct security and recourse.
- We don't touch your money: All funds are handled by you or your lawyers.
- Loan admin management: We work with you to help with loan management admin.
Private credit funds
Private credit funds Vs RSC direct lending opportunities.
Our private credit direct lending investments are not for everyone and are reserved for those who have the means to fully fund deals themselves. \
Advantages of direct lending vs a private credit fund.
- Good for larger investors who have $500k to $100M.
- Good for investors who want deal control.
- Good for investors who want direct security.
- Good for investors who want higher net returns.
Disadvantages of direct lending vs a private credit fund.
- Isn't viable for smaller investors, who don't have the capital to take a whole deal.
- Isn't viable for passive investors who don't want to be actively engaged in deals.
Private credit borrower profile
Why do people use private credit?
Borrowers use private credit for a variety of reasons, and not all borrowers come with impaired credit histories. Some simply, don't want the headaches of bank.
- They do not meet bank lending criteria. Tax debts, late interest payments, low credit scores or because they don't have 2 year financials.
- Bank funding requires serviceability, which requires tax to be paid. Businesses that need short to medium term capital, may not wish to crystallise profits and pay excess tax.
- Opportunity cost of a bank: They may be bankable, but the time taken by the bank may mean they lose an investment or business opportunity.
- Specialised product. The borrower requires a specialised facility a bank doesn't offer.
What are private credit investments?
Private credit investments involves investors providing funds to private businesses or in some instances to publicly traded businesses, where the debt itself (security) can’t be publicly traded. This can occur directly between investors and private businesses, or via investors investing into their money into a managed fund with an investment manager that then loans these funds out.
By their nature private credit investments are generally speaking illiquid, because they can't be easily transferred from one party to another, like publicly traded corporate debt or government bonds.
There are many subcategories of private debt investments and there are many financial products. Private debt investments can have a range of different types of security, from mortgage backed property, loan book backed, corporate guarantees and alternative assets. Picking the right type of private debt investments that is right for you, is critical to your investment goals.
At Royce Stone Capital we specialise in direct lending private credit investments that are mortgaged backed.
What are the risks of private credit investments?
As with all investments, there are risk and private credit investments are not immune but they are safer than many equity investments. Broadly speaking the below are the main risk involved with private debt and how we mitigate for these at RSC.
Investment manager risk
If you are investing your money into a private debt fund, then the performance of that fund is subject to the decisions made by the investment manager. Just because the fund says it will only lend to a 70% LVR of a property, does not mean the actual loan is 70% of the property value. As some investment managers can vary the way in which a property is valued, to make the valuation fit the requirements of the fund mandate!
Another issue with private debt funds and private credit funds, is investment managers may use their fund as security to take a loan. In other words they may provide the fund itself and the investors capital as security for a loan that the fund is taking to leverage its loan book. Once again at RSC because we don't run a fund, this is not an issue you will ever have to face!
At RSC, as an investor funder in our direct lending products, you make the decision! All information is presented to you, with our view, but you ultimately are the decision maker, and you can determine the level of DD you want done to your satisfaction!
Counter party risk
One of key risk with private debt investments, is the risk of that the borrower, the contractually obligated party does not fulfill their obligations and commitments under the loan agreement. This can include not repaying the loan on time, not paying interest on time, taking out other loan facilities beyond what is permitted or altering the underlying physical security.
With RSC direct lending investments borrowers as part of their signed legal obligations have a number legal obligations that they are contractually bound to. To ensure these borrowers honour these agreements borrowers must provide security for the transactions they enter into.
In most cases it is a first or second mortgage over property, which the lender can then enforce against and have sold, with additionally penalties going to the lender. Secondly borrowers must provide a personal guarantee. This means any assets held in their personal name can be claimed against, in the event of non-payment. Directors also leave themselves open to being made bankrupt and being prevented from being directors in future, if they are unable to repay all funds owed to the lender.
What this means, is that RSC investor funders, have a number points of recourse and security, by which to enforce their rights in the events borrowers default against terms. Giving our investor funders confidence, to move ahead with transactions, whilst ensuring their principal has security.
Valuation risk, LVR, property value over time:
One of the key risks with private debt investments, in specific mortgage backed lending, is the value of the underlying property asset that is being provided as security!
Valuation
When it comes to property security, a number of things need to be considered. What is the quality of the valuer? Is the valuation based on the as is current value? What would the property be worth in a fire sale scenario? is the valuation based on the site with permit values included, and if so, is that project still feasible, as the feasibility will determine the inherit permit value.
At RSC we do our own internal valuations and speak to a number of parties to determine the fire sale value of an asset. If we are in doubt or unsure, or at the request of our funders if neither us nor them can determine the value of the asset, we will engage a third party to do a valuation.
LVR and property liquidity
The type of property will also determine the loan LVR. A loan against a residential property in a major city can afford a 80% LVR, but a residential property in a regional town centre may only attract a 60% LVR. Similarly, a commercial property may attract a 75% LVR in a metropolitan city, but a piece of land that is yet to be rezoned may only attract a 60% LVR.
The LVR has several factors that come into consideration, the main one being the liquidity of an asset! The higher its liquidity, the higher an LVR can go. The lower the liquidity of an asset, the lower the LVR must be to compensate the investor / funder for any financial inconvenience caused, so the funder can be reimbursed.
Liquidity risk of private debt investments
By their nature private debt investments are not as liquid as publicly traded corporate bonds or government debt. This means that once an investor enters a private debt transaction, it is harder for them to sell the investment to another party. Because of this inconvenience investors are rewarded with an illiquidity premium.
In the case of mortgage-backed direct lending that we do at RSC, liquidity for investors comes via one of four ways.
- The borrower refinances their debt with another party, on maturity.
- The borrower repays the loan on maturity.
- The asset is sold by the investor / funder, due to the borrower being in default.
- The investor / funder can sell the loan contract to another lender (speak to us about how this is done.)
Who manages my money with a RSC private credit investment?
The role of RSC is to originate loans and to help with the loan management process. From start to finish, all funds are managed by you the investor / funder. We do not manage your money!
From when the loan is established, funds are transferred from your account to your solicitors account, who ensures all documentation is in order. Once the loan docs are signed to the satisfaction of your lawyer, and the mortgage registered. Funds are then transferred from your lawyer’s trust account to the borrowers lawyer’s trust account.
In the instance where interest is paid monthly. It is either paid directly to your nominated bank account or to your solicitor’s trust account.
RSC can help with loan management administration and certain communications with the borrower. But all decisions are ultimately made by you.
What is the difference between private debt and private credit?
Private credit and private debt are used interchangeably to describe the same thing in the industry today.
However, from a purist perspective, typically private credit was a subcategory within private debt. So private debt broadly referred to the private lending market, whereas private credit focused on a specific subset of deals within private debt. The specific subset of deals were mainly focused on warehouse facilities, private corporate debt, , securitisation of debt, and credit facilities based on going concern.
Private credit also has very different understanding based on geography. In the US for example the nature of private credit deals, is vastly different to private credit deals in Australia. In Australia most private credit deals are mortgage backed, whereas in the US a higher percentage of deals are based on going concern, and other complex structures that aren't hard asset backed.
