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In Australia, private debt represents approximately 10 per cent of the total property loan market, with more brokers looking to private lenders for solutions. In this feature, sponsored by Msquared Capital, we review why more brokers are using private lenders and top tips for making it a seamless experience
In the current economic landscape, private lenders have emerged as vital contributors to financial stability and growth, with their value lying in their agility and flexibility, a trait that traditional financial institutions can lack.
For many, private lenders can serve as a lifeline for borrowers with unconventional financial profiles or niche needs that traditional lenders and banks may overlook. They are able to help bridge the gap between supply and demand and fund entrepreneurial ventures.
Speaking to The Adviser, the managing director of private lender Msquared Capital, Paul Myliotis, outlined that one of the reasons why more brokers are using the private lending sector is because of the struggles brokers can face with mainstream lenders.
But it has not always been smooth sailing for the sector, with some brokers having been burned by unscrupulous private lenders, or finding that commitments were pulled right at the last minute.
Speaking to The Adviser, Mr Myliotis explained: “What would happen is, right at the death, you get a letter of offer, you pay an upfront fee, you think the money is there and it would fall over.”
As such, Mr Myliotis and former banker-turned-broker Paul Miron launched Msquared Capital together with the aim of creating a credible and trusted offering.
“We have not issued an offer that we have not funded because of capital. And, since inception [in 2017], we haven’t changed the terms of that offer once issued. So, brokers can come with confidence to us, knowing that the terms that we have provided at the onset will be the terms that we will deliver on at settlement,” Mr Myliotis said.
He added that some private lenders can charge high establishment fees to get into the loan, which can be off-putting for brokers, particularly if there is no guarantee that the loan will settle. As such, he said Msquared Capital maintained low fees that are “often reimbursed if we don’t do the deal”.
Apprehension surrounding the changing of term sheet conditions and the “jacking up of interest rates” right towards the settlement of the loan was another facet the lender identified as a worry for brokers. Mr Myliotis stated: “We will not do that and we haven’t done it since inception.”
He added that Msquared Capital was a true lender – with money domiciled in the business through one of its three investment funds all with different risk profiles – and loans geared against securities and provided for purposes including property purchases, loan refinancing, working capital loans for small- to medium-sized enterprises (SMEs) and refinancing recently completed residual stock.
The need for speed
Like other non-banks, private lenders provide a range of services and advantages that some traditional lenders may struggle to provide. A key one is speed.
According to Mr Myliotis, mainstream banks “are taking three months to do anything slightly complex at the moment”, and – given the rapidly changing market and escalating house prices – securing quick and hassle-free loans can be the difference between success and failure for many borrowers.
But where private lenders differ from many other lenders is in the loan sizes they can go up to.
As an example, Msquared Capital recently funded a circa $6 million residual stock loan at 72.5 per cent loan-to-value ratio (LVR), secured against a recently constructed duplex. It took a week from the client signing an indicative letter of offer to the private lender providing the funds.
Mr Myliotis noted that while most non-banks might provide up to $3 million, private lending investor appetites are generally much larger. For example, Msquared Capital has facilities that go up to $50 million.
Private lenders also provide opportunities for shorter-term solutions (like bridging loans) as well as highly geared transactional business, complex transactions and “deals that are just too hard for the big banks to handle”.
He stated: “One of our niches is we do owner-occupier industrial properties at a level that the banks won’t even consider. So, we could do [loans] starting from $2 million to $20 million for owner-occupier industrial properties up to 70 per cent LVR.
“Right now, we’re finding that people who are operating businesses out of their industrial property need cash flow to shore up business. And we’re supporting the businesses in that asset class.”
As such, many brokers use private lenders to assist their clients with a short-term opportunity and then move them back into a bank facility once they’ve fulfilled that need and can service mainstream lending credit policies.
Top tips for writing private
When looking to access finance from a private lender, Mr Myliotis highlighted the importance of clearly identifying the borrower’s exit strategy, as it can influence the terms of the deal. For example, the Msquared Capital managing director said private lenders may provide additional gearing if they can see a clear exit strategy.
“If we can define the exit, we’ll go up to 75 per cent (LVR) on big-ticket [deals], which a lot of people are not doing. We’re seeing other funds clock out at 65 per cent and the solution is not there,” he said.
He suggested that the strategy for returning the client to “a bank style transaction” was also important when submitting deals to private lenders.
He explained: “We’re not in the business of putting the client into default and selling property if we can avoid it. So, we really need to understand how you’re going to get us out.”
Brokers should also look for private lenders that have a higher percentage of repeat borrower business, the MD continued, as it can be an indication of the reliability, trustworthiness and performance of a private lending partner.
He stated that “over 70 per cent” of Msquared Capital’s business had been from repeat borrowers since its inception.
ONE OF OUR NICHES IS WE DO OWNER-OCCUPIER INDUSTRIAL PROPERTIES AT A LEVEL THAT THE BANKS WON’T EVEN CONSIDER
- Paul Myliotis, managing director, Msquared Capital
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