Five months into its liquidity crunch, Toronto-based asset manager Ninepoint Partners LP has proposed a restructuring to unfreeze redemptions from its signature private debt fund – a plan that would let the investment vehicle carry on while at the same time allowing the one-quarter of investors who want out to get their money back.
The fund in question, the Ninepoint-TEC Private Credit Fund, manages $1.4-billion and is marketed as a lender to public and private companies that are unable to access traditional bank financing. The fund is co-managed by Third Eye Capital Management Inc., another Toronto-based private credit specialist, and has been operating for more than a decade.
In February, Ninepoint halted investor redemptions from the fund because of a spike in payout requests amid the collapse of another private debt manager, Bridging Finance Inc., and the resulting tension in private debt markets. By its very nature, private debt is an illiquid asset class, because loans to higher-risk companies often cannot be recalled or sold on a moment’s notice.
At the time, the severity of Ninepoint’s funding crunch was not publicly known, but in a private presentation last week where it proposed the restructuring, Ninepoint said 25 per cent of investors in the fund, which is its largest private debt fund, have sought to redeem their money.
A similar, but less severe, scenario resulted in a freeze in redemptions from another of Ninepoint’s private debt funds, the Alternative Income Fund, with 10 per cent of investors trying to get out, the asset manager said.
To buy some time during the February market turmoil, Ninepoint suspended investor redemptions from four private debt funds in total. Two were temporary pauses, but the freezes for the Ninepoint-TEC fund and the Alternative Income Fund were indefinite.
The decision put Ninepoint in a bind, because private debt funds had exploded in popularity over the past five years owing in part to the fact that investors had been told they had the freedom to cash out at any time, subject to short holding periods. (Private equity funds, by contrast, lock investors in for a minimum of five years.) Ninepoint in particular had made its name by marketing private debt to the retail masses.
Ninepoint declined to comment for this story.
The temporary redemption pauses were already set to lift next month, but Ninepoint took time to devise a solution for the indefinite freezes. Under the restructuring proposal, which requires approval from investors, the Ninepoint-TEC fund and the Alternative Income Fund would each be split in two. One arm of each fund would carry on as normal, but with revised terms. The other arms would be liquidated over time to pay out investors who want their money.
“Our role as manager is to strike a balance between those in the fund who wanted to redeem and achieve liquidity quickly, and those who wish to stay in the strategy,” Ninepoint co-chief executive John Wilson said during the presentation, a recording of which was obtained by The Globe.
For the Ninepoint-TEC fund, the continuing arm would get a proportional share of existing loans. As debts are repaid, the incoming cash would be used partly to help fund new loans.
The liquidation fund, for investors who decide they want out now, would also get a proportional share of loans, but its sole focus would be returning cash to unitholders.
Because both funds would have exposure to the same loan portfolio, split proportionally, there would be no picking and choosing of debts, Ninepoint said.
For unitholders who choose not to redeem, management fees could be subject to some significant changes. Normally, investors in Ninepoint-TEC pay a 1.45-per-cent annual management fee – as well as a 20-per-cent performance fee for returns above eight per cent. Under the proposal, if the fund does not achieve returns of six per cent or higher in 2022 and 2023, investors will have the management fees rebated.
Ninepoint co-CEO James Fox described the proposal as “extremely punitive” to Ninepoint if the fees are rebated, because the cost of managing the funds is material.
Investors who choose the continuation option would face some changes related to redemption requests. Going forward, redemptions would be paid quarterly, not monthly, and any investors who change their minds and decide they want their money back in the first year after the restructuring would have to pay a five-per-cent early redemption fee. The charge would not be collected by Ninepoint; it would instead be put back into the fund.
Ninepoint did not specify a timeline for paying back unitholders who want to sell, but said the repayment plan stems from balancing the needs of all investors.
“We are sympathetic to people who put redemptions in and they feeling like they’re getting stretched out,” Mr. Wilson said during the presentation, “but look at it from the point of view of the 75 per cent who don’t want to redeem. They don’t want every ounce of liquidity that gets generated used to fund the one-quarter of unitholders that are redeeming.”
Investors in the Alternative Income Fund would also be able to decide whether to remain invested or cash out now, but those who keep their money in would not be offered fee rebates.
Ninepoint told investors and financial advisers it proposed the restructuring plans after spending the spring countering “misinformation” about the funds. During this time, Ninepoint invited some investors and analysts to attend due diligence sessions where attendees were given detailed information about the asset manager’s loan portfolios.
Ninepoint also worked with the Ontario Securities Commission to calm fears about its past connection to Bridging Finance. Ninepoint co-managed Bridging’s flagship fund from 2014 to 2018. The OSC had publicly announced it was investigating Bridging after discovering several problematic loans and other alleged impropriety.
In April, Ninepoint released a public statement to clear the air, saying it had “received confirmation from the OSC that [Ninepoint] is not the subject of any investigation arising from its dealings with Bridging Finance.”
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