With record low interest rates, self-managed super funds (SMSFs) trustees are shifting their cash allocations into equities, however this may not be enough and they would need to consider a number of other investment options, such as listed and unlisted trusts, managed investments and private real estate debt.
According to alternative investment platform AltX, almost one in two SMSFs said cash was currently a ‘poor investment’ and 40% believed they would need to invest in other assets to make up the yield shortfall.
At the same time, SMSFs were perceived to be poorly diversified according to the Australian Taxation Office (ATO) however they had more flexibility to diversify than Australian Prudential Regulation Authority (APRA)-regulated super funds – and for larger SMSFs with the ability to deploy capital into less liquid or unlisted assets, private debt is one option to consider.
Additionally, SMSFs could tap into direct deals or invest via managed funds.
AltX co-founder and chief executive, Nick Raphaely, said that his company was working with advisers to help simplify access through bespoke funds, and also democratise access for wholesale investors to invest in individual deals they feel comfortable with.
According to him, first mortgage investments could deliver three important benefits:
- Liquidity – For SMSF members nearing retirement, the relatively short-term position (six to 12 months) of a private debt deal is comparable to a fixed-term deposit.
- Income – Once you’re in retirement phase, it can be reassuring to have interest income paid monthly, rather than waiting for company dividends and franking credits.
- Capital preservation – as 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.
“One of our investors told us, ‘My only goal for managing my own super is to preserve my capital and establish enough income to enjoy life. I'm not here to get rich quick’,” Raphaely comments.
“Another investor has told us private debt plays a conservative role in his SMSF portfolio – and he sees it as working his capital harder than cash in the bank, without taking undue risk.
“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 honour the terms the contract, and may be one reason we have a default rate of zero.”
However, he warned, it was important to weigh up the relative risk and return.
“When you can access the details on a private debt deal, you can weigh up the opportunity on its own merits. This includes understanding the valuation, location potential, borrower track record, and the LVR (Loan to Value Ratio). The higher the LVR, the greater the risk – and the higher the return the opportunity should deliver,” AltX co-founder stressed.
“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. And 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.”