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Northleaf private credit fund hits $670-million close

Bank towers are shown from Bay Street in Toronto's financial district on Wednesday, June 16, 2010.

Adrien Veczan/THE CANADIAN PRESS

Northleaf Capital Partners is expanding its private-credit business as institutional investors around the world push more money into loan strategies in pursuit of higher returns.

The Toronto-based firm is set to announce the closing of its first global credit fund, Northleaf Private Credit I, having amassed $670-million (U.S.) in investor commitments.

Private lenders cater to borrowers outside the publicly traded debt market, and the field has seen a surge of new entrants and growth since the financial crisis. This has been driven in large part by new regulations and capital requirements that caused banks to leave the space, particularly in the United States and Europe.

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At the same time, institutional investors such as pension funds have been looking to alternative asset classes that offer higher returns. The amount of capital awaiting allocation in private credit is now hovering near record highs, reaching $214-billion at the end of the third quarter, according to alternative-asset database Preqin.

"What we're seeing in credit is symptomatic of the even broader trend toward the private markets," said Stuart Waugh, managing partner of Northleaf. "It's not just from big institutional investors, it's now from mid-sized pension plans, corporates, even high-net-worth investors and family offices."

That trend has been good to Northleaf. It now manages more than $10-billion in commitments from 75 Canadian investors across its alternative-asset platforms, which also include infrastructure and private equity. Northleaf was spun out of Toronto-Dominion Bank in 2009 as a $2.8-billion division, and it has long been backed by Canadian heavyweights such as Canada Pension Plan Investment Board. The firm intends to court more global investors in the coming years.

Northleaf will source its new credit deals largely through relationships it built as a private-equity investor. Such partnerships led to all 10 of the private credit investments that the new fund has made to date, which amounts to 30 per cent of the fund's capital. Most of these deals come from the United States, where the private credit market is more developed than it is in Canada.

Mr. Waugh said Northleaf is focused on mid-market deals, ideally with $15-million to $50-million in earnings before interest, tax, depreciation and amortization. The fund thinks this market still has interesting investment opportunities, even in the competitive environment.

Amid bull-market conditions and soaring U.S. equities, some market watchers are concerned that a widespread downturn could be close at hand. That could dampen returns for some lenders.

Mr. Waugh said his team regularly reflects on whether the capital structure of new investments could withstand a repeat of 2008 to 2009 conditions.

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"We would never make a credit investment – or even a private-equity investment – without understanding what does this specific business investment look like in a prolonged downturn. Any good private-market investor today is going to be modelling some kind of market correction or multiple contraction into their hold period and looking at whether they still earn an attractive return," Mr. Waugh said.

Northleaf is also working on expanding its global footprint beyond its Toronto headquarters and small offices in Montreal, London, Chicago and Menlo Park, Calif. Northleaf also has a growing team in Melbourne, Australia, where it has infrastructure assets, and hopes to do some credit deals in the future. The firm also plans to open an office in New York in the coming months.

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