Investment in Private Debt

According to the most recent PwC “Emerging Trends in Real Estate” report, an increasingly popular way to get exposure to real estate is investing in private debt. Senior lending has defensive qualities and continues to offer a premium over gilts and corporate bonds and to attract new fixed-income capital. “I can see more interest in debt investing,” says one global research head.

“If there is an adjustment in values then your debt isn’t wiped out on day one. At this point in the cycle there may be more protection in being a debt investor than an equity investor.”

As such, loan notes are taking over the role previously held by banks and investment houses that have benefitted from cash in hand to trade on the overnight markets making high returns. At the same time lending out to businesses and adding large arrangement fees but neglecting to pass sensible returns on to investors.

The business community has not forgotten the behavior of the banks post credit crunch, when they moved the goalpost’s and virtually stopped lending… and when they did begin to lend they would impose impossible conditions and sky-high charges with built in penalties, which amounted to commercial suicide for struggling businesses.

A couple of well-known banks took things a lot further, typically down valuing property portfolios to such an extent that agreed LTV’s were exceeded thus invoking higher rates and inevitable seizure of property, which was sold on almost immediately to a subsidiary company. There are various legal actions pending for this very reason.

Added to this situation, and reported by PwC are the comments of the head of real estate at a German bank:

 “Going forward, the banking sector will not be able to cope with the lending volumes that it has been doing over the last five years, which only furthers the need for private debt”.

Over the past 7-8 years loan notes have become a simple and flexible way of raising funds for businesses for development and growth. The loan note provider benefits from valuable cash to grow and move forward with plans. The loan note purchaser benefits from a fixed annual income (and in some cases capital growth) far in excess of returns in deposit accounts and stocks and shares. This is an attractive addition to anyone’s portfolio as generally there will be first charge over the assets of the company and returns that are not correlated to the stock market.

Equally, this method also isolates the investor from asset devaluation and the type of operational exposure only commonly found in ownership of single unit commercial or private rental investments.

Investors world wide have a healthy respect for products structured and promoted by UK based companies. Although not regulated in the traditional sense, well structured loan note instruments and bonds are an attractive addition to any ones investment portfolio.

For more information on the loan note and bond products in our portfolio, please contacts us.

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