The conventional wisdom says that retail investors should steer clear of the fast-growing market for illiquid private debt.
Yet Ninepoint Partners’ Ramesh Kashyap and a small but growing number of money managers are selling a very different message -- one that, perhaps in a sign of the times, appears to be resonating.
Last year the Toronto-based firm’s Alternative Income Fund nearly doubled in size to about $500 million as amateur investors desperate for higher yields piled in, lured by the promise of bigger payouts.
Some might see targeting mom and pop as a risky move given their shorter investment horizons and the recent spike in managers who’ve found themselves trapped with hard-to-sell assets. But Kashyap disagrees, noting that the fund is designed to avoid just such a scenario. It keeps about 20 per cent of its holdings in liquid securities or cash, investors have to give 30 days notice before taking their money out, and if redemptions exceed more than five per cent of assets in a quarter, Ninepoint can spread the payments out over 18 months.
“While we do leave some gains on the table, pumping up liquidity makes a difference, especially for the retail investor,” said Kashyap, who oversees about $2 billion as Ninepoint’s head of alternative investment strategies.
Institutional investors such as pensions, endowments and family offices have plowed hundreds of billions of dollars into private credit in recent years, attracted to premiums that can be more than five percentage points higher than comparable public debt.
The asset class is able to offer higher yields in part due to the reduced liquidity that comes with direct lending, which bypasses traditional capital markets.
Yet amateur investors sometimes find the inability to quickly pull out of illiquid assets tough to swallow. In extreme cases, a sudden rush for the exits can create situations akin to a bank run, leaving money mangers with the choice of selling at fire sale prices, or closing the door to redemptions.
Ninepoint’s fund, which has returned roughly seven per cent per year since its inception in 2016, or about 2 percentage points less than the firm’s pure private-credit strategies, seeks to balance the payout it offers against the liquidity demands of retail clients.
So far, it’s been gaining traction as declining interest rates globally push mom and pop investors further afield, following in the footsteps of Canada’s retirement funds and life insurance companies.
Ninepoint makes first-lien private loans to small and mid-size Canadian companies ranging from C$5 million to C$35 million and with terms averaging 24 months. The firm, which manages roughly $6.5 billion in total assets, also focuses on infrastructure, private equity, project finance and distressed debt.
While private-debt funds in the U.S. are few and far between, retail investors have access to the asset class via vehicles called business development companies, which have delivered juicy dividends in recent years while extracting hefty fees.
Like many in the now $800 billion private-credit business, a growing dilemma has become how to best deploy all the new money coming in, according to Kashyap.
“Everybody wants to invest in private debt -- raising money hasn’t been an issue at all,” Kashyap said. “The challenge is more finding good solid investments to allocate than to raise money.”
--With assistance from David Scheer.