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Credit investing: Everything you need to know

an example of real estate finance which sits under credit investing
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What is credit investing?

Credit investing comprises two types of investments (debt and equity) and involves investing in a credit or a debt loan. Credit investments can take several forms, including consumer and small/medium business loans, venture debt, specialty loans and other forms of private debt.

Equity Investments

Equity investments are investments into publicly listed companies or enterprises whose shares are traded on exchanges (e.g. the ASX 200). They provide investors with partial ownership of the underlying asset.

Debt Investments

In many ways, debt investments operate like an ‘I owe you.’ In short, they promise regular interest repayments over a set period with the added benefit of full repayment of the initial debt upon maturity. Investing in debt investments can be a beneficial way for investors to preserve their initial capital while earning a fixed-income return.

How do debt investments work?

There are three common structures that debt investments usually take. Each structure determines the underlying rate of return and when/how an investor will be paid. It is important to note that the income derived may be more or less than expected depending on the type of interest rate offered.

Fixed-rate Securities

Fixed-rate securities offer the same return rate for the entire life of the investment, irrespective of market fluctuations. Typically, fixed-rate securities take the form of investment bonds.

Floating-rate Securities

As the name suggests, with floating-rate securities, the underlying rate of returns fluctuates in line with the benchmark interest rate, e.g. the RBA cash rate. This helps to protect investors from the effects of inflation and ensures investor returns keep pace throughout all aspects of the market cycle.

Zero-coupon Securities

Rather than receiving regular interest payments, with zero-coupon securities, the investor gets the total return in a bulk payment upon maturity or redemption of the loan.

The most common types of debt investments

Bonds

Australian Bonds

Issued by the treasury departments of municipal, state and national governments, government bonds are debt securities that are typically fixed-term, fixed-income investments. Because government entities issue them, they are often considered a safer option than other debt investments.

Corporate Bonds

A type of debt security issued by corporate entities, corporate bonds are designed to raise capital for the issuing company. Essentially, investors who buy into the bond are lenders to the issuing company. Often offering higher interest rates, the safety of your money is only sometimes guaranteed as performance largely depends on the company’s management issuing the bond, so it is wise to do your due diligence and choose carefully.

Distressed Debt

Distressed debt involves purchasing investments considered to be high-risk and below investment grade. They typically trade at a significant discount because the underlying entities are at risk of becoming insolvent.

Specialty finance

Lending that occurs outside of traditional real estate and banking channels and includes:

Direct Lending

Private loans are usually issued to small to medium businesses by asset management funds using money raised from investors. The loans are held on the respective fund’s financial records until maturity or refinancing occurs.

Real Estate Finance

Property finance is lending for commercial, industrial, office, and high-rise residential developments. This type of lending encompasses land bank lending, development finance, and residential lending that caters to owner-occupiers and investors.

Bridge Finance

Bridging finance provides borrowers with short-term funding solutions with flexible repayment options. These options include capitalised interest, interest-only payments, term amortisation, or a combination.

Structured Finance

Asset-backed Securities

Asset-backed securities are financial instruments backed by a pool of underlying assets such as mortgages, credit card receivables, or auto loans issued to businesses and individual consumers.

Mortgage Backed Securities

Mortgage-backed securities are when investors lend money to home buyers without being the lender. With mortgage-backed securities, the lender combines various home loans into one package and sells them at a reduced rate to banks and other lending institutions. Home buyers then take out a loan through these banks or other lenders. With MBS securities, investors will receive periodic payments until the loans mature.

The benefits of credit investing

With investors continuously searching for better returns and ways to decrease their exposure to public markets, credit investing can offer access to a stable income and added liquidity. Rising in popularity, credit investing continues to outperform traditional fixed-income investment products. Credit investing can also be a beneficial way for investors to balance portfolio risk, as debt investments can be used as defensive assets to protect an investment portfolio against inflation and market volatility.

Improved predictability of portfolios

The credit investment market tends to rely less on broad market trends and more on the characteristics of the underlying investments, which, in turn, helps reduce portfolio volatility. Access to regular income can also provide predictability and stability when forecasting overall returns.

Attractive risk-adjusted returns

Investing in credit can deliver a sustainable and ongoing source of regular income whilst also balancing out the risk of loss.

Income

Most managed funds offer investors the choice of regular interest payments or the option to reinvest, making credit investing an ideal option for people with self-managed super funds or those looking to generate retirement or passive income streams.

Low Correlation to Public Markets (i.e. shares)

Offering the benefits of diversification investments into credit and fixed-income loans can offer more balanced returns even when the share market is not performing well. This type of investment can also mitigate the potential effects of domestic and international stock market volatility.

What is the best way to invest in credit?

With the credit investing space becoming more enticing, many investors are searching for ways to access market opportunities. Investing in an alternative asset manager offering credit-based funds is one way investors can tap into the credit market. Before investing in credit-based funds, it is wise to look at the underlying performance of the fund manager, the quality of the underlying asset pools, and the respective funds’ investment requirements.

Remara has a range of credit-based funds open to wholesale and retail investors, including our flagship Private Credit Income Fund (open to retail and wholesale investors) and our Credit Opportunities Fund (open to wholesale investors only). Offering an 13.40% return p.a* (post fees) over the last 12 months, our Private Credit Income Fund is an ideal option for income-based investors looking for consistent income and the ability to withdraw money quarterly without penalty. It suits investors with a low-risk profile and offers portfolio diversification along with higher-than-average returns.

Our Credit Opportunities Fund has a targeted return of the RBA cash rate +10% p.a. (post fees) with a running yield of 15.39% p.a. (post fees). It is suited to investors with a medium to high-risk investment profile looking to add a growth fund to their portfolio. With underlying investments in structured finance, corporate loans, tactical opportunities and retail and project finance, it exposes investors to the private credit market with the added benefit of a regular income stream and portfolio diversification. The Credit Opportunities Fund is only open to wholesale investors.

If you would like to find out more about how credit investing could benefit you or would like more information regarding our range of credit funds, contact our investment team today.

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