Hazelview Investments, a private money manager that specializes in commercial real estate, is halting redemptions on its $1.3-billion Four Quadrant fund for the second time in a year.
Hazelview already halted redemptions on the same fund in the fourth quarter of 2023, but the hope was that the freeze would be temporary as higher interest rates that have rocked the commercial real estate market started falling, making it easier to sell private assets.
While Hazelview was able to lift the halt and pay first-quarter redemptions, it is now reversing course. On Wednesday, management told investors redemptions would be halted again, likely for 120 days again, meaning clients may not be able to cash out again until Dec. 31.
Redemption requests currently total $384-million, or roughly 30 per cent of the fund’s total assets, almost double their level this time last year, according to Hazelview. If they do resume later this year, they will be capped at 5 per cent of the fund’s total assets each quarter as they have been in the past.
“Due to the continued stagnation in private market transaction volumes, rendering the sale of private assets impractical, we have made the difficult decision to suspend 4Q redemptions,” Hazelview wrote in a memo to investors, referring to the Four Quadrant fund.
Although interest rates have started falling in Canada, with the central bank cutting its benchmark rate by a quarter-percentage-point last week, many borrowers who are sensitive to higher rates are still struggling. Most real estate development loans, for instance, are at a variable rate, and their interest costs are still much higher than they were two years ago when the projects may have launched.
Other private lenders also have had to halt redemptions for the first or second time, and some have scrapped their monthly cash distributions. In May, private debt manager Ninepoint Partners LP said it 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. The same fund already had its redemptions halted in 2022 and was then restructured in an attempt to prevent it from happening again.
Last week, private debt manager Next Edge Capital told investors it would gate its flagship credit fund after a surge in redemption requests and then wind it down over the next two years.
The Four Quadrant fund, which Hazelview has managed for 12 years, offers investors exposure to a mix of private and public real estate investments. It owns commercial properties, lends to real estate companies, buys public debt and corporate bonds and invests in shares of publicly traded companies. Despite this mix – which makes up the “four quadrants” of investments – the fund is largely illiquid. Roughly 80 per cent of the portfolio is made up of assets that are hard to sell in a flash when investors want out.
Although the portfolio has some public equities it could sell to fund redemptions, management believes it is best for investors to use this capital to help finish development projects.
“As these projects stabilize, they will evolve into cash-generating assets, positioning the fund to maximize future returns. In the meantime, redemptions will be funded through the exit of private investments as transaction volumes in the private market gradually recover,” Hazelview wrote to investors.
Based on budget estimates through the end of 2025, Hazelview believes it can continue paying its monthly cash distribution. However, the fund’s total return has fallen below its annual target of 8 to10 per cent. As of March 31, the Four Quadrant fund had lost 5.9 per cent over the previous year.
Hazelview has tried before to prevent a cash crunch in its Four Quadrant fund. In late 2022, the fund raised $200-million from Ares Capital and created a new class of preferred share units for the global private equity firm.
However, these units have ultimately created an imbalance between unitholders. Ares ranks senior to all other investors “with respect to rights on distributions, liquidation, winding-up and dissolution,” according to Four Quadrant fund documents, and its return is fixed at 7.95 per cent annually for three years.
Editor’s note: This story has been updated to reflect Hazelview’s target total return, instead of its target cash distribution.
Tim Kiladze