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PointNorth’s recent work has come as activist investor, forcing changes at companies such as Liquor Stores N.A.

JASON FRANSON/The Globe and Mail

Private-equity fund PointNorth Capital Inc. made its name as an activist investor, successfully taking on, and replacing, directors at a leading liquor retailer and nursing-home chain.

Yet as the Toronto-based firm finishes investing its first $270-million fund and prepares to launch a second fund, PointNorth is finding more opportunities to put capital to work in debt markets: as a lender to private companies rather than engaging in shareholder showdowns at public ones.

Debt is the new equity for PointNorth and many other institutions that focus on balancing returns with risk. These investors are earmarking an increasing amount of capital to credit markets, rather than putting their money into a stock market where valuations are testing historic highs and activist opportunities are hard to find.

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PointNorth was launched in 2016 by entrepreneur John Bitove and former investment bankers Phil Evershed, a mergers and acquisitions specialist, and Barry Goldberg, whose expertise is in lending and restructuring. OMERS, the pension fund for Ontario's municipal employees, was an early backer. The trio's willingness to get their hands dirty was clear from the start, as Mr. Bitove said: "We are confident that our unique brand of constructive engagement will enable PointNorth to invest in challenging situations."

"Constructive engagement" meant high-profile proxy battles that put new boards, management and growth strategies in place at Edmonton-based Liquor Stores N.A. Ltd., North America's largest publicly traded booze retailer, and Markham-based Extendicare Inc.

The firm's hands-on approach also translated into loans to private companies that, for one reason or another, could not win backing from banks. PointNorth stepped up as a lender to Callache Stone Quarries, which mines white marble from hillsides on Vancouver Island. Privately owned Callache owns one of North America's largest marble deposits and, with PointNorth's backing, the firm expanded into Asia and the Middle East. Think of how many Gulf States build hotels and airports with marble floors.

PointNorth also recently loaned money to Waste Industries USA Inc. of Raleigh, N.C., one of the largest garbage-disposal companies in the southeastern United States. Waste Industries was acquired in August in a buyout led by its management and private-equity firm HPS Investment Partners, a $39-billion (U.S.) fund manager spun out of JPMorgan Chase & Co.

Because Callache and Waste Industries are private, PointNorth does not disclose the interest rates it charges, but Mr. Bitove said the fund is earning equity-like returns on loans to private companies, with less downside risk.

The country's largest institutional investors have also moved into direct lending and other corners of the credit markets. For example, the Ontario Teachers Pension Plan and alternative asset managers Onex Corp. and Brookfield Asset Management Inc. make loans to private companies.

Industry wide, credit-focused funds similar to PointNorth are turning in strong results. Over the past five years, private debt funds posted 11-per-cent annual returns, according to a survey of more than 1,700 money managers from alternative asset database Preqin. The firm measures performance from a variety of credit market strategies, including the direct lending approach practised at PointNorth, along with distressed debt investing and venture debt funds.

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Over the past five years, direct lending was the top-performing strategy, averaging 16-per-cent annual returns. Private debt funds are performing well because of a pickup in economic growth, both in North America and overseas, which has led to a low rate of credit defaults and bankruptcies.

By comparison, Preqin found that all private-equity strategies, including equity market activists and buyout funds, turned in 15-per-cent annual returns over the same period.

Solid past performance from credit funds has opened the fundraising floodgates: Preqin's global data show there are currently 310 private debt funds attempting to raise $137-billion (U.S.) from investors, including a planned $10-billion offering from Tim Hortons owner 3G Capital that, if successful, would qualify as the largest private debt fund ever raised.

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