A Wealthsimple Trade app icon is shown on a smartphone on Dec. 15, 2020. Wealthsimple has partnered with alternative asset manager Sagard to expand into the private credit market.Jesse Johnston/The Canadian Press
Online financial services provider Wealthsimple Technologies Inc. is expanding into the private credit market in a partnership with alternative asset manager Sagard, allowing retail investors to access a sector typically reserved for institutions and Canada’s ultrawealthy.
On Wednesday, Wealthsimple will announce the launch of Wealthsimple Private Credit, an investment fund managed by Sagard’s private credit team and led by Adam Vigna, the former global head of principal credit investments for the Canada Pension Plan. This is the second private asset fund Wealthsimple has added to its lineup in the past year after launching a venture capital and growth equity fund last April.
Private credit is a way for business to raise capital and refers to loans made directly by investors to companies.
Toronto-based Wealthsimple’s step into the sector follows a year of tumultuous markets and rising interest rates. Some private credit funds saw a major boom over the past decade, and billions of dollars were funnelled into companies such as Bridging Finance Inc., Ninepoint Partners LP and Romspen Investment Corp., whose funds typically paid out attractive 8-per-cent yields during a time when interest rates on government bonds and guaranteed investment certificates were almost nil.
As interest rates began to rapidly rise, however, some managers found themselves in a crunch amid a slew of redemptions from investors.
However, Mr. Vigna, managing partner and chief investment officer of Montreal-based Sagard, who has managed private credit for more than 20 years, said Sagard was not among the managers that experienced difficulties and continues to see strong institutional interest in private credit.
Sagard focuses its lending primarily on publicly traded or family-owned North American middle-market companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $10-million to $500-million.
Part of the difference when it comes to risk, says Wealthsimple’s chief investment officer Ben Reeves, is that Sagard’s private credit portfolio targets companies that they believe can “withstand the current economic environment.”
That means Sagard makes sure it is lending to companies that do not already hold a lot of debt and that loans are secured against assets that can be used to pay the fund back in the event of a default.
“We think the fund can perform well at different times than Treasury bonds and equities, which is what constitutes most of Weathsimple’s portfolios,” Mr. Reeves said in an interview.
The fund has a current target yield of 9 per cent, with Mr. Vigna saying the opportunity is even greater today than it has been historically for private credit investors.
“When we look at what’s going on with like the banks today … what the government will likely do is to continue to increase regulation and that means the banks will naturally have to be more conservative with their lending,” Mr. Vigna said in an interview.
“And if they’re more conservative with their lending, they’re going to continue to pull back from the market from a lending perspective. So that will result with even more opportunities for private investors like ourselves.”
In order to access the fund, clients need to have a minimum of $100,000 in deposits at Wealthsimple and must make a minimum investment of $10,000 in the fund. Because of the risk involved, Wealthsimple also limits the private credit investment to 20 per cent of an investor’s portfolio.
“This investment won’t be for everyone,” says Michael Katchen, chief executive officer of Wealthsimple. “If you can’t take any risk then you may be better suited to a GIC or savings account.”
“But when you look at how sophisticated investors build their portfolios, like the CPP, alternative investments are a huge share of the asset allocation of those portfolios, and yet the average retail investor doesn’t really know about these assets, let alone have access to them.”
Wealthsimple’s product expansion follows a difficult year for the tech sector. In early 2022, the company reduced its staff by 13 per cent. As well, like many asset managers over the last year, markets have affected Wealthsimple’s overall assets under management, which remained flat last year. Assets now stand at $20-billion, according to Wealthsimple.
“What we’re seeing in the markets is not unique to Wealthsimple,” Mr. Katchen added. “Investment firms’ assets fluctuate with markets. It’s normal and expected. We continue to have strong client and net deposit growth, enthusiastic uptake of new products, and continue to win share of the industry in Canada.”
When asked if there would future layoffs, Mr. Katchen said it is not something he is considering “at this time.”
“We made tough but proactive decisions last year that put the business in a very strong position.”