What is a sophisticated investor?

If you have a gross annual income of $250,000 and/or at least $2.5 million in net assets, you’re classified as a sophisticated (or wholesale) investor – and that gives you more options to diversify your investment strategies. With the rapid growth in property prices and incomes, more Australians are reaching sophisticated-investor status – by 2031 that cohort will double to more than six million investors.

So what drives the decisions of this group of investors? Like all investors, they are currently most concerned about two main things: equity market volatility and how to earn yield in a long-term low-interest environment. A recent survey of AltX investors revealed just how important a proven track record of returns is when allocating funds to non-traditional asset classes like private real estate debt. And 38% say they plan to increase their allocation to this alternative asset class in 2022.

Private real estate debt is a core income strategy

In the wake of widespread market disruption, sophisticated investors are looking for greater certainty – and for a higher income return than banks can currently offer. With interest rates in Australia remaining at all-time lows, private real estate debt provides an alternative to more traditional fixed-income options like term deposits or bonds.

As Nick Raphaely, Co-founder of AltX puts it: “Money needs to earn its keep – it should be working as hard as you do. But it’s not doing that in the banks right now.”

AltX investors are ahead of the curve when it comes to private debt. The majority (61%) say that private real estate debt is already a core part of their investment strategy in retirement. It’s not just that the yield is higher than with other asset classes, or the predictability of regular monthly interest income. The most important reason for investing in real estate debt is knowing their investment is secured against a first mortgage, as well as the diversification benefits for their portfolio.

Finding the right investment amid market uncertainty

According to AltX’s 2022 Private Real Estate Debt Investor Outlook, nearly one in four investors (24%) either fear a bubble in the equity market or worry about the impact of ongoing low-interest rates and what this means for their ability to earn yield. This makes it increasingly difficult for investors to generate stable returns while still protecting their capital against riskier investments.

Private real estate debt is one solution. Because this investment type is linked to the asset and the borrower, it’s less likely to be impacted by external factors that can heighten volatility. And that’s why 59% of respondents said private real estate debt would give them the best downside protection over 2022 and 2023 – far higher than direct property (16%), bonds (5%) and equities (3%).

Raphaely equates those who invest in private debt to sellers of picks and shovels during the Gold Rush era:

“Very few people made their fortunes mining for gold, but the people who consistently made money provided services to them. That’s what we do every day – we enable borrowers to take risk on property assets and projects, and we do it in a very disciplined way.”

Meeting the changing needs of investors

With banks scaling back their direct lending in response to regulatory reforms, it’s creating new opportunities for private lenders. And that’s just one reason industry experts believe the private debt market could double by 2025. This comes at an ideal time for sophisticated investors who are approaching retirement – as income certainty and capital preservation become a priority, alternative strategies step in.

As an accessible online platform, AltX gives investors a user-friendly way to analyse the suitability of a wide range of private real estate debt deals, daily. And in turn, this also helps them have more confidence in a dependable income stream through to retirement.

With a growing cohort of sophisticated investors in Australia concerned by a market mired by low-interest rates and external market uncertainty, the need for more diverse investment options is likely to grow. Private real estate debt is one-way investors can take greater control of their capital and continue to earn stable returns despite the disruption of recent years.

Looking to diversify your portfolio with an asset class that offers the security of a first mortgage? There’s a reason why more and more investors are turning to private real estate debt. Find out more about how it works and get started by registering your interest with AltX today.