Supercharge your private debt investments: how lending can achieve higher yield for your investments

In the last 10 years, more and more investors have discovered private debt. Lending to private companies cuts out the bank middleman, so it can be better for the borrower as well as for the investor. Annual interest rates of 5-10% are common, offering a warm welcome to investors weary of earning very little on bank accounts. Interest rates are not guaranteed and capital invested is at risk.

Of course, there are no free lunches, and some investors have suffered losses. One lesson is always to go direct and diversify. This means lending directly to a diverse range of borrowers, not through the balance sheet of a single intermediary.

The Rockpool model is built around this ‘direct and diversified’ mantra. Investors get access to a stream of loans, each one originated and structured by our in-house investment team. Each loan opportunity is issued by a different SME, with a track record of profit and growth. Our investors are the direct beneficial owners of loan notes issued by each company. Rockpool investors control their own lending programme – with the ability to decide how fast or slow they would like to deploy capital.

Added to this recipe is a special sauce in the form of the ‘equity kicker’. Investors get a slice of any gains made by the shareholders of the borrowing companies. When all goes to plan, this typically delivers a premium of 50% over and above the attractive annual cash interest (not guaranteed). That creates a cushion against losses and offers the potential for really exciting returns.

You may be wondering what this means in terms of tax implications. In fact, one of the attractions of private debt is the way it can change the tax picture. Gains from the equity kickers are not subject to income tax, instead enjoying a maximum rate of 20% (CGT) or even 10% using investor’s relief. It’s also possible to place your private debt portfolio outside the reach of inheritance tax, avoiding a potential 40% hit. Of course, there’s always the zero tax routes of ISAs and pensions. I plan to write more about these in another post.

As inflation hits the headlines and investors seek higher yields, private debt has an important role to play. It is one of the few ways left to earn a sensible premium above inflation. It’s free from the kind of attacks that have plagued buy-to-let investors, like stamp duty hikes. And it’s got the feel-good factor of supporting the engines of economic growth, entrepreneur-led small and medium sized companies.

When lending to private companies your capital is at risk and you may not get back what you lend. Tax benefits of private company investing depend on your personal circumstances and on compliance with the relevant rules. We do not provide investment, tax or legal advice.