Introduction
Private credit has become an increasingly recognised part of the Australian investment landscape, but the term is still unfamiliar to many investors.
At its simplest, private credit refers to lending that takes place outside the traditional banking system. Rather than a bank providing the capital to a borrower, funding may be provided by private investors through a specialist private credit manager.
How does private credit work?
Private credit can take many different forms.
Loans may be provided to businesses, property developers, investors or other commercial borrowers. Depending on the transaction, the loan may be secured by assets such as real property.
A private credit manager will generally assess a lending opportunity before deciding whether to provide funding. This assessment may include consideration of:
the borrower and guarantors;
the purpose of the loan;
the value and nature of any securities;
the proposed loan-to-value ratio;
the borrower proposed repayment and exit strategy;
the term of the loan; and
the risks associated with the transaction
Private credit investments can also be structured differently. Someinvestment funds pool investor capital across a portfolio of loans, whileothers operate on a contributory basis, where investors participate in specific lending opportunities.
How does BlackBriar approach private credit?
BlackBriar operates a contributory mortgage investment model forwholesale investors.
Rather than investor capital being pooled across a broad portfolio,investors can consider individual mortgage-secured lending opportunities anddecide whether they wish to participate in a particular transaction.
This means investors are provided with information about thespecific opportunity, which may include the borrower, purpose of the loan,security properties, loan-to-value ratio, loan term and proposed exit strategy.
This structure provides greater visibility over where an investor'scapital is being deployed, although each investment remains subject to therisks associated with the particular loan.
Why do borrowers use private credit?
Traditional banks operate within relatively standardised lendingpolicies and credit processes.
Private lenders can sometimes consider transactions that do not fitneatly within those parameters.
Examples may include borrowers seeking:
- bridging finance;
- business acquisition funding;
- commercial property finance;
- refinancing;
- construction or development funding;
- short-term working capital; or
- funding where timing is important.
This does not necessarily mean the borrower is unable to obtainbank finance. In some circumstances, private credit may simply provide greaterflexibility or a faster assessment process.
What are the risks of private credit?
Like all investments, private credit involves risk.
Potential risks may include borrower default, declining propertyvalues, delays in repayment, enforcement costs, limited liquidity and changingeconomic conditions.
Holding security over property can provide a lender with additionalrights if a borrower defaults, but a registered mortgage does not guaranteerepayment.
Private credit may form part of a broader investment portfolio forsome wholesale investors, but investors should understand the individualtransaction and associated risks before investing.