Investing in Private Credit with Wealthsimple offers a way for more Canadians to participate in private credit investments.
Private Credit is a core asset class in institutional, pension, and high-net-worth portfolios that has not been widely accessible to individual investors until now. We have crossed many barriers to bring this to our clients because of the positive impact it can have on nearly everyone's portfolio.
Wealthsimple offers private credit through a partnership with Sagard, led by private credit investment professionals formerly with Canada Pension Plan. This product offers a 9% return (net of fees).
About private credit investing
Private credit, also known as private lending or private debt, is a form of lending to businesses. It is called private credit because the debt is not issued or traded on public markets.
Borrowers use private credit for a couple reasons. They may not have easy access to funds through traditional financing channels, or might prefer to work with a lender who can offer more flexible terms and faster loan processing.
As an asset class, private credit has offered 2-5% higher returns (net of fees) than public debt. However, funds are less liquid then they would be if you are working with a traditional debt product. This means that you are typically only able to withdraw money at specific times of the year. In general, this illiquidity pays off in the form of better overall returns for investors with longer time horizons.
It is suitable for investors with a 3+ year investment horizon because it comes with risk of loss.
To start the process of creating a private credit account, follow these steps:
- Log in to your Wealthsimple mobile app
- Tap the Arrow icon at the bottom of your screen
- Tap Add an account
- Select the Access exclusive investments menu option
- Answer the next few questions to create an application
- Keep an eye on your email. Our team of fiduciary Portfolio Managers will review your application and email you to confirm your suitability, and if suitable, your maximum deposit amount, and next steps to fund your account.
Frequently asked questions
How do I know if private credit investing is right for me?
Private credit has historically offered clients the potential for equity-like returns with lower risk. Returns can exceed public markets credit due to manager skill and illiquidity premiums. Private credit may be suitable for a wide range of investors, including retirees seeking income from their portfolios or savers who desire a diversifying high-yield component to their portfolio. This should be thought of as one component of a diversified portfolio with a history of attractive risk-adjusted returns.
Still not sure? The Private Credit account opening process will ask you questions to allow our team of fiduciary Portfolio Managers to determine if Private Credit is right for you and if so, what dollar value allocation is optimal. We’ll give you a recommendation based on the information you provide us.
Is there a minimum investment requirement?
Yes, there is a minimum investment of $10,000 required to invest in Wealthsimple’s Private Credit fund. You must also have at least $100,000 in net deposits with Wealthsimple to qualify.
What accounts can I hold this fund in?
You can hold this fund in a managed RRSP, TFSA or Personal account. This fund cannot be held in a self-directed trading account. This is because Wealthsimple will be acting as a fiduciary and determining whether this investment is suitable for you based on your personal situation and other assets. An investment comes with access to advice from a Wealthsimple Portfolio Manager.
What exactly does this fund invest in?
Private credit – also called “private lending” or “direct lending” – refers to loans made directly by investors to companies. It is private credit because the debt is not issued or traded on the public markets.
This fund has two types of loans: (1) Loans made directly by our fund management team to medium-sized companies, and (2) loans made by banks to medium-sized companies.
The fund manages risk by only investing in areas that the management team knows well, and by investing in types of companies that have characteristics we expect to be resilient to the current economic environment.
Much of the private credit landscape consists of loans made as part of private equity deals, known as “sponsored” private credit. This fund avoids these kinds of deals because we believe that the risk-reward is lower than loans originated by our fund managers or through banks. The loans that this fund makes are to companies that aren’t as risky as many private equity-backed companies, and to companies that aren’t taking on as much debt relative to the earnings of the company. This increases the odds that the debt will be repaid.
How does the Wealthsimple’s Private Credit fund differ from other private credit options in Canada?
This fund differs from most private credit options available to Canadians in two ways:
- The focus on directly originated loans where our team has deep expertise as opposed to loans made alongside private equity deals.
- The quality and experience of the management team. The credit team is led by Adam Vigna, who led Canada Pension Plan’s Principal Credits Investing group. This group invested $20B in bank-led and direct credit investments. He has recruited an investment team with high quality investment experience managing significant credit portfolios across the private and syndicated markets for Canada Pension Plan, KKR, Garrison Investment Group.
What kinds of returns can I expect?
Like all investments, nothing is guaranteed. However, as an asset class, private credit has offered 2-5% higher returns than public credit. For example, over the past ten years, private credit as an asset class has offered a 10.4% internal rate of return. This has provided a similar return profile to real estate and infrastructure, which have returned 11.2% and 9.9%. Credit available in public markets have returned 4.9% for investment grade and 6.8% for high yield (riskier) bonds.
The Wealthsimple Private Credit Fund aims to provide monthly income, currently targeted to earn a 9% yield (net of fees). However returns can vary significantly from year to year as market prices fluctuate.
How risky is this investment?
The fund makes loans that come with the risk of loss in the event that a creditor cannot repay. This can and does happen to borrowers who use private credit. We expect the value of the loans to fluctuate as the price of credit fluctuates in the broader market. The fund uses leverage, which can amplify returns and risk but comes with borrowing costs and a wider range of outcomes. There is also liquidity risk, where loans may decline in value due to a lack of willing buyers, irrespective of the underlying credit quality.
Given those risks, the fund uses a variety of strategies to minimize the risks to investors’ incomes.
- Focusing on managing downside risk and providing resilience in turbulent markets
First and foremost, our private credit managers focus on managing downside and providing resilience in turbulent markets in the underwriting process and in how they structure loans.
- Targeting senior secured credit
The fund primarily targets senior secured credit, meaning that the fund will have a first claim on a firm in the event when borrowers run into trouble. This makes it less risky than high yield bonds, which typically would come after senior debt in distress, and equity, which pays to shareholders after debtholders have been paid.
- Doing deep diligence on each investment
The management team conducts deep diligence on each investment and only invests in industries where they have deep expertise. In addition, the loans made have investor protections in place with strong credit documentation and covenants that require lenders to meet certain financial health metrics or incur penalties (known as financial maintenance covenants).
- Targeting floating rate loans
The fund will target floating rate loans, meaning that as interest rates change, the rates paid by lenders will increase or decrease. This differs from most bonds which have fixed interest rate payments. This is a source of resiliency for the portfolio, but also increases credit risk. As a result, the fund will target a portfolio of companies that the management team believes will be resilient to the current economic environment, including the prospect of stagflation that could be extremely difficult for many, but not all, businesses.
- Managing leverage risk
The fund manages leverage risk by matching the term of leverage with the term of the underlying loan, and by limiting leverage to a prudent level in the view of the credit managers.
- Managing liquidity risk
The fund manages liquidity risk by imposing limits on the amount of capital that can be withdrawn by investors in any single period, which will reduce the possibility of forced sales to generate cash.
- Managing foreign exchange currency risk
Finally, the fund manages foreign exchange currency risk, which we believe will allow it to target a more consistent return in Canadian dollars. We believe this is an attractive feature for Canadian investors.
Who will manage the fund?
Sagard will manage the private credit portfolio and choose the underlying businesses to extend loans to. The Sagard credit team is led by investment professionals formerly with CPP (Canada Pension Plan) that collectively have decades of experience in private credit. Sagard will manage a Canadian feeder fund that hedges all investments into CAD and provides Canadian tax slips. As the fund matures, Sagard and Wealthsimple may add other private credit managers.
When can I withdraw my funds?
With the Wealthsimple Private Credit Fund, you will need to keep your funds invested for the first 6 months. After this time, you will be able to withdraw your funds on a quarterly basis (January 1, April 1, July 1 etc).
That being said, the monthly distributions received in the Private Credit account can be withdrawn at any time, even within the first 6 months.
Note: Fund redemptions are limited to 5% of the fund’s value per quarter on a pro rata basis, meaning if many investors want to withdraw at the same time, you may need to wait. In addition, the fund manager has the discretion to suspend withdrawals.
What are the fees?
You will be charged an asset management fee of 1.25%, on top of Wealthsimple’s standard managed account fees, to invest in the Wealthsimple Private Credit Fund. If the fund returns more than 5%, a 15% carry fee applies to those returns.
Those fees seem pretty steep. Is this a good opportunity for investors?
Private investment fees are generally higher because you need a manager in order to access these opportunities. Management fees are designed to cover the costs of diligence and sourcing to find attractive credit opportunities, and to structure the terms of those loans to aggressively manage risk. The asset class has historically provided attractive net returns, despite these fees.
Private Investments have very different fee structures than public investments (where you should certainly keep costs well under 1%). The reason being these types of investments take a large amount of skill and there is a big difference between the results of the best performing managers and those of the worst. Again, unlike public markets, a performance fee kicks in if the manager achieves a certain threshold of returns for investors and is designed to incentivize performance. In this case, if the manager makes investors 5% or more, a 15% performance fee is charged on the entire return. The equity like 9% return that we are targeting is net of all fees.
Private Investments have historically only been available to individual investors through high-minimum, high-fee advisors. We’re thrilled to be able to provide access to Private Credit at our standard, low management fees, which are about half of the fees a typical advisor would charge.
What will my money be invested in until the fund launches?
Your money will be invested in a high-interest savings portfolio until the fund launches.
Can I expect to see a contribution statement for the 2022 tax year if I contribute to an RRSP Private account before the tax deadline?
Yes, if the funds are deposited into an RRSP Private Credit account prior to March 1st, 2023, you will receive a tax slip for these deposits. You will receive this tax slip even if the funds haven't yet been officially invested in the private credit fund.
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