An asset class previously only available to South Africa’s investment elite, private debt, has become one of the world’s fastest-growing alternative asset classeshaving increased from $205bn in private loans extended in 2007, to $1.4tn in 2022. Investors are attracted to its lower volatility, lower listed market correlation and better cash returns relative to those provided by traditional asset classes such as equities, fixed income and bonds.
In the context of the rapidly increasing interest rate environment, a combination of benign equity returns and higher yields on debt can result in private debt delivering similar returns to that of equity, but for lower risk. South Africans who hold cash offshore no longer need to be frustrated by lower interest and low returns. Coupled with Westbrooke’s focus on capital preservation, Westbrooke’s private debt suite has become paramount in this volatile investment environment where investing in UK private debt can yield in excess of 9% per annum in GBP and a local option targets 14%+ per year from contractual income streams.
Also known as direct lending, private debt is a fixed-income alternative investment which, simply explained, is when a loan is made by a non-bank lender. Non-bank lenders provide private loans for various purposes, such as to bridge property transactions, develop real estate, finance business growth, provide working capital and fund infrastructure. These loans generally have shorter repayment periods.
Private debt investors enjoy the following benefits:
- Higher returns than traditional fixed-income investments, such as bonds.
- Lower volatility than publicly traded investments, as the private market nature of the assets removes mark to market swings inherent in the listed markets.
- Potentially lower risk as the investments typically benefit from hard asset security and (when managed by an experienced investment manager) are made to companies with stable cash flows and solid fundamentals.
- Portfolio diversification as the investment risk profiles generally differ from those provided through traditional listed access points.
- Predictable cash flows as the borrower typically pays set interest amounts and principal on a regular basis.
- Potential tax efficiency due to the ability for enhanced investment structuring.
Allocations to alternatives
Dino Zuccollo, head of product development and distribution at Westbrooke Alternative Asset Management explains that in the latest Westbrooke Alternative Asset Management Investing in Alternatives Wealth Partner Survey, private debt, structured products and hedge funds are the top three alternative investments for sophisticated South African investors:
“61% of respondents indicated that they plan to increase their allocations to alternatives, allocating up to 20% of their portfolios to these investments. The majority (55%) focused 60% or more of their alternative investment allocation to offshore markets.
“South African wealth managers are earning attractive yields for their clients by working with our teams in South Africa and the UK to diversify across a portfolio of secured debt transactions.”
Both of Westbrooke’s private debt strategies (Westbrooke Income Plus and Westbrooke Yield Plus) are achieving higher yields than comparative fixed-income funds.
Private debt also allows local investors to access opportunities in markets that are otherwise inaccessible to South African investors (for example, the UK).
It is important to invest via an experienced manager with a track record of success as alternatives are complex, may be opaque, difficult to implement and may be invested in a foreign geography with vastly different risk profiles.
Westbrooke has an established track record of successfully having investing over R7 billion across more than 175 private debt transactions across three continents. Westbrooke invested about R2.1 billion of group and client capital across 61 transactions since January last year. More than half was invested in private debt.
Concludes Zuccollo, “One of the appeals is that in terms of risk and return – return is generally skewed in the investor’s favour, realising higher returns with less risk. Westbrooke has an established track record of local and offshore private debt investing.”