Private debt Investments with Fixed Interest Returns
Private debt investments that give your family certainty.
We work with multi-generational family offices that want deal control, security for their principal and a premium return. If our private debt investments are good enough for family offices, then doesn't your family deserve the same?
That is why we have created private debt opportunities of various sizes from $200k to $10M, to provide opportunities for various wholesale investors.
Our direct lending model makes you the funder, removing the need for you to blindly trust an investment manager. We don’t deal in “target returns", only actual returns on a per deal basis!
- First mortgage private debt investment net returns of 7.5% to 14% p.a.
- Second mortgage private debt investment net returns of 16% to 24% p.a.
- Lender warehouse facility private credit net returns of 12% to 15% p.a.
Fixed Income Investments with high yields
How does the RSC direct lending model work?
Our private debt 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 from our strong marketing presence to match individual investor preferences.
- Initial diligence: We conduct initial DD and provide recommended deals terms. After a letter of offer is executed by the borrower, formal DD takes place.
- Formal DD & Old school values: We help guide you regarding valuations and other critical DD items. We also inspect Melbourne properties with you!
- You have control and legal claim: All loan and mortgage documents are done under your lending entity's name ! This can be done using your lawyers or lawyers we recommend.
- We don't touch your money: All funds are handled by your lawyers, and we do not manage your money.
- Loan management: We work with you to help with loan management admin.
Who am I lending my money to?
Why do private debt investments exist?
Private debt investments exist to service the liquidity requirements of private businesses, that cannot be fully serviced by traditional banking! Typical reasons include.
- They do not meet bank lending criteria. This could be because of tax debts, a late interest payment, low credit score or because they don't have sufficient financial records.
- They are bankable but the bank can't meet their requirements. The bank may not be able to provide the capital in time, the bank may be unwilling to lend more money, they may not fund a particular asset / transaction type or the bank may not offer interest only options.
- 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 tax to meet bank serviceability requirements in order to borrow more money. As such, private lending offers them a solution as most private lenders don't require lodged financials.
- They don't want the headache of a bank. In a number of instances, we have client's who simply don't want the headache of a bank!
Fixed Income Investments, That Give you Certainty
RSC private debt investments and borrower risk profile.
At Royce Stone Capital we structure and originate two types of deals for our investor funders, based on what they want! The pricing is based on the borrower credit application, security and transaction type.
RSC low doc loan applications.
- Borrowers have good credit scores, no defaults and solid repayment history.
- Meet most second-tier lending criteria.
To attract these borrowers, we offer second tier rates with interest only terms for 1 to 3 years and an easier application process.
Full private loan applications.
- Borrower does not meet bank or second tier criteria.
- Borrower does not wish to deal with the banks.
To attract these borrowers, we offer an expedited loan process, better terms than most other private lenders and coalignment with the borrower when things get hard
A full break down of deal returns is provided below or start working with us today!
Fixed Interest Investments with high yields
What returns can I make with private debt investments?
When it comes to private debt investments, you are remunerated in four different ways.
- Private market investment premium / illiquidity premium.
- The risk adjusted rate of return.
- Deal size premium: Micro deals sub $200k offer higher risk adjusted returns for the inconvenience caused to the investor / funder as well as deals that are above $10M, because there are few competitors.
- A real alpha return: Investors that are able to provide swift liquidity (within 8 business days) to private businesses are able to gain a premium return, above the risk adjusted rate for similar transactions.
- Be rewarded for inconvenience: In the event a borrower is late on a payment or defaults on contract terms, beyond what is reasonably acceptable. The penalty rate is 1.5 times to 2 times the base rate.
What this translates to is net of fees you can earn 7.5% to 24% per annum as a base rate, depending on the transactions you fund!
A full break down of deal returns is provided below or start working with us today!
Fixed income investments with peace of mind
Peace of mind, first mortgage private debt investments
We have two types of first mortgage products, either a low doc application or a private loan. Across both types a first mortgage is provided to the investor / funder, meaning you are the bank and have the first call to the asset! Deals sizes from $500k to $10M.
Property LVRs
- Residential property up to 80% LVR in metro cities.
- Commercial property up to 75% LVR in metro cities.
Low doc applications.
- Borrower meets second tier lending requirements.
- 1 year to 3 years.
- Net returns of 7.5% to 9.5% per annum.
- Paid monthly.
Private loan applications.
- 3 months to 1 year
- Net returns of 8.5% to 14% per annum.
- Paid monthly or paid in advance
High return private debt investments
High return, second mortgage backed private debt investments
We have two types of second mortgage products, either a low LVR or high LVR application. Across both types a second mortgage is provided to the investor / funder meaning you sit behind a bank or a second tier. Deal sizes from $100k to $2M.
We have a number of steps funders can take to protect their interests, that most private lenders aren't aware of, in addition to experienced legal counsel to protect your interests!
Low LVR (sub 70%) second mortgage applications
- 3 months to 1 year.
- Net returns of 15% to 19% p.a.
- Paid in advance out of the loan amount.
High LVR (sub 82% LVR) second mortgage applications
- 3 months to 1 year.
- Net returns of 18% to 24% per annum.
- Paid monthly or paid in advance.
Work with us today, to learn how to properly do a second mortgage loan and earn a higher return!
Private credit, direct lender warehouse facilities
Private credit investments, lender warehouse facilities
Provide the capital that private lenders need to grow their loan books by lending them the capital they need via investment into a private credit warehouse facility.
Deal sizes of $5M minimum, or these facilities can be syndicated amongst investors.
The advantage of these facilities is you are providing funds to a private lender that then uses your funds to do micro loans, with the lender managing the loans and you having the loan book as security!
Gain the benefit of reduced concentration risk, passive investment and a higher net return. Typical scenarios involve providing funds to invoice financiers, or other lenders with specialised debt books.
Typical deal terms
- Concentration per deal cannot be greater than 5% per any one loan of funds provided, with the exception of mortgage backed loans. Subject to capital provided.
- Net returns of 12% to 15% p.a. to the investor.
- Security registered against the lender loan book or a carved out asset pool.
- 1-to-3-year facilities.
How to manage the risk of private debt investments
Getting rewarded for inconvenience and the risks of direct lending
Direct lending that is mortgage backed are one of the oldest forms of private debt investments. It is for this reason family offices so often invest in it, because they have security and are handsomely rewarded for any inconvenience. Below are some of the key risks of direct lending and how they are mitigated.
- The borrower does not repay the loan or interest. You have the ability to take possession of the asset and sell it. This typically takes 3 to 5 months and with legal costs of $30k to $50k. During this time, penalty interest is charged, and your legal costs are reimbursed from the sale.
- Property valuations. Property prices can rise or fall, and as such your LVR can increase or decrease as prices move. This is why we will only go up to 80% LVR as is valuation, so there is a sufficient buffer for property price movements and equity for penalty interest etc. Additionally, your legal contracts should stipulate that the borrower must maintain the LVR at the time of the loan and inject further equity if required to maintain the LVR.
- Second mortgage risk. In the event of default, the first mortgage lender (the bank) and their penalties have priority, before the interests of a second mortgage holder. We ensure your contract paperwork has certain clauses, to identify any issues before a first mortgage lender takes possession, liquidate assets quicker and for you to take control from the first mortgage lender.
Private credit funds
Private credit funds Vs RSC direct lending opportunities.
Direct lending is not for everyone and is reserved for those who have the means to fully fund deals themselves. In return they are able to secure higher returns than a private credit fund.
Advantages of direct lending vs a private credit fund.
- Good for larger investors who have $200k to $20M.
- Good for investors who want deal control and oversight (active management).
- Good for investors who want to have their name on the individual 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.
- Isn't viable for investors seeking deal diversification across a small amount of funds.
- Isn't viable for investors who don’t' know how private lending works.
Private credit investments vs property development funds
Property development funds vs RSC private credit investments
Too many investors have been misled about property developments investments, only to lose their wealth in a number of cases. We explain why below.
Advantages of private credit investments vs property development funds
- Most property development funds inject investor capital as equity into various sub projects. Most of the time that capital is treated as an equity injection at a project level, and is taken as collateral by the lender on that project! At RSC you have a secure mortgage on the asset, which outranks caveats and equity investors!
- Most property development funds have a "target return." At RSC because you have control of the investment via a mortgage and a loan contract, the borrower is obligated to pay you the agreed rate, which is your actual rate return!
- At RSC, we only do deals on as is assets! We don't entertain construction loans or construction risk
- RSC second mortgage private debt investments in most cases return 20% to 24% p.a to the investor. Which is higher than what most property development funds offer as a target return.
Disadvantages of RSC private debt investments vs a property development fund
- Property development funds can offer higher net returns, of 15% to 28% p.a depending on the project.
Fixed Income Certainty
Fixed income investments, with high returns.
Our private debt investments are fixed interest investments by the nature of the transactions we do. This provides you - the investor/funder -with certainty and also gives the business borrower certainty of what their repayments are. A small percentage of our transactions have variable rates and this is because we wish to protect investors from any movements in the BBSY rate over a longer time horizon.
Fixed interest on your terms
- Secure a fixed income return for 3 months or up to 3 years, depending on the nature of the loan allocated to you that you fund.
- Our transactions allow us to negotiate terms that beyond year 1, the prevailing interest rate can be adjusted by any increases in the BBSY rate, to give you higher returns.
- Loans that you fund, that have interest paid in advance, offer a higher fixed income return than the quoted interest rate. This is because, you are outlaying less funds on the net loan amount vs the gross loan amount.
What are private debt investments?
Private debt 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 debt 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 debt investments that are mortgaged backed.
What is private credit?
Private credit investments are a subcategory of private debt investments. The term private credit investments is often used interchangeably with private debt investments. However, in our perspective, private credit focuses directly more so on funding to do with corporate facilities.
Typically, private credit in our eyes and that of Deutsche Bank, are transactions where private credit is where a corporate loan funded by investors is being given to a mid tier company. Additionally, we believe any facility where a loan book is being financed, such as a warehouse facility also belongs in this subcategory.
Private corporate credit can have a senior debt position, or it can be a subordinated debt position, with fixed or floating returns.
What are the risks of private debt investments?
As with all investments, there are risk and private debt 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 debt 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.
