A real estate sold sign in Oakville, Ont., on Dec. 20, 2020.Richard Buchan/The Canadian Press
Romspen Investment Corp., RIC101.CF one of Canada’s largest private debt managers, is restricting redemptions from its flagship real estate fund, as the North American mortgage market adjusts to a prolonged period of rising interest rates.
This week, Romspen told its investors looking to cash out from the Romspen Mortgage Investment Fund that they may have to wait, citing delays in loan repayments and the need to protect against loan losses. The company uses investor money to provide mortgages to higher-risk commercial developers, who typically don’t qualify for bank loans.
The fund’s ability to pay back its investors largely relies on its borrowers’ ability to refinance their debt. But soaring mortgage rates have taken a toll on the cost and availability of refinancing in commercial real estate markets in the U.S. and Canada.
In a notice to unitholders on Monday, Romspen said it can’t continue to honour investor redemptions at the pace they’re being requested.
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More than $700-million has been returned to Romspen’s investors over the past 18 months, and the current redemption queue represents roughly another $325-million – about 12 per cent of the fund’s assets. The fund had $2.8-billion in assets as of the end of June.
Instead of providing immediate redemptions, the company will create a side pool for unitholders who want to cash out, and will allocate a proportional percentage of assets to that fund. Investors who elect to redeem will receive payouts as cash becomes available through loan repayments or asset sales. But the illiquid nature of the fund’s investments could mean long waits.
“We believe that this option provides those who still want to redeem with a certain level of liquidity over time, while giving the fund some additional capacity to carry out its objectives for the benefit of remaining unitholders,” Romspen said in its notice.
The company emphasized its history of weathering moments of turmoil in real estate markets. Going back to the mid-1990s, the fund has posted an average annual return of nearly 8 per cent, with very little volatility.
That kind of yield has made private debt funds like Romspen’s wildly popular in Canada in recent years, particularly among wealthier investors looking to manoeuvre around ultralow interest rates.
But now, with low-risk savings vehicles capable of generating annual returns upward of 5 per cent, the case for private debt has weakened. Investor preferences are shifting toward low-risk bonds, high-interest savings and guaranteed investment certificates, many of which are carrying their highest rates in a generation.
Earlier this year, another Canadian asset manager, Ninepoint Partners LP, froze redemptions across four private credit funds after seeing a surge of investors requesting their money. At the time, Ninepoint attributed its liquidity crunch to general investor fears stemming from the Bridging Finance scandal.
Bridging, another private lender, managed more than $2-billion before being placed in receivership in 2021 amid allegations of fraud. Investor losses in that case are ultimately expected to total well over $1-billion.
According to Ninepoint, the pall cast by Bridging’s collapse made some investors rethink the private credit space in Canada.
In early September, Ninepoint announced the approval of a restructuring plan that would allow for redemptions to resume. But, like Romspen, it will create side pools for two of its funds that pay out redeeming investors as loans are repaid or assets are sold.
In the cases of both Ninepoint and Romspen, an inherent drawback of private credit has come to the fore. Illiquid investments like real estate don’t always mesh well with fund structures that promise to give investors easy access to their money.
Under normal market conditions, this balance tends to work pretty well for most funds. But the imperfect liquidity match “gets much more challenging when markets are more stressed,” Dan Hallett, principal and vice-president of research at Highview Financial Group, said in an e-mail.
Real estate activity has plunged in recent months, as central bankers have hoisted interest rates to try to regain control over inflation. The rising costs of financing have, in turn, weighed on property valuations, as well as transaction and loan activity, most visibly in the residential space.
“We are seeing similar hesitancy in the industrial and warehouse sector, which had been, until recently, an oasis of relative strength,” Romspen said in its second-quarter report, released last week.
“The commercial real estate market presents a distinctly different picture than even six months ago.”