A design flaw in some of Canada’s most popular private debt funds has sparked a reckoning for the sector, with retail investors realizing the promises made to them about cashing out do not always hold up.
The decision has exposed the mismatch between illiquid loans and the promise of easy redemptions for investors. Private loans are often made for terms of one to three years and cannot be repaid quickly on demand, while retail private debt funds often allow investors to get their money back in a matter of months. One of the two funds Ninepoint has frozen indefinitely, the Alternative Income Fund, promised “30-day liquidity,” according to the fund’s marketing materials.
It’s reasonable to provide continuous redemptions for funds that invest in securities such as public equities, noted Greg Racz, president of MGG Investment Group, which manages private debt funds. “If you’re in private, illiquid loans, it just makes no sense whatsoever,” he said. In the hearing, Mr. Carney spoke specifically about funds with illiquid assets that offer daily redemptions.
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