Traditionally financial advisers were considered investment specialists who earned fees for advising their ‘non-financial’ clients on where to invest. But with traditional debt and equity investments no longer achieving the desired outcomes, they’ll need to stay ahead of all available investment options – including the ones self-directed investors are already embracing.
Trust in financial advice eroded during the Banking Royal Commission, and only one in ten Australians currently receive financial advice. Oliver Wyman estimates non-advised investments in Australia are worth $3.6 trillion – more than three times assets under advice.
“Financial advisers have been forced to make significant changes – to their fee models, professional education requirements and client duty of care – and in some cases their licensees have exited the industry,” says Nick Raphaely, CEO and Co-founder of AltX, an alternative investment platform focusing on property-backed private debt.
“At the same time, the available universe of investment options has expanded – and many high net worth or sophisticated investors know that. They expect more from their advisers than ever before.”
Direct investors are embracing debt
While it’s still a relatively small component of any portfolio, industry experts believe Australia’s private debt market could double by 2025. According to Preqin, Australia’s private capital assets under management rose steadily in 2020 to a record $77 billion, and the country has one of the most attractive risk/return profiles globally. These assets comprise private equity, venture capital, private debt, real estate, infrastructure, and natural resources.
“Investors no longer question whether the asset class has merits. They come directly to us, and are more interested in whether the deal matches what they’re looking for in terms of risk and return,” says Raphaely.
One AltX investor, who currently has over 100 deals on the platform and also invests in private debt elsewhere, says AltX’s deals play a “conservative role” in his portfolio as a capital preservation play. “I like the quality of the deals, and I like AltX’s flawless default rate of zero. Your money works harder there than with the bank, without taking on any undue risk.”
As a wholesale investor, he also invests directly in property, funds and equities – without a financial planner.
“I find they don’t really understand what you’re trying to do, or they have a bias towards a particular path,” he says. “I wish accountants could still provide that kind of advice, because they see everyone’s books and understand what does and doesn’t work.”
Most investors don’t have the time or expertise to stay on top of a truly diversified portfolio – let alone any tax advantages. Yet 19% of Australians say the biggest barrier to accessing financial advice is lack of trust – and 29% say it’s a desire to manage their own finances.
AltX’s Flagship First Mortgage Debt Fund has recently received a ‘Recommended’ rating from independent research house IIR, and AltX can also create bespoke funds for advisers. This makes first mortgage private debt more accessible for both advisers and their clients.
However, they first need to understand the role of alternative assets like private debt in the current market.
Liquidity, yield and capital preservation
For investors approaching or in retirement, generating reliable income is the number one concern right now. But defensive positions are currently difficult: investing in cash currently does not beat inflation, and other fixed-income like 5-year Australian government bonds are only returning around 0.5% yield.
“Alternatives are not designed to keep pace with ‘raging bull’ equity markets – they provide non-correlated diversification to protect investment portfolios,” explains Raphaely. “But they can provide a balance of income, diversification and liquidity if you know what you are looking for.”
For example, AltX provides returns of around 4%-8% on first mortgage-backed property loans, over a fixed period – say 12 months. Construction loans may yield higher returns, but they assume an extra level of risk in the execution of actually building a project.
That’s why private debt investors need to do a fair amount of due diligence before committing to any specific deal. And their advisers should be across those details too.
“I understand property,” the AltX investor told us. “I don’t look at any LVR (Loan to Value Ratio) over 65% unless it’s a cracker of a position. I look at the valuation and whether I agree with that value. I look at the property, where it is and what the alternative uses are – how easy it would be to resell. And I tend not to go past 12 months.”
He prefers to invest directly, to have full visibility over the underlying asset. “I like that AltX has been doing this for quite a while. What I really love is that the exit strategy for the borrower is clearly laid out for every transaction. This gives me a lot of clarity on how I’m going to get my money back.”
Not just for those in the know
Raphaely co-founded AltX 10 years ago because he believed the ‘exclusive club’ mentality of investing in private debt was ripe for disruption. “It shouldn’t have to be a case of who you know,” he says. “We want to democratise access to this asset class.”
Many AltX investors do hear about the platform through friends and colleagues. These investors are far less likely to come through their financial adviser – although Raphaely hopes that will change as more planners understand the valuable role private debt can play in a portfolio.
“Instead of targeting a balanced portfolio mix with 60% equities and 40% bonds, think about it in terms of time,” he suggests. “Especially for retirees, who don’t have the time horizon to recover from a capital loss or ride out low bond yields.” For example, carving liquidity needs up into time, you could allocate cash funds to a 12-month private debt deal – and enjoy strong returns with a similar sense of security. “As a first mortgage holder, you rank in priority to other creditors,” notes Raphaely.
Other assets, like private equity, also have a strong showing as alternatives to equities – but (like equities) they play a growth role, rather than yield. And private equity positions are far less liquid than shares.
“There are assets that can provide income, but they aren’t the ‘usual’ types of products many financial planners are used to,” says Raphaely. “If we look at the US, there is certainly growing acceptance of alternatives as part of the mix. Yieldstreet, for example, enables investments in art or marine finance as well as real estate.”
As financial advisers seek to stay relevant in ever-changing markets – where new tech platforms may be just as trusted by the next generation of investors as a human adviser – it’s important to be aware of all the possible options available to meet investor goals and risk appetite.
AltX (www.altx.com.au) is a market-leading alternative investment platform. Founded in 2012 and headquartered in Sydney, AltX provides bespoke access to alternative income-generating products which have traditionally been inaccessible to individual investors. AltX has funded in excess of $2bn of transactions since inception with zero loss of investor capital.
This article was sourced from a media release sent by Medianet