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Private lending is rapidly gaining traction in Australia, providing a flexible alternative to traditional bank loans. It allows businesses to access capital under less stringent terms and with fewer prerequisites compared to major banks. For borrowers who don’t meet standard bank criteria or need urgent funding, private lending offers a valuable solution. These loans are typically short to medium term and used for business transactions or property development.
Private lending encompasses a broad range of financial products, including mortgage backed loans, invoice financing, and asset finance essentially, any debt instrument tied to an asset. This type of lending helps borrowers save time, take advantage of immediate business opportunities, and mitigate the losses of missing out on profitable ventures. However, given the higher risks taken by private lenders, interest rates tend to be higher than those offered by traditional banks.
Even borrowers with strong credit histories might struggle to get loans from banks for certain asset classes, such as petrol stations or land banks, which aren’t considered bankable assets. In these cases, private lenders can step in and provide funding quickly sometimes within just eight days, compared to the months it may take for a bank to process a loan. Additionally, when businesses need funds urgently but don’t meet a bank’s serviceability requirements, private lenders can offer a much-needed lifeline.
Australia’s banking system relies heavily on private lending, often referred to as the shadow banking market. This market provides liquidity in situations where banks cannot, reducing default rates and giving banks an exit strategy. It also ensures that businesses, especially those with higher risk profiles, can access the funding they need to grow. This is particularly crucial for ventures that wouldn’t typically qualify for consumer loans, but are integral to the broader economy.
What is Private Credit?
From an investor’s perspective, private credit involves providing funds to a business through a private loan. In Australia, most private credit deals are secured by property, either through first or second mortgages.
Returns on Private Credit Investments
The returns on private credit investments can vary based on the underlying asset, the borrower’s profile, and the complexity of the transaction. Mortgage-backed loans typically provide attractive returns: first mortgages yield between 8% and 14% per annum, while second mortgages can offer returns as high as 18% to 26%. The profitability of these loans depends on several factors, including the risk profile of the borrower, loan size, loan-to-value ratio (LVR), loan duration, and the type of security.
Private credit offers several advantages over public debt investments. In addition to risk-adjusted returns, investors benefit from an illiquidity premium because private credit requires active management and specialized expertise. The need to source, develop, and manage these deals means there is less competition in the private credit space, allowing for higher yields.
Another key factor driving returns in private credit is the “inconvenience premium. Borrowers are often willing to pay above-market rates if they can access funds quickly to seize opportunities or address urgent business needs. For investors, this creates the potential for higher returns without taking on additional risk simply by providing liquidity faster than traditional lenders can.
Returns can also differ depending on how investors choose to participate. Smaller investors those with less than $500,000 may find it advantageous to invest through a fund, while larger investors might prefer direct lending for greater control over their investments.
Royce Stone Capital’s Approach to Private Credit
At Royce Stone Capital, we specialize in mortgage-backed private credit, working with family offices and professional investors with $1M to $10M in liquid assets. Unlike traditional fund models, we represent investors directly, handling deal origination and loan management on their behalf.
Our direct lending model offers investors greater oversight and control, as their name is directly associated with the mortgaged property. This approach not only delivers higher net returns compared to fund models but also makes our deals more competitive, attracting more borrowers and creating mutually beneficial outcomes for both lenders and borrowers.
Conclusion
As private lending continues to grow in Australia, it presents a valuable opportunity for both borrowers and investors. For businesses, it offers faster, more flexible access to capital, while for investors, private credit provides attractive returns with additional premiums. With a tailored approach that prioritizes speed, flexibility, and strong partnerships, Royce Stone Capital helps unlock growth potential in a competitive market.
