The $1.3-billion private debt fund run by Ninepoint Partners LP and Third Eye Capital Management Inc. is limiting redemptions, despite restructuring nine months ago to accommodate investors who previously wanted out.
Withdrawals from the Ninepoint TEC Private Credit Fund II will be limited to 3 per cent of the fund’s net asset value during the previous quarter, according to an investor memo obtained by The Globe and Mail that sets out terms for the second quarter. The fund has a maximum redemption cap of 5 per cent. The cap on withdrawals include the fund’s monthly distributions to investors, which are paid first. That means redemption requests are fulfilled using whatever money under the limit is left over.
The affected fund is managed day to day by Third Eye and marketed to investors by Ninepoint, which are both based in Toronto. In total, the fund has $1.3-billion in assets, and its size and decade-plus history make it one of the best-known private debt funds in Canada.
“The terms set for the second quarter are in keeping with the restructuring agreement,” Ninepoint said in a statement.
Private debt funds typically lend to higher-risk borrowers who struggle to obtain bank financing. The funds grew popular with Canadian retail investors over the past decade by paying sizeable yields, usually about 8 to 10 per cent annually, at a time when benchmark interest rates were close to zero. Lately, however, some retail investors have started to reconsider their devotion.
For one thing, private debt funds are facing more scrutiny since Bridging Finance Inc., one of Canada’s largest private debt managers, was put under the control of a receiver in April, 2021. Bridging’s leaders and owners now face charges and lawsuits alleging fraud.
Interest rates have climbed as well, and investors can now find decent yields in lower-risk products, such as guaranteed investment certificates.
As these forces grew more powerful, Ninepoint suspended redemptions from four of its private credit funds in February, 2022, citing a spike in payout requests related to the collapse of Bridging and the resulting tension in private debt markets. The Ninepoint TEC Private Credit Fund was the largest of the four funds affected, according to fund documents.
Private debt managers can struggle when they face elevated redemption requests because the loans in the funds are illiquid by nature. Unlike stock holdings that can be sold in whole or in part in an instant, private loans are made on preset terms, and often do not mature for months or years. If necessary, private loans can be sold to generate cash, but such sales often come at deep discounts.
To solve its redemption issue last year, Ninepoint and Third Eye proposed a restructuring in June, 2022, that would split their fund in two: One arm would carry on as normal, but with revised terms. The other would be liquidated over time to pay out fund investors who wanted their money. The restructuring was approved by a unitholder vote in September.
Nine months later, Ninepoint continues to deal with the redemption issue, this time pertaining to investors who elected to remain in the continuing fund, now known as the Ninepoint TEC Private Credit Fund II.
In its update this week, Ninepoint and Third Eye did not disclose what percentage of investors are looking to get their money back this time around, but they reminded unitholders the fund manager has the right to change the redemption limit as long as the fund’s independent review committee deems such action to be in the best interest of unitholders.
In an e-mailed statement to The Globe, Ninepoint said: “Our ongoing engagement with investors indicates the vast majority want to remain invested in the fund, and these changes [the 3 per cent redemption limit] were put in place to protect the long-term value of the strategy to serve their interests. This move also puts us in the optimal position to balance cash flows, distributions, and reinvestment in the strategy.” Third Eye did not respond to a request for comment.
Elevated redemption requests are an issue for a growing number of private investment vehicles, often because of the mismatch between illiquid loans and immediate withdrawals. In December, U.S.-based Blackstone REIT, one of the largest private real estate funds in the world, limited redemptions because so many of its investors wanted out, despite Blackstone stressing that the underlying portfolio was performing well.
In Canada, Romspen, which is one of the country’s private mortgage lenders and has $3.2-billion in assets under management, had to completely freeze investor redemptions last fall. But in its case, the trouble was with loan repayments by borrowers. Around the same time Toronto-based Starlight Investments also halted redemptions on two funds that specialized in U.S. housing.
In February, The Globe reported that almost 40 per cent of the loans in the Ninepoint TEC Private Credit Fund II have not required cash interest payments since their inception, and none have been made. Another 25 per cent allow the borrowers to defer their cash interest payments. So-called PIK loans – or “payment in kind” – are common in private debt, but they can limit the cash available to fund things such as distributions and investor redemptions.
Editor’s note: This article has been updated to provide additional detail about the fund’s second-quarter redemption terms.
Tim Kiladze