Ninepoint Partners LP will stop paying cash distributions on three private debt funds that collectively manage $2-billion in assets and will also skip the current redemption window on its flagship private debt fund, preventing investors from cashing out in the second quarter.
Toronto-based Ninepoint informed investment advisers this week that it will stop paying cash distributions on the Ninepoint-TEC Private Credit Fund II, which is co-managed with Third Eye Capital, the Alternative Income Fund and the Canadian Senior Debt Fund as of July 1, according to memos obtained by The Globe and Mail.
“After reviewing our various liquidity options, Ninepoint Partners and our subadvisors have determined that the best path forward to preserve liquidity and balance the long-term goals of these three affected funds is to redirect future distribution into additional units rather than cash distributions starting July 1, 2024,” Ninepoint said in a statement to The Globe.
In its memos to investment advisers, Ninepoint did not specify why it has halted cash distributions on the three funds. The asset manager wrote that it has been “reviewing various options with the aim of creating liquidity for the fund,” adding that, “at this time, liquidity generated will be used to honour ongoing commitments to portfolio companies, satisfy the fund’s redemption provisions, and meet operational requirements.”
Ninepoint is also changing some redemption protocols. Typically, its private debt investors are able to cash out once a quarter, up to a maximum of 5 per cent of total fund assets. This quarter, it is skipping redemptions altogether on the $1.2-billion fund it co-manages with Third Eye.
“Currently, the fund is unable to make redemption payments due to having insufficient net cash for this purpose,” Ninepoint wrote in a memo to advisers. “The fund must balance redemptions with its obligations to allocate sufficient resources to effectively execute its long-term strategy, ultimately benefiting all unitholders.”
Private debt managers in Canada raise money from investors – often retail investors – and then lend these funds out to borrowers who are unable to obtain traditional bank financing. In exchange for lending to higher-risk corporate borrowers, investors have historically received outsized monthly payouts that amounted to about 8 per cent annually.
Lately, however, some higher-risk borrowers have struggled with much higher interest costs. Many loans offered by private debt managers are provided at variable rates, and these have become more expensive for borrowers, just like variable-rate mortgages.
When borrowers struggle, they may not repay their loans on time, creating a cash crunch for private debt managers.
The pain is spreading across the industry. In all, private debt funds that manage nearly $10-billion have struggled with elevated redemption requests or major defaults, and funds managed by companies such as Romspen Investment Corp. and Hazelview Investments have halted redemptions.
Canada’s private debt sector was also dealt a major blow in 2021 when Bridging Finance Inc., which managed $2.1-billion, mainly from retail investors, was put under the control of a court-appointed receiver. While the roots of Bridging’s woes are potentially different – three of its leaders have been accused of fraud – investors still suffered and are expected to lose roughly $1.3-billion.
It is not the first time Ninepoint has modified its redemption schedules for private debt. In 2022, the asset manager halted redemptions on four funds and ultimately restructured the fund it co-manages with Third Eye because so many investors wanted out.
This time around, Ninepoint has not mentioned a surge in redemption requests. Instead, it is attributing the changes to insufficient cash.
To this end, it arranged a $100-million credit facility with Bank of Montreal in April, 2023, to help manage cash flows in its fund with Third Eye, as well as to support growth. But rather than borrow more now, Ninepoint has told advisers that “the higher interest costs and restrictive covenants that come from increased debt could jeopardize the fund’s long-term stability and force the fund to liquidate assets under suboptimal conditions, potentially at lower valuations.”