Category: Investor Education
By Raise Private Capital | Raise Insights
Reading time: Approximately 5 minutes
Many private investment opportunities are described as "secured". But what does that really mean, and how much protection does security provide if an investment doesn't go to plan?
When researching private credit or property-backed investments, you'll often come across the term secured investment.
It sounds reassuring. After all, if an investment is secured against property or another valuable asset, that must mean your money is protected, right?
Not necessarily.
Security can provide important legal rights if a borrower fails to repay a loan. However, the level of protection depends on the type of security, the value of the underlying assets and where investors stand in the repayment order.
Understanding these differences is an important part of assessing any secured investment.
What is a secured investment?
Put simply, a secured investment involves legal rights over specified assets that may help recover money if the borrower fails to meet their obligations.
In private credit, these assets might include property, land, buildings or other business assets.
For example, a property developer might borrow $3 million to fund a project valued at $5 million.
The lender could hold a registered mortgage over the property as security for the loan.
If the developer fails to repay, the mortgage may provide rights to enforce the security and recover money from the property.
However, the amount recovered will depend on factors such as the property's value, the costs of enforcement and the rights of other creditors.
Security provides a potential means of recovery. It does not guarantee repayment.
Who actually holds the security?
This is an important distinction that investors sometimes overlook.
In some investment structures, investors do not hold security directly.
Instead, a security trustee or another appointed entity may hold and enforce security for their benefit.
For example, a managed investment fund might lend money to a property developer, with a security trustee holding the registered mortgage.
Investors in the fund may hold units rather than having direct ownership of the mortgage or underlying property.
Their rights depend on the investment structure and governing documents.
Before investing, it's worth understanding who holds the security, who can enforce it and how any recovered funds would be distributed.
What's the difference between secured and unsecured investments?
The main difference is the legal rights available if the borrower cannot repay.
With a secured investment, a lender or security trustee may hold enforceable rights over particular assets.
With an unsecured investment, there is generally no specific asset pledged as security for the debt.
If a borrower becomes insolvent, unsecured creditors typically rank behind secured creditors in relation to assets subject to valid security interests.
However, not all secured investments have the same level of protection.
The type of security, its ranking and the amount owed to other creditors can make a significant difference.
Why does mortgage ranking matter?
When property is used as security, you'll often see references to first-ranking and second-ranking mortgages.
A first-ranking mortgage generally gives the mortgage holder priority over a second-ranking mortgage holder when proceeds from the secured property are distributed.
Consider a simple example.
The following example is hypothetical and illustrates mortgage ranking. It excludes interest, enforcement costs, fees and other claims that may affect actual recoveries.
A property is sold for $5 million, with the following amounts outstanding:
Property sale proceeds: $5,000,000
First mortgage debt: $3,000,000
Second mortgage debt: $1,500,000
Remaining proceeds: $500,000
In this simplified example, both lenders could be repaid in full.
But what if the property sells for only $3.5 million?
The first mortgage holder would generally be entitled to repayment ahead of the second mortgage holder.
After repaying the $3 million first mortgage, only $500,000 would remain for the second mortgage holder, before accounting for relevant costs.
That could leave the second mortgage holder with a substantial shortfall.
Actual recoveries depend on the security documents, creditor priorities, enforcement costs and other circumstances.
This is why understanding where an investment sits in the repayment order matters.
Importantly, a first-ranking mortgage does not automatically make an investment low risk.
Even a first mortgage can experience a shortfall if the property's value falls sufficiently or enforcement costs are substantial.
What is a loan-to-value ratio?
Another important consideration is the loan-to-value ratio, commonly called the LVR.
It compares the amount borrowed against the value of the property securing the loan.
For example:
Property valuation: $5 million
Loan amount: $3 million
Loan-to-value ratio: 60%
The calculation is:
$3 million ÷ $5 million × 100 = 60% LVR
A lower LVR generally means there is a larger difference between the property's assessed value and the amount borrowed.
That difference may provide some protection if the property's value falls.
However, valuations can change, and the amount recovered from selling a property may be lower than its assessed value.
An LVR also needs to be considered alongside the ranking of the debt, other secured liabilities and the costs involved in recovering the money.
A low LVR does not eliminate investment risk.
Does a secured investment mean your capital is safe?
No investment should be considered risk-free simply because it is described as secured.
Even where security is held over property, several things can affect the outcome.
A property's value may fall. A development may experience delays or cost overruns. A borrower may default, and enforcing security can take time and involve significant costs.
Investors may also have limited ability to withdraw their money before the investment matures.
In some circumstances, investors could lose part or all of their invested capital.
This is why it's important to look beyond the word secured and understand the actual legal arrangements supporting an investment.
Common questions about secured investments
Are secured investments guaranteed?
No.
Security may provide rights to recover money from particular assets, but it does not guarantee repayment of capital or investment income.
The amount recovered depends on the value of the assets, the rights of creditors and the costs involved.
Is a first mortgage investment safer than a second mortgage investment?
A first-ranking mortgage generally has priority over a second-ranking mortgage in relation to the secured property.
That priority can be important if a borrower defaults.
However, the overall risk depends on factors including the property value, loan amount, borrower, security arrangements and investment structure.
Mortgage ranking is only one consideration.
Can you withdraw money from a secured investment early?
Not necessarily.
Many private credit investments have restrictions on early withdrawals.
Some require investors to remain invested until a loan is repaid or an underlying asset is sold.
Investors should check the investment documents to understand their redemption rights, maturity dates and any restrictions on accessing their capital.
How Raise Private Capital approaches secured investments
At Raise Private Capital, we provide eligible wholesale investors with access to selected private market investment opportunities, including private credit and property-backed investments.
Some of these opportunities involve security arrangements such as registered mortgages over property.
Our focus is on helping investors understand the structure behind an opportunity, including the underlying assets, security arrangements, repayment terms and the parties responsible for managing the investment.
Different investments can have different security arrangements, even when they appear similar.
Raise Private Capital is not necessarily the lender, issuer, trustee or security holder. Those responsibilities depend on the particular investment and are explained in the relevant investment documentation.
We believe understanding these details is just as important as understanding the potential return.
Look beyond the word "secured"
A secured investment may offer valuable legal rights if a borrower fails to repay.
But the existence of security is only one part of the picture.
Before considering a private credit or property-backed investment, it's worth understanding what assets support the investment, who holds the security, where the investment ranks and how recovery would work if things don't go to plan.
The important question isn't simply whether an investment is secured. It's what that security actually means for investors.
At Raise Private Capital, this reflects our approach to private investments:
Structure Over Speculation.
Explore Private Investment Opportunities
Raise Private Capital provides eligible wholesale investors with access to selected private credit, property-backed and structured investment opportunities.
Explore our current opportunities to learn more about their investment structures, security arrangements and eligibility requirements.
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The availability of investment opportunities is subject to eligibility requirements and the terms of the relevant investment documents.
Raise Private Capital Pty Ltd (ABN 19 694 558 775) is a Corporate Authorised Representative (CAR No. 1320689) of True Oak Investments Pty Ltd (AFSL 238184).
This article provides general information without taking into account your objectives, financial situation or needs and does not constitute an offer to invest. Investment opportunities are available to wholesale clients only. Raise provides access to investments issued and managed by third parties. Before investing, read the relevant offer document, including its terms and risks. Capital and returns are not guaranteed. All investments carry risk, including the potential loss of capital.