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Private debt a cash replacement

private debt SMSF

Access to private debt markets may be a suitable replacement for cash investments for funds unable to access the direct property market.

SMSF investors unable to access direct property investments can still benefit from the growth in that sector by becoming a source of funding through private debt deals, according to an alternative investment platform.

AltX co-founder and chief executive Nick Raphaely said traditional sources of income for an SMSF had become less attractive, but private debt could provide access to income-generating products that were usually inaccessible to individual investors.

Pointing to the “2021 Vanguard/Investment Trends SMSF Investor Report”, Raphaely noted around 50 per cent of SMSFs viewed cash as a poor investment, adding Australian 10-year government bonds were yielding only 1.7 per cent in May 2021.

He also noted that while SMSFs have favoured property “because of the high ticket price of investing in direct property, the reality for many SMSFs is that if they choose to invest in a property directly, it is very difficult to diversify beyond that”.

“There is, however, another way SMSFs can benefit from Australia’s property boom, without buying directly into the asset. And that is to ‘be the bank’ – to fund the private lending deal that underpins a specific asset,” he said.

He noted SMSFs had the flexibility to diversify into this sector and private debt was particularly suitable for larger funds with the ability to deploy capital into less liquid or unlisted assets via direct deals or managed funds.

“We are working with advisers to simplify access through bespoke funds and also democratising access for wholesale investors to invest in individual deals they feel comfortable with,” he said.

He said the first mortgage investments available via AltX offered liquidity as the short-term positions of a private debt deal, usually around six to 12 months, were comparable to a fixed-term deposit and also provided an income stream to those in retirement phase, as well as capital preservation.

“Our SMSF investors say they feel comfortable knowing there is a ‘bricks and mortar asset’ as underlying security – and as a first mortgage holder, they rank ahead of other creditors for repayment of capital,” he said.

“The underlying security is the collateral that directly supports the loan – much the same way as banks operate. That’s a strong incentive for the borrower to honour the terms of the contract and may be one reason we have a default rate of zero.

“While cash and bonds are currently struggling to deliver the returns SMSFs expect, it’s still important to have some defensive assets within your portfolio as a buffer against market volatility and inflation.

“With the ability to generate income in the low interest rate environment still one of the largest retirement concerns for SMSFs, alternative income strategies like private debt could be the answer.”

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