The Globe & Mail article published on February 7, 2023 discussing the Ninepoint-TEC Private Credit Fund is misleading and distorts facts. The Fund is being run by the same team since the investment strategy’s inception in 2010. Ninepoint and Third Eye Capital (TEC) have never represented the investment strategy to be anything other than what it is: managed by a sophisticated team that can analyze and structure complex senior secured loans with borrowers that traditional cashflow-based lenders won't lend to. As a result, the strategy has generated higher returns, (compounding at 10.4% since inception) with the trade-off of more limited liquidity than publicly traded investments.
It should be noted, Ninepoint and TEC have consistently provided multiple opportunities (in person, webcasts, white papers, portfolio updates) for our Investment Advisor partners to access detailed information for this strategy including the webcast hosted on February 7, 2023 which was attended by over 200 Investment Advisors. During the webcast, the Third Eye team completed a comprehensive portfolio update.
Ninepoint and TEC believe the portfolio is well positioned for the current market environment with overweight exposure to the energy and sustainability sectors. Currently 99.8% of the portfolio are performing loans.
Furthermore, the principals at TEC are significantly aligned with unitholders with over $130MM invested in the strategy alongside investors.
Portfolio data mentioned in the article was derived from an internal bank memo that was inappropriately disclosed to the reporter and contains information without analysis or context. Ninepoint provides bank dealers with ongoing transparency into the portfolio.
Before the article was published, senior TEC staff met with the reporter to describe the Fund’s strategy in more detail and to provide a better understanding of the Fund’s portfolio and investment principles. In spite of this, the reporter included several inaccuracies in his article which are addressed below, point by point, by the investment team at Third Eye Capital. Italicized quotes are from the article, followed by TEC's response:
|"Almost 40 per cent of the loans in a private debt fund run by Ninepoint Partners LP and Third Eye Capital Management Inc. have not required cash interest payments since their inception – and have not paid them…"|
TEC response: 3 of 15 portfolio investments (and 3 out of 12 portfolio companies) were permitted from inception of the loans to PIK (Payment in Kind) because (1) the Fund had an equity interest in the portfolio companies which boast high growth EV/cash flow multiples, and (2) the portfolio companies’ cash return on invested capital (ROIC) was significantly higher than the cost of debt (COD). To illustrate the benefit of such a PIK structure to the Fund, if a portfolio company generates 20% ROIC and has a COD of 10%, and the portfolio company reinvests the amount it would otherwise pay in cash interest, then the amount of reinvestment generates a return that compounds the cash flows of the business at 20%. Those cash flows attract a multiple that increases the value of the portfolio company and therefore increases the value of both the Fund’s security and equity interests.
The claim “have not paid them” is inaccurate. Even with PIK structured loans, the portfolio company is obliged to pay any accrued interest first from the proceeds of any sale of assets, third party financings, and certain other events (such as grants, insurance claims, etc.). All 3 portfolio companies have paid accrued interest in cash from such events when they occurred. One of these portfolio companies has two loans with the Fund, one of which pays regular interest in cash because it is a revolving loan with a balance that fluctuates up to a prescribed limit.
|"… while another 25 per cent have the option to defer their cash interest payments"|
TEC response: 3 of 12 portfolio companies have the option to pay interest in cash or to add the cash interest charges to the loan at a higher rate. These terms were in effect since inception of the loan or as a result of a partial deleveraging through a conventional lender (e.g., a bank comes in to support the portfolio company, reduces some of our debt, and has covenant tests to determine if interest can be paid in cash). One of the portfolio companies is owned by the Fund and therefore decisions whether to pay interest in cash or reinvest the cash are based on the ongoing cash flow needs and investment plans of the portfolio company. Another portfolio company has multiple loans, including a PIK structured loan since inception, and is included in the 3 portfolio companies described in the PIK loans above.
|"Loans that do not pay cash interest are known as PIK loans, short for “payment in kind,” and are similar to IOUs that defer cash interest until the total debt comes due"|
TEC response: This is an incorrect characterization of PIK-structured loans of the Fund. The determination of whether a loan will be structured as a PIK is made at loan inception; it is not a deferral of interest that is otherwise supposed to be paid in cash. Also, PIK loans are not “IOUs” payable when total debt comes due; as explained above, the Fund’s PIK loans do pay accrued interest in cash upon certain events.
|"These loans can reward investors with more interest when they mature, because the borrowers typically pay a higher interest rate in a lump sum. However, PIK loans can also be riskier debts because no income is promised until maturity, which can be years out."|
TEC response: The interest rate does not increase by virtue of a loan being structured with a PIK. And it is untrue that “no income is promised until maturity” as described above.
|"…their latest public investor update said three borrowers comprised 55 per cent of its $1.1-billion loan portfolio as of Oct. 31. Concentration risk of that sort means investors could suffer large losses if even one or two of those borrowers struggle. It is not clear if those three loans are deferring cash interest payments."|
TEC response: The Fund provides its clients with regular portfolio updates and detailed loan-by-loan transparency even though the Fund does not have continuous disclosure obligations to the public. The top three portfolio companies by NAV includes a borrower owned by the Fund (and other TEC funds). The other two borrowers are in sale or financing processes aimed at repaying the Fund in full. Concentration levels are within the guidelines of the Fund documents and consistent with past practice and the high conviction strategy of the Fund. All loans are senior secured with sufficient collateral to cushion against a downturn. None of these borrowers are “deferring cash interest.” The largest portfolio company’s loan was structured as PIK from inception. The owned portfolio company has several loans with the Fund, including one that is PIK-structured and two that pay regular cash interest. The third largest portfolio company pays regular cash interest.
|"The proportion of PIK loans in the Ninepoint-TEC fund, for instance, can mean there isn’t as much inflation protection in the portfolio."|
TEC response: This is wrong – the incidence of PIK loans does not correlate to inflation protection. In fact, because the Fund’s loans are based on the value of underlying assets that act as both collateral and the source of repayment, the value of such assets increase in an inflationary environment. The Fund’s strategy provides better inflation protection than a private debt fund which lends based strictly on enterprise values or cash flows, since profit margins tend to contract and are more volatile in an inflationary environment.
In addition, in a typical year the Fund might generate total cash flows (incl. interest, fees, return of principal) of 20% or more of average NAV. Given the evergreen structure of the Fund, these cash flows can be reinvested in new portfolio investments at prevailing (higher) interest rates.
|"Third Eye also specializes in distressed debt and special situations, such as lending to borrowers who have filed for creditor protection, so it is less inclined to make short-term, floating-rate loans that last one to three years. Third Eye’s loans often last two to five years."|
TEC response: Taking out the owned positions, 44.5% of the Fund’s portfolio is floating rate. Note that in situations where the Fund has equity upside, fixed rate interest may be preferred due to capital appreciation benefits of the residual equity. The average time to exit for the Fund’s investments have historically been less than 24 months, excluding renewals of performing investments or portfolio companies that were acquired as result of a foreclosure or restructuring due to default and enforcement.
|"Part of our core expertise is in restructuring and business turnaround,” Arif Bhalwani, Third Eye’s chief executive officer, said in an interview. “We are the risky component” of a private debt portfolio."|
TEC response: The Fund is not a complete investment program and is the “higher octane” part of a private debt allocation for investors seeking asymmetric risk profiles that limit downside risk through asset-backed security but can generate steady returns with upside convexity.
|“However, PIK loans can also be riskier debts because no income is promised until maturity, which can be years out."|
TEC response: A PIK-structured loan is not inherently riskier. In the context of the Fund’s strategy, loan proceeds are primarily used to increase the value of the portfolio company (for example, through new capital investments). Since the value of the underlying portfolio company appreciates at a greater rate than the outstanding loan balance, collateral coverage increases. The underlying assets in this strategy serve as both collateral and the source of repayment. Higher asset values provide greater downside protection.
PIK loans generate income for the Fund on a monthly basis since the interest that is PIK’d is covered by the increasing value of the underlying collateral (i.e., NAV is increasing). The accrued interest is recognized in cash throughout the term of the loan as the portfolio company remits to the Fund all proceeds from the sale of assets, third party financings, and certain other events (such as grants, insurance claims, etc.), which proceeds are first applied toward accrued interest.
|"Mr. Bhalwani’s description of Third Eye’s investment strategy also differed from Ninepoint’s stated focus on capital preservation. “You’re going to see very complex situations, highly structured transactions,” he said in the interview. “We’re trying to generate private equity-type returns with better downside risk protection."|
TEC response: Several critical aspects of the strategy provide downside risk protection (i.e., capital preservation) including: (i) the Fund’s loans (by NAV) are senior secured loans at the top of a company’s capital structure, or if there has been a partial refinancing from lower cost of capital sources, senior secured over the ownership of the portfolio company; (ii) the loans are secured against valuable asset collateral, which is evaluated on a periodic basis and through the support of independent appraisals or valuation reports. These attributes have resulted in the Fund not suffering any realized loss on invested capital since inception (including its predecessor funds).
Returns are driven through the contractual returns on the underlying loans but also through fees and equity kickers that are paid to the Fund as a result of TEC’s value-added advice to portfolio companies. The Fund holds private equity instruments in 6 portfolio companies; in each instance, these were received as bonus consideration and equity value was priced following a transaction event. These equity instruments have the potential to provide significant returns as 4 of these 6 portfolio companies are negotiating liquidity events.
|“Lately, though, private debt funds have lost some of their lustre because rising interest rates have made their yields look much less appealing relative to other fixed-income investments. The funds’ 8-per-cent to 10-per-cent annual returns used to compensate investors for the risk they were taking on, but their risk premium, as it is known, may not be enough any more, considering some guaranteed investment certificates pay more than 5 per cent annually. The economic outlook is much less rosy today, and riskier borrowers are more likely to default in tough times.“|
TEC response: Private debt remains an attractive asset class and the Fund’s risk premium will adjust as newly priced deals are made. There have been no new investments made in the Fund since TEC is prioritizing liquidity; however, new opportunities are able to be priced with a significant increase in nominal yields as would be expected.
The return on cash deposits has improved following successive interest rate rises by the Bank of Canada. However, nominal returns on cash are still below the inflation rate and cash does not help maintain purchasing power in the long run. Risk adjusted returns on the Fund have outperformed most cash and fixed income investments since inception. Moreover, the Fund provides a valuable function to the Canadian economy by providing access to financing to good companies that are underserved or overlooked by traditional sources of capital, such as banks.
We are disappointed that a major Canadian news organization published an article without proper due diligence and sufficient analysis of a subject that affects investors, Investment Advisors and the business of Canadian Asset Managers.
Both Ninepoint and Third Eye Capital are providing the above in order to correct the misinformation contained in the article published by the Globe & Mail. We are committed to ensuring our Investment Advisors and investors continue to receive fair, accurate and correct information so that they are best positioned to make informed investment decisions.
Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”).
Ninepoint Partners LP obtained unitholder approval to terminate the Ninepoint-TEC Private Credit Fund on September 30, 2022. As of that date Ninepoint Partners LP launched the Ninepoint-TEC Private Credit Fund II which is available for purchase through offering memorandum as of that date, in Series A1, F1, FT, and T on Fundserv. Please refer to the Offering Memorandum for complete details. For further information, please contact your Ninepoint Product Specialist.
The Ninepoint-TEC Private Credit Fund II is offered on a private placement basis pursuant to an offering memorandum and is only available to investors who meet certain eligibility or minimum purchase amount requirements under applicable securities legislation. The offering memorandum contains important information about the Fund including its investment objective and strategies, purchase options, applicable management fees, performance fees, other charges and expenses, and should be read carefully before investing. This communication does not constitute an offer to sell or solicitation to purchase securities of the Fund. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction. The Fund is generally exposed to the following risks.
See the offering memorandum of the Fund for a description of these risks: Speculative Investment; General Investment Risk; General Economic and Market Conditions; Inflation and Supply Chain Risk; Disease and Epidemics; Risks Related to the Russian Invasion of Ukraine; Class Risk; Changes in Investment Strategy; Limited Ability to Liquidate Investment; Capital Depletion Risk; Redemptions; Redemption Cap Subject to Manager Discretion; Financial Condition, Liquidity and Capital Resources; Valuation of the Fund’s Investments; Unitholders not Entitled to Participate in Management; Reliance on the Manager; Dependence of the Manager on Key Personnel; Reliance on the Sub-Advisor; Dependence of Sub-Advisor on Key Personnel; The Sub-Advisor and Manager Receive Management Fees and Performance Fees on the Net Asset Value of the Fund, which includes Payment-in-Kind payments that may never be recovered; No Ownership Interest in the Portfolio; Distributions; Potential Indemnification Obligations; Liability of Unitholders; Lack of Independent Experts Representing Unitholders; No Involvement of Unaffiliated Selling Agent; Not a Public Mutual Fund; Capital Depletion Risk; Charges to the Fund; Use of a Prime Broker to Hold Assets; Changes in Legislation; Tax Considerations; Withholding Taxes; Information Sharing Requirements and Withholding Tax Risk; Market View; Origination and Availability of Loans; Credit Risk and Default in Repayment Obligations by Borrowers; Business Risks; Non-Performing Loans; Insolvency Considerations with Respect to Borrowers; Borrower Fraud; Breach of Covenant; Concentration; Collateral; Liquidity of Underlying Investments; Fixed Income Securities; Equity Securities; Decline in the Industries in which the Fund Invests; Inability to Realize on or Dispose of Security Granted by Borrowers on a Defaulted Loan; Inability to Meet Redemption Requests Due to Illiquidity of Collateral; Risks Associated with Certain Dispositions; Distressed Investments and Special Situations; Fraudulent Conveyance, Lender Liability, Equitable Subordination and Recharacterization; Use of Leverage by Portfolio Companies; Original Issue Discount and Payment-in-Kind Instruments; Projected Operating Results; Need for Follow-On Investments; Equity Kickers Generally; Long-Term Investments; Counterparty Risk; Director Liability; Lender Liability Risks; Custody Risk; Interest Rate Risk; Currency Risk; Foreign Investment Risk; Options; Indebtedness and Use of Leverage; Hedging.
The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP (“Ninepoint”) and are subject to change without notice. Ninepoint makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.
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