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Next Edge to wind down credit fund amid private debt uncertainty

TIM KILADZE

Decision announced last week is its second wind-down of a private debt fund

Private debt manager Next Edge Capital is gating its flagship credit fund after a surge in redemption requests, meaning clients are unable to get their money out and the portfolio will be wound down over the next two years.

The decision, announced last week, marks Next Edge’s second wind-down of a private debt fund. Since 2020, the Torontobased asset manager has also been winding down the Next Edge RCM Private Yield Fund, whose credit adviser is R.C. Morris Capital Management Ltd. The fund reported a 25-per-cent loss in the month of March and an 18-per-cent loss in 2023, as it becomes more concentrated and subject to wider performance fluctuations.

Based in Vancouver, R.C. Morris is a private lender and has participated in a number of Canadian wealth management deals in recent years. The company lent money to Bridging Finance Inc., the private debt manager that was put in receivership in 2021, and it also backed Gary Ng’s acquisition spree of independent wealth management companies between 2018 and 2020, including PI Financial.

Created in 2015, the Next Edge Private Debt Fund lends to companies that typically cannot obtain bank financing. Over its first eight years, the fund often posted solid returns between 7 and 9 per cent annually, but performance dipped in 2023 – just as Canadian investors were growing more cautious about private debt. Around this time, a growing number of private debt managers started halting redemptions or reducing their monthly cash distributions.

With so much uncertainty in the sector, a large number of Next Edge’s investors tried to cash out, and the Private Debt Fund dealt with redemption requests worth $145-million in 2023 – close to half of the fund’s $298-million in total assets under management – according to an investor memo sent last week.

Redemption requests have continued this year and currently sit at 20 per cent of total assets. Next Edge believes the best option is to wind down the portfolio and roll its investors into a different fund in the future. In doing so, management has capped the existing fund’s monthly payouts at a 6per-cent annual yield – only 1 per cent higher than some guaranteed investment certificates – and halted redemptions.

“The team has done everything possible to prevent a gate/winddown from happening; however, we feel that our hand is now forced,” Rob Anton, Next Edge’s president, wrote in the investor memo.

“A redemption amount of this magnitude was never anticipated under most operating environments, especially considering the long-standing, and continued positive performance of the fund.”

Before the COVID-19 pandemic, private debt was one of the hottest growth sectors in Canadian wealth management because its funds typically paid 8-per-cent annual yields, while benchmark interest rates were ultralow. Since 2022, these funds have become less lucrative to investors because their yields haven’t risen, meanwhile benchmark interest rates have climbed five percentage points.

A cooling Canadian economy has also affected business bankruptcies, which are now rising quickly. In the past two years, private debt funds that manage nearly $10billion have struggled with elevated redemption requests or major defaults – and a growing number are halting redemptions.

Last week, Ninepoint Partners told investment advisers it would stop paying cash distributions on three of its private debt funds that collectively manage $2-billion in assets.

Ninepoint is also skipping the current redemption window on its flagship private debt fund. Redemptions are typically permitted quarterly, to a maximum of 5 per cent of total assets.

In its own memo to advisers, Next Edge explained that it contemplated different outcomes but felt the current volume of redemption requests couldn’t be overcome.

“We believe that even if we met these existing redemptions over an extended period, which would have been required, the fund would face a flood of further sizeable redemptions upon reopening,” Mr. Anton wrote. Under the plan, the existing fund portfolio will be wound up and paid back to all unit holders on an orderly basis “by way of the issuance of units in new classes of the fund that can be sold or held as desired.”

The new fund units will follow a similar mandate to the existing fund, but will have exposure to a portfolio with improved liquidity, allowing for redemptions, Next Edge chief operating officer David Scobie wrote in an e-mail to The Globe and Mail.

R.C. Morris founder Chris Morris wrote in an e-mail that the company “remains proactive in the private debt space through our other managed investment vehicles.”

“Despite facing well-publicized challenges, including some of our own, we remain optimistic on the long-term prospects of the private debt industry in Canada.”

Before the COVID-19 pandemic, private debt was one of the hottest growth sectors in Canadian wealth management.

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2024-06-05T07:00:00.0000000Z

2024-06-05T07:00:00.0000000Z

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