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President Donald Trump speaks in Indianapolis, Wednesday, Sept. 27.Michael Conroy/The Associated Press

A Canadian private debt fund is betting that U.S. President Donald Trump's push for more NATO defence spending will bring fortune north of the border as contractors seek high-yielding loans to fund their businesses.

The Sprott Canadian Senior Debt Fund is targeting small-to-midsize Canadian companies that manufacture parts for defence giants like Lockheed Martin Corp. and Boeing Co. to make and distribute high-yield, first-lien secured loans. It aims to raise an initial $500-million to chase deals from among a select set of about 800 companies in Canada, according to Ramesh Kashyap, senior vice president in the alternative-income group at Ninepoint Partners LP.

"Trump is asking all the NATO members to pick up a bigger share," said Mr. Kashyap. Ninepoint is the new name of SPR & Co., which runs the Canadian diversified assets of Sprott Asset Management, with about $3-billion under management. "The defence spending overall as part of NATO is going to go up."

Private credit funds have emerged in Canada as pension funds, endowments and life insurance companies search for higher returns in a low-yield world. These non-traditional sources of funds are filling a gap as new regulations and capital requirements make it too onerous for the country's big banks to lend to smaller and riskier companies.

Target Companies

The goal is to raise at least $200-million by the end of January 2018 from institutional investors, Mr. Kashyap said. The fund seeks a 9-per-cent to 12-per-cent net return to investors, through deals that have an average loan size of $15-million, but which could go as high as $30-million. Target companies will typically have revenue under $200-million and be over-leveraged, with their business concentrated with a few big clients, which means that big banks generally won't lend to them, Mr. Kashyap said.

The fund, which is sub-advised by Waygar Capital Inc., will focus one-third of its business on lending to the defence sector. Another third will come from restructuring and turnaround, and the rest from traditional asset-based lending, Mr. Kashyap said.

Mr. Trump has called for North Atlantic Treaty Organization allies to meet a 2-per-cent spending goal to help the U.S. pick up the tab. The U.S. is projected to spend 3.58 per cent of GDP on defence this year, down from 3.61 per cent in 2016. NATO said its European members will spend an average 1.47 per cent of their economic output on defence this year, from 1.45 per cent in 2016.

Canada spends about 1.2 per cent of GDP on defence, with a plan to lift it to 1.4 per cent by 2025. Prime Minister Justin Trudeau pledged to increase the defence budget to $32.7-billion by the 2026-27 fiscal year, from $18.9-billion in 2016-17. Over 20 years, new military funding will total $62.3-billion.