Understanding the Capital Stack: How PPIF Protects and Enhances Investor Returns
The Evolution of CRED (Commercial Real Estate Debt) in Australia
Since the Global Financial Crisis (GFC), Australia has experienced a structural shift in commercial real estate (CRE) lending. Traditional banks, constrained by APRA’s Basel III capital requirements, have significantly reduced their exposure to development and construction finance. This has opened the door for experienced non-bank lenders like Princeton Financial Services (PFS) to fill the gap through tailored, first mortgage, senior secured lending structures.
Comprehending the Capital Stack
The capital stack defines the hierarchy of financial claims on a project’s income and assets. Each layer carries different risk and return characteristics. Senior secured debt, positioned at the base, offers the greatest security and first claim over collateral, while mezzanine and equity positions carry proportionately higher risk and potential return.
Capital Stack Hierarchy
PPIF invests exclusively in the senior secured layer, providing investors with exposure to stable, income-producing loans supported by first mortgage security over real property.
Capital Preservation via LVR Buffer
Capital preservation is central to PPIF’s investment philosophy. Loans are written with conservative Loan-to-Value Ratios (LVRs), typically between 60% and 70%, ensuring a significant equity buffer between project value and loan exposure.
Capital Preservation via LVR Buffer
(40%)
(60% LVR)
This approach ensures that even in a market downturn, borrower equity is first to absorb potential losses, protecting investor principal.
PPIF Capital Structure and Protection Layers
PPIF enhances investor protection through a unique 5% Investor First-Loss Reserve funded by Princeton. This reserve sits above investor capital and, combined with borrower equity, provides a total capital buffer of 42.7% before any investor exposure.
PPIF Capital Structure and Total Capital Buffer
(Developer Equity + Princeton Reserve)
The diagram above illustrates the strength of PPIF’s layered protection. Investors hold senior secured debt positions representing 62.3% of portfolio GRV, supported by a 5% Princeton reserve and 37.7% developer equity contribution.
Example Scenario: How PPIF’s Capital Buffer Protects Investors
Consider three developments in PPIF’s portfolio, each with a Gross Realisation Value (GRV) of $30 million, located in Sydney’s prime metro and eastern seaboard markets.
Portfolio Total GRV: $90 million
Weighted Average Loan-to-Value Ratio (LVR): 62.3%
Investor First-Loss Reserve: 5%
Developer Equity / Borrower Contribution: 37.7%
This means PPIF investors collectively fund approximately $56 million in First Mortgage loans, supported by $34 million in combined protection — developer equity and Princeton’s reserve. If the market corrects by 10% ($9 million), the first losses are absorbed by the equity and reserve layers, preserving investor capital. Even under a 20% market decline ($18 million), investor funds remain intact, as the total 42.7% buffer continues to protect principal. This demonstrates PPIF’s resilience to market volatility through prudent structure and conservative leverage.
Prime Metro Focus: Market Depth and Stability
PPIF’s lending mandate targets prime metropolitan residential locations across Sydney, Melbourne, and Brisbane. Sydney represents the core exposure, being Australia’s deepest and most liquid residential property market. Historically, Sydney has demonstrated greater price stability, stronger absorption rates, and faster recovery following market slowdowns, all of which enhance capital protection.
By focusing on high-quality borrowers, well-located projects, and tightly managed construction funding, PPIF ensures predictable outcomes and reliable monthly distributions for investors.
Governance and Oversight
PPIF operates with institutional-grade governance, including Perpetual as Trustee and Custodian, and Pitcher Partners as external auditor. The Independent Credit Committee assesses all loan proposals pre-approval, while the Credit Compliance Committee monitors ongoing performance. This framework ensures continuous oversight, transparent reporting, and adherence to AFSL and trustee obligations.
Summary
PPIF offers wholesale investors a secure, income-focused exposure to Australia’s private credit market through senior, first mortgage lending. Its layered capital protection, robust governance, and strategic focus on prime metropolitan markets position the fund as a leader in defensive, yield-driven investing.
Michael Fardoulis
Head of Distribution - Investor Products
This opinion piece is served by Michael Fardoulis.
Michael Fardoulis serves as the Head of Distribution – Investor Products at Princeton Mortgage Fund, where he spearheads strategic initiatives and drives growth in a dynamic market. In this role, he leverages his expertise to develop and execute distribution strategies, building strong relationships with key stakeholders.