Navigating Australia’s Growing Private Credit Market
Private credit, or non-bank lending, is experiencing significant growth in Australia. A property debt fund is a form of private credit that pools capital from investors to provide loans.
The loans financed by the property debt fund are secured by Australian property, which provides a layer of security for the lender (i.e. the investors in the property debt fund) because the property can be sold if the borrower defaults on the loan. Property debt funds generate regular income returns to the investors in the fund from the interest paid on the loans by the borrower.
To understand the risk and return of these investments, investors should consider the concept of the capital stack—the hierarchy of claims on a project’s cash flows or assets. The primary position of the capital stack is first mortgage debt. If your investment is secured by a first mortgage, you are the first lender to be repaid in full should the underlying property assets have to be sold after a borrower has defaulted on the loan.
The secondary position of the capital stack is second mortgage debt. Second mortgage or mezzanine debt is repaid only after all first mortgage debt holders are repaid in full in the instance of a loan default.
The final position of the capital stack is equity. Equity investors are last to be repaid and only benefit if the project succeeds, as these holdings represent ownership in the project.
Understanding the capital stack may help investors in private credit better understand the risk profile and fund structure. Some investments may appear debt-like but contain equity components, where repayments depend on the project's long-term success. These can offer higher returns but also come with higher risk. Investors should evaluate whether the
risk-reward balance is appropriately priced and aligns with their goals for stability and income. By understanding the nuances of the capital stack and seeking professional advice, investors can confidently navigate the growing private
credit market while protecting their capital and achieving their desired financial outcomes.
Disclaimer: Past performance is not indicative of future performance. The distributions and investment returns depend on the performance of the underlying investments. Information contained within this article does not constitute financial advice, nor is it a personal recommendation. Capital Property Funds is not authorised or qualified to provide financial advice or to make an investment recommendation. Information contained within this article is general in nature and has been prepared without regard to the individual objectives, financial situation, or requirements of any person. Prospective investors should seek personal financial and legal advice before deciding to invest.
