Private debt funds freeze investor withdrawals

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Two of Canada’s largest private debt funds, Bridging Finance Inc. and Romspen Investment Corp., froze investor redemptions on Monday, the latest sign of COVID-19-related stress in a sector popular with wealthy, income-seeking investors.

Bridging, which oversees $1.7-billion in client assets under management, and real estate lender Romspen, which oversees $2.9-billion in assets, both told backers they are suspending redemptions – known in the industry as “gating” the funds – because of pandemic-induced turmoil in markets.

Both Toronto-based asset managers are backed by clients who are typically looking for income and wealth preservation.

Romspen said the freeze would remain in place “until there is reasonable visibility on the future direction of the economy and financial markets.”

Bridging froze all redemption requests retroactive to Feb. 1. The firm said it would keep paying out regular cash distributions each month. Romspen warned investors it would likely need to reduce cash distributions in the future because of expected losses on its mortgage portfolio.

Last month, Vancouver-based Trez Capital, which provides mortgages to commercial real estate developers, froze redemptions on more than $3-billion of investors’ assets.

Private debt funds, which compete with banks to provide loans, attracted a significant following in recent years, as wealthy individuals and institutional investors sought extra income during an era that featured relatively low interest rates on traditional fixed-income investments, such as government bonds.

Globally, investors put more than US$550-billion into private debt funds over the past five years, according to consulting firm Preqin. In a recent report, Preqin executive Tom Carr said: “Private debt has been the expansion story of the past decade.” But this is the private debt market’s first big test in an economic downturn, since the global financial crisis in 2008.

In a letter to investors on Monday, Bridging chief executive David Sharpe said his eight-year-old firm makes short-term loans to companies that are “providing essential services across Canada,” including milling flour, delivering groceries, repairing Coast Guard vessels and monitoring railways.

“If Bridging were to press existing borrowers out of the portfolio in order to satisfy unusual redemptions in the funds, the effect would be to cut off funding to these businesses during an unprecedented economic emergency,” Mr. Sharpe said. “It could also result in Bridging investors being unfairly treated if Bridging were to be asked to sell positions at a discount given the lack of a normal market.”

Bridging averaged an 8.3-per-cent annual return over the past six years, the company said in a mid-March presentation. In that presentation, chief investment officer Natasha Sharpe, wife of the company’s CEO, said the firm expects to continue generating positive returns, and said with traditional lenders expected to pull back on corporate loans, “these are the times Bridging was designed for.”

In its letter to investors, Romspen said most of its mortgages “will be affected by the crisis in one way or another. Some projects will be shut down until people are able to return to work, while many loans will require interest deferrals and maturity extensions. Others will default and become workout loans, some perhaps for extended periods.”

Romspen has been lending money against real estate for 53 years, and generated 10-per-cent annual returns for the past 25 years. In its letter to clients on Monday, the firm said its employees have more than $100-million invested in Romspen funds, aligning their interests with investors. “The fund’s current liquidity ensures we can continue effective management of the portfolio even through bad times – it also ensures we are never a forced seller.”

“It never feels good to have this degree of chaos affecting all aspects of life, but this, too, will pass and normalcy will return,” Romspen said in its investor letter.

Romspen is one of about 300 alternative lenders in the Canadian mortgage market, according to Canada Mortgage and Housing Corp., holding about $14-billion of outstanding mortgages, or roughly 1 per cent of the overall market. Canada’s banks and insurance companies dominate the residential and commercial mortgage market.

Toronto-based Morrison Financial Mortgage Corp., which manages assets worth about $60-million, also suspended dividends, redemptions and new purchases last month. In an interview with the Bloomberg news service, company executive David Morrison said: “The real estate market is at a total, or near-total, shutdown. Many larger companies of the same ilk are in the same boat and have been forced to take, or are in the process of considering similar action.”

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