Private debt, or as we prefer to refer to it as private lending, is the business of lending money to individuals or businesses who cannot borrow from traditional lenders, like banks, or prefer the flexibility of borrowing from non-bank lenders.
Suitability
Private lending is suitable for investors with medium to long-term time horizons, who understand the core concepts and lower liquidity of private investing and who are looking for higher, consistent, and stable income alternatives to traditional income investments, like GICs, bonds or bond funds.
Strategy and Performance Overview
This concept invests in senior short-term asset-based loans written to small and medium enterprises across North America and Europe. This fund offers a pure-play investment in a diversified private debt portfolio, which provides reliable monthly income that is low in volatility and adjusts to changes in the interest rate environment.
Portfolio Composition - As of January 31st, 2024
- 36 Credit Facilities
- Senior-Secured Loans: 99.97% of the loan portfolio
- Asset-Based Loans: 95.17% of the loan portfolio
- Floating Rate Loans: 99.82% of the loan portfolio
- Estimated Portfolio Liquidity: 94 days
- Short Term Senior Secured Private Debt produced a monthly return of 0.70% and a 1-year return of 9.32%.
- The fund continues to deliver predictable monthly income.
Why invest in
Short Term Senior Secured Private Debt?
Professional Management
By working with professional managers, who have experience and expertise in managing private lending strategies and portfolios, investors can diversify from traditional fixed income, such as GICs and bond funds to achieve consistent and predictable, monthly or quarterly income and lower volatility than publicly traded investments.
Consistently Out-Preform Bond Funds
Many top-quality private lending strategies have consistently outperformed traditional bond funds without the negative returns experienced in during periods of rising interest rates.
Regular Valuations
Investments held within private lending funds provide regular valuations by respected auditing firms and are not subject to the price volatility resulting from the fear and greed of investors in public markets.
Lower Price Volatility
Private lending funds report regular Net Asset Values (NAV) and transact purchases and redemptions on NAV valuations, again avoiding the fear and greed volatility.
Systematic Monitoring
Many private lending firms provide access to data rooms so professional advisors can dig deeply into portfolio holdings or at a minimum prepare regular reporting portfolio metrics, such as Loan to Value (equity in the underlying loans), non-performing loans, etc.
Loans Secured By Hard Assets
Most private loans are secured by collateral in the form of hard assets, such as real estate, equipment, receivables, etc. that can be liquidated in the case of forfeiture of loans and managers have experience, people, policies, and procedures to structure reserves or liquidate to recover non-performing loans.
Short-Term Duration
Many private loans are relatively short-term or floating rate, which reduces risk and potential volatility and allows them to maintain a reasonable spread over traditional fixed income investments.
Regular Opportunities Expanding
Over the past decade a wide variety of private lending firms have introduced new opportunities for investors, which allows portfolio management firms to diversify investment strategies more broadly to better manage risk and liquidity.
Consistent Predictable Income
Monthly income streams and dividend reinvestment opportunities are generally available.
Registered Account Eligible
Depending on the type of purchase, private lending may be eligible for registered accounts (RRSP, TFSA, etc.) and dividend reinvestment discounts.
Risks & Volatility
Understanding risks and volatility is critical to being successful investing in both public and private markets and both share similar risks, but others are quite different.
- Manager Risk
- There is always the possibility that a manager may make a series of bad investments or allow self-interest to put investment capital at risk. Through our due diligence and manager selection process, we work to minimize this risk.
- Liquidity Risk
- Investments in Private Lending are less liquid than traditional investments, such as publicly traded equities and bonds.
- Investors may have limited options to sell their shares or exit the investment before the end of the investment term.
- Private funds can be “gated” (investors may be restricted or limited in their ability to add or withdraw funds) mostly due to high volumes of redemptions during short periods of time, which can last for long periods of time. This has happened when the reputation of the fund or manager comes into question or when significant losses are experienced.
- This lack of liquidity could result in challenges if you need to access your capital unexpectedly.
- Valuation and Transparency
- Investments in Private Lending are not subject to the same level of regulatory oversight and reporting requirements as publicly-traded investments.
- This can lead to challenges in accurately valuing the underlying real estate assets and a lack of transparency regarding the financial performance and operations.
- Limited Exit Options
- Exiting investments in Private Lending can be more complex and restricted compared to publicly-traded equities, bonds, or REITs.
- There might be restrictions on selling your shares to other investors, and the process could be subject to certain limitations or conditions, potentially impacting your ability to realize returns on your investment.
- To mitigate these risks, thorough due diligence and partnering with experienced management teams are essential.
- Volatility
- Private investments, such as private debt and equity, are not traded on public exchanges. Their valuation and trading occur less frequently and are often based on third-party valuations.
- This is advantageous as it removes investor stress caused by volatility of publicly traded securities, but investors should understand and be comfortable with pricing mechanisms.
Liquidity
- Due to the wide variety of loan transactions in private lending portfolios and strategies, there is a wide range of liquidity restrictions.
- Investors should always understand the liquidity restrictions, plan, and notify your advisors well in advance of upcoming cash needs.
Potential Returns
- Every investment has many moving parts so predicting the future should be used for estimation purposes only.
- Generally, target ranges for professionally managed private lending funds, is in the 6 to 8% range.
