Private debt, like private equity, is generally not an easy asset class to get exposure to. There is no ready market to privately lend money to corporate borrowers either directly or indirectly. You tend to have to be a lender and know other lenders to get access to the best private debt investments. Even if you have the substantial minimum amount ready to invest with a manager that specializes in private debt, it may take up to three years to put your money to work while paying substantial management fees on committed capital.
But as we explored in the previous instalment in this series, private debt has compelling attributes as an investment, especially in this time of low bond yields and rising inflation. With its private debt offering, Nicola Wealth has tried to remove or at least lower some of the structural barriers to accessing this asset class.
The Nicola Wealth Private Debt Fund, with assets under management of $510 million as of September 30, 2021, started in 2017 as a fund-of-funds. We invested with reputable private debt fund managers that provide secured loans to profitable mid-market businesses in the United States and Canada.
In time we became a co-investor in these loans alongside the managers which gives us discretion over which investments to pursue at much lower third-party manager fees than investing in a fund. Now that we have achieved sufficient scale, we are also investing through separately managed accounts with leading US private debt managers similar to the investing approach taken by many of Canada’s largest pensions.
Separately managed accounts are large co-investment pools that give us full discretion on each investment, significantly discounted manager fees, and full control over how and when we deploy capital. In addition, we also provide unitranche and mezzanine debt financing directly to profitable companies in Canada. In these cases, our in-house investment team sources and structures the loan, performs due diligence on the company, and after closing, monitors the company’s performance over the term of the loan. Significant investments are also vetted by an eight-member investment committee that includes highly experienced external experts in private equity and private debt.
“We really tried to build an all-weather private debt portfolio with the goal of performing well in all types of markets,” says Jurgen van Vuuren, Senior Director & Head of Private Debt with Nicola Wealth. “Over 70% of our portfolio is invested in the U.S. with the balance invested in Canada.”
The portfolio is also highly diversified by strategy, investment and risk profile. The foundation of our approach to private debt is built on lending to companies that generate high free cash flow throughout economic cycles and many of our borrowers are owned by private equity firms. A high level of portfolio diversification is also central to our approach. Over time as we continue to move away from fund investing in favour of co-investing and lending directly, this should allow us to better manage risk while also reducing third party manager fees.
Perhaps best of all, our Nicola Private Debt Fund, like all of Nicola Wealth’s funds, has an open-ended and evergreen structure allowing our clients to contribute to the fund (and, with some restrictions, redeem) at times that work for them. “You get to invest in a fully diversified pool of assets on day one and the first quarter you’re invested, you’re eligible to start getting distributions,” van Vuuren says.
The Nicola Private Debt Fund has generated a since-inception annualized return of 7.3% and the year-to-date November 30, 2021 return reached 9.7%. Plus, Nicola Wealth clients have the comfort of placing their money with a diversified asset manager that has built its reputation over the last 27 years.
“As the Nicola Private Debt Fund grows and expands its direct investing capabilities in private debt, we expect to take advantage of further economies of scale, giving our clients easy, cost-effective access to a pension-quality private debt offering,” van Vuuren says. A hard asset class to get into? Perhaps not.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Past performance is not indicative of future results. All investments contain risk and may gain or lose value. Returns are net of fund expenses charged to date. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.