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Romspen, one of Canada’s biggest private mortgage lenders, with $3.2-billion in assets under management, is freezing investor redemptions, citing some trouble with loan repayments.

The act of freezing redemptions, known as “gating” in the investment industry, prevents investors from taking their money out of the fund. Because Romspen is a private lender, a preset mechanism for redemptions normally permits a certain amount to be paid back to investors each month.

The company has not said how long the freeze will last. Instead, it told investors this week that it will “temporarily defer payment of unit redemptions requests until there is more clarity with respect to the fund’s timetable for borrower loan repayments and the receipt of proceeds of collateral and asset monetizations.”

Romspen’s portfolio largely comprises construction and predevelopment loans, and it lends to borrowers across the United States and Canada. In its letter to investors, the company warned that “if redemption demands continue at high levels, the trustees may be compelled to institute other temporary liquidity management measures.”

In an e-mail to the Globe, managing partner Derek Jenkin said the freeze stems from a sudden shift in sales and refinancings. “When rates changed quickly over the past few months it created an air pocket as many pending transactions were delayed or disrupted,” he wrote. “Ultimately, this affects short term cash flows and distributions as many deals that were being refinanced or sold around that time got delayed.”

The redemption freeze is an escalation of the announcement Romspen made in October, when management told investors the company would limit redemptions and restructure the fund because of “unusually elevated investor demands for liquidity.”

Private debt was one of the hottest sectors in asset management over the past decade because many lenders – including Romspen, Ninepoint Partners LP and Bridging Finance Inc. – paid attractive yields, often about 8 per cent annually, at a time when central bank interest rates were close to zero. Romspen’s trailing 12-month yield is 8.2 per cent.

Lately, however, some private lenders have struggled in Canada. Bridging Finance collapsed and is now being investigated by the RCMP, The Globe and Mail has reported, and soaring interest rates have changed the calculus for retail investors because private debt yields don’t always compensate for lending to higher-risk borrowers in this market.

The trouble for private lenders is that it is hard for them to meet surging redemption requests, because their loans can’t be liquidated easily. In Romspen’s case, a mortgage may be tied to a real estate development that takes months or years to complete.

Ninepoint, which lends to a range of industries, also faced a rising number of redemption requests this spring and suspended redemptions on four of its private credit funds. To solve the liquidity issue, it eventually proposed a restructuring to unfreeze redemptions from its signature private debt fund, which ultimately saw redemption requests from 25 per cent of investors in the fund.

Ninepoint’s solution was to split its flagship fund in two, with investors who want out going into a new fund that pays them out as loans are repaid. The plan allowed the primary fund to carry on while allowing the one-quarter of investors who want out to get their money back.

In September, Romspen essentially copied this structure. “We believe that this option provides those who still want to redeem with a certain level of liquidity over time, while giving the fund some additional capacity to carry out its objectives for the benefit of remaining unitholders,” the company said at the time.

But that wasn’t enough. This week, Romspen told investors “the runoff Pool did not dampen redemption activity, and loan payoff activity remains suppressed.”

This isn’t the first time Romspen has halted redemptions. In April, 2020, the lender gated its funds because there was so much uncertainty surrounding the first round of pandemic lockdowns.

The difference then was that central banks slashed rates to zero, which kept money flowing through the economy. This time around, central banks are hiking rates – and are expected to keep doing so for the next few quarters.

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