Burgeoning Alternative Credit Market Sparks Canada’s First Fund of Funds

(Bloomberg) -- Bridging Finance Inc. is launching what it says is Canada’s first fund of funds for alternative credit -- tapping into the swelling market for private debt in the country.

The asset manager is planning to raise about C$500 million ($372 million) over the next 12 months, adding to its C$1.4 billion in assets under management, Chief Executive Officer David Sharpe said. Sharpe, a status member of the Mohawks of the Bay of Quinte, launched a private debt fund last month dedicated to financing Indigenous economic development which he also plans to expand to C$500 million.

The fund of funds, which is expected to be launched in June by Bridging and its affiliate Fern Capital Partners, will invest in funds focused on private credit, distressed debt, senior loans, along with public debt such as short-term Treasuries and preferred shares. Longer term, it plans to invest in infrastructure funds.

It will cater to clients willing to “take baby steps into the private-debt world,” said Wilson Tow, a partner at Fern Capital Partners and an expert on doing due diligence on hedge funds.

Growing Market

Toronto-based Bridging is one of several money managers deepening their push into private credit, where businesses bypass the capital markets for finance. Global direct lending funds are raising money at a record-setting pace, collecting $19.4 billion so far this year as investors pile into the market for private credit, according to London-based research firm Preqin.

In Canada, private debt under management totaled $10.4 billion at the end of June, and $600 million was raised this year, also according to Preqin. Toronto-based Ninepoint Partners launched a private debt fund last month that will focus on investing in U.S. middle-market companies. Other big players in the sector include Penfund and Northleaf Capital Partners.

Sharpe’s Bridging has already lent C$300 million to finance renewable energy, housing, grocery stores and fisheries to Indigenous communities, C$30 million of which was done through the new fund.

“I’ve never had a default on an Indigenous loan,” said Sharpe in his Toronto office. “And demand for direct credit has increased greatly since we started seven years ago.”

The fund of funds will charge 40 basis points on top of the fees of the underlying funds -- which range from 1% to 1.5% for management and 15% to 20% for performance fees -- and have monthly liquidity.

Regulatory Scrutiny

For now, Bridging’s new vehicle will invest in funds from Algonquin Capital Corp., Lawrence Park Asset Management, 1832 Asset Management , Next Edge Capital Corp., Onex Corp., and Bridging Finance.

Bridging’s other direct lending funds invest in collateral-based bridging loans, inventory and accounts-receivables financing. Returns hover around 8.5 percent, according to Sharpe. It charges an average of 12 percent in its loans. The firm has 36 people and plans to grow to 40 by year-end.

The growth in private debt has drawn attention from regulators. A report from the Federal Reserve and other supervisory agencies in January pointed out the increased participation of non-bank firms in direct lending in the U.S., pushing more risk out of the banking system and into the shadow banking world, beyond their purview.

In Canada, while the shadow banking sector has grown steadily since the global financial crisis in 2008, the overall financial system has expanded even faster, keeping risks under control, the Bank of Canada said in a report published in March. The central bank estimated the sector at close to C$1.5 trillion at the end of 2017, up about 30% from the end of 2015.

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